Many have heard that the NCUA is setting its sights on CUSOs. You may have read the transcript of Chairman Debbie Matz's testimony before the Senate. Or you are experiencing it firsthand with a zealous examiner shining his or her magnifying glass on your CUSO. Either way, are you prepared for the potential extra focus on your CUSO? Will you be able to quickly answer all questions with the necessary and relevant information, or will you look like a deer in headlights?
For years, CUSOs have been serving credit unions in many capacities, enabling them to use innovative ways to better provide services to members. In addition, CUSOs help drive down operating costs and increase noninterest income. CUSOs have saved and made millions of dollars for the credit union industry. Such benefits are undeniable.
Now, the NCUA would like to provide some closer parental guidance. Currently, the NCUA may examine the books and records of a CUSO but only to determine if the CUSO is a permissible investment and the effect on the safety and soundness of its owner credit unions. The NCUA currently requires owner credit unions to grant them access to the books and records of a CUSO and the examiner is charged with ensuring that the credit union's liability exposure is limited to its capital investment. This, ultimately, becomes a question of whether the CUSO is a legal separate entity, so that if there were claims made against the CUSO, the credit union would not be liable for them. There is also some consideration given to how critical the CUSO's services are to prevent debilitating effects on credit union's core services if the CUSO were unable to perform.
Although the review of a CUSO is limited, this does not mean that a CUSO should stonewall an examiner, but this does mean that an examiner has no authority to directly regulate how a CUSO conducts its business activities. In most instances, you should work with the examiner to explain the CUSO services. This process should also highlight how your CUSO is helping the credit union owners minimize costs and generate income. You should explain, with confidence, the policies and procedures that your CUSO follows in accordance with the regulations and any applicable state or federal laws.
Often the role of a CUSO is misunderstood by an examiner and you should be in a position to communicate clearly the CUSO's services to assuage any concerns of the examiner. These questions and criticisms in an exam are often because the examiner simply does not like or understand the services that are being provided. If you are not prepared to give an explanation, you may find that your CUSO's credibility is damaged and that your CUSO is hampered by arbitrary limitations. In the end, an examiner does not have authority to tell a CUSO how to run its business. He or she can only instruct a credit union to make sure the services it receives from CUSOs and other third-party vendors conform to credit union policies and procedures. However, it is easier for the examiner to limit the CUSO's ability to provide services and too often the CUSO conforms to the examiner's will without question.
So, what questions should you be asking yourself if and when the NCUA focuses on your CUSO? The most important question is whether your CUSO is conducting a permissible service. NCUA regulations set forth the permitted services a CUSO may perform. Whether you formed a new CUSO or invested in an existing CUSO, you and your legal counsel should review the services your CUSO is currently providing and determine if those services are permitted under the regulations. In addition, your CUSO must be a separate legal entity from all credit union owners, and this should be documented by an attorney opinion letter confirming such separateness.
Next, you should have a clear picture of the CUSO clients and ensure that the CUSO is primarily serving credit unions and credit union members. This will involve a summary of the CUSO's books and records showing that more than 50% of the CUSO's business is serving credit unions or their members. The method of calculating the customer base is not specifically prescribed by the NCUA; therefore, there may be several ways to determine if the CUSO primarily serves credit unions or their members, such as customer volume or gross revenue. However, you should be confident in how this calculation is performed along with why it is the most relevant means to measure the customer base.
Finally, you need all your documentation in place. I think it is good practice to have a disk or folder with all the appropriate documentation in one place. You do not want to be looking for documentation and paperwork while the examiner is standing there. Furthermore, you need to ensure that the documentation matches what actually happens on a daily basis. I cannot tell you how many times I have encountered an agreement that references services and pricing that no longer apply. In preparation for any exam, you should work with your legal counsel to have all of your paperwork in place and you need to know that its content matches your daily operations.
With the increasing scrutiny on CUSOs from the NCUA, you should do a legal and business audit of your CUSO. This process will provide you with all of the necessary preparations for a CUSO review.
Brian Lauer is a partner with Messick & Weber PC
Contact 610-891-9000 or [email protected]
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