NCUA Board Gives CUSOs the Green Light for Lending

In a 2-1 vote by the NCUA board, the agency approved a final rule to allow CUSOs to originate any type of loan originated by a federal credit union.

During Thursday’s meeting, Board Member Rodney Hood, who has been in favor of and has prioritized this rule and issue since his time on the board, led the discussion. Hood’s views are that the final rule will allow CUSOs to originate loans and expand their abilities for consumers to help create competition inside and outside of the credit union space – much like fintech organizations have done with the auto lending market.

“Let me be clear, I certainly believe that Credit Union Service Organizations are what will help credit unions, and in particular mid-sized to smaller credit unions, stay relevant in the years ahead by continuing to grow in scale in the cooperative spirit, while ensuring that the industry is responding to the rapidly changing landscape,” Hood said.

While the agency received a record number of comments on the final rule, more than 1,000 according to the NCUA, Hood said the majority of comments supported the measure. He took a moment to address those comments critical of the rule and those who addressed concerns the rule could result in CUSOs becoming payday lenders.

“Specifically, some have said that this rule will allow them [CUSOs] to become payday lenders – pernicious payday lenders run counter to the ‘people helping people’ philosophy. And I believe these concerns are simply unfounded,” Hood said.

Chairman Todd Harper, the lone no vote on the rule, has been against moving this rule forward because without proper oversight of CUSOs or third-party vendors, the NCUA should wait until the agency has that authority; and that can only be given by Congress.

“There is a classic philosophical difference on this rule. On the one hand, my colleagues believe that the changes contained in this final rule will help small credit unions to compete and remain viable. On the other hand, I believe that unleashing such competition within the credit union system will lead to lower earnings for smaller credit unions because of the earnings that CUSOs will siphon off the top from participating credit unions. This will then lower returns on loans and lower credit union returns on average assets. As a result, this rule in the long run will likely lead to further industry consolidation,” Harper said.

Vice Chairman Kyle Hauptman and Hood both voted in favor of the final rule for a number of reasons, one being that the board will have “additional flexibility to approve permissible activities and services outside of notice-and-comment rulemaking.” Another reason appeared to come down to competition.

“This rule gives credit unions the tools to compete more effectively in the digital marketplace,” Hauptman said. “It also gives members another choice when shopping online. That’s a good thing. As always, we will be watching how this rule impacts consumers and credit unions.”

Hauptman said the NCUA will keep an eye out for any consumer issues and if CUSOs are properly delivering these loans to consumers. He added, “These rules we make are sometimes more art than science … so if this rule needs to be tweaked in the future, then we’ll tweak it.”

CAMEL to CAMELS

In a 3-0 vote, the board approved a final rule updating the CAMEL rating system to the CAMELS rating system. In the final rule, the “S” was added to signify sensitivity to market risk into the component. The board also approved redefining the “L” in the liquidity risk component of the system.

According to the NCUA, the benefits of adding the “S” component are “to enhance transparency and allow the NCUA and federally insured consumer and corporate credit unions to better distinguish between liquidity risk (L) and sensitivity to market risk (S).”

The addition of “S” also enhances consistency between the supervision of credit unions and financial institutions supervised by the other banking agencies.

“The NCUA’s adoption of the CAMELS system is good public policy and long overdue,” said Harper. “Separating the liquidity and market sensitivity components will allow the NCUA to better monitor these risks within the credit union system, better communicate specific concerns to individual credit unions and better allocate resources.”

Implementation of the revised CAMELS rating system is scheduled to take place April 1, 2022.

In a statement published Thursday, CUNA President/CEO Jim Nussle said of both votes by the NCUA Board, “We thank the board for finalizing these two rules, both of which will improve the operating environment for credit unions to help them better serve their members. The CUSO rule will help credit unions pool resources when necessary to continue to meet loan demand. The CAMELS final rule will provide greater clarity and transparency regarding credit union sensitivity to market and liquidity risk.”