NCUA Needs Power to Supervise Third-Party Vendors, Inspector General Says

Congress should give the NCUA power to supervise third-party vendors and CUSOs, the agency Inspector General said this week, contending that the lack of oversight responsibility puts the Share Insurance Fund at risk.

“CUSOs and third-party vendors have become integral to the operations of many credit unions, and deficiencies in their operations could cause significant widespread financial disruption and other harm if statutory examination and enforcement authority is not provided to the NCUA,” the IG said.

The IG reported that between 2008 and 2015, nine CUSOs caused more than $300 million in losses to the Share Insurance Fund and led to the failures of credit unions with more than $2 billion in aggregate assets. One CUSO caused losses in 24 credit unions, some of which failed, according to the report.

Although the NCUA conducts CUSO reviews, there is nothing in the Federal Credit Union Act that allows them to conduct such exams. And when the agency asked vendors to voluntarily submit to exams, most vendors declined, according to the IG.

The NCUA requires that any federally insured credit union with an investment in or loan to a CUSO enter into a written agreement with the CUSO that allows the agency complete access to the CUSO’s books and records.

By comparison, other federal banking regulators have full supervisory responsibility over third-party vendors under federal law. Those regulators have been reluctant to include the NCUA in their reviews of vendors because the agency lacks statutory authority.

The IG said agency officials intend to ask the top 20 credit union vendors to voluntarily participate in the agency’s review process.

The issue of whether the NCUA should review third-party vendors is a contentious one in the credit union community. The IG noted that four NCUA board chairs, including current NCUA Chairman Rodney Hood, have asked Congress for that authority.

Credit union trade groups generally have opposed expanding the NCUA’s authority to include CUSOs and vendors.

In 2018, CUNA President/CEO Jim Nussle said credit unions are required to perform due diligence on third-party vendors and that due diligence already is subject to supervision by the NCUA.

At the time, Carrie Hunt, NAFCU’s EVP of government affairs and general counsel, said granting the NCUA supervisory powers over third-party vendors was unnecessary, costly and would not necessarily result in better supervision of credit unions.