Harper Renews Call for Vendor Scrutiny

On Tuesday, NCUA Board Chair Todd Harper called on Congress to grant the NCUA authority to better regulate CUSOs and other key vendors.

Harper, speaking at NAFCU’s Congressional Caucus in Washington, D.C., was repeating a plea he’s been making for more than a year. In 2022 the NCUA was thwarted by opposition from NAFCU and CUNA.

Harper said the NCUA has not given up in its campaign to convince Congress to restore its authority under the Central Liquidity Facility (CLF) to examine critical third-party vendors — a power already granted to the FDIC.

Harper said credit unions increasingly rely on CUSOs and third-party vendors to provide services from adopting artificial intelligence to proving instant payments to members.

“This growing regulatory blind spot in the financial system compromises our nation’s economic security, poses risks for the financial well-being of our citizens — and more immediately — threatens the reserves of the National Credit Union Share Insurance Fund, which you all contribute to, should problems and losses at a vendor lead to the collapse and failure of a credit union,” Harper said.

NAFCU has said the NCUA already has tools in place to access information needed to assess the risk from third-party vendors.

Harper said the NCUA is also continuing to press for statutory amendments to the Federal Credit Union Act to enable the NCUA board to “proactively manage” the Share Insurance Fund by allowing higher premiums when times are good.

“A full counter-cyclical approach would help ensure that credit unions will not need to impair their contributed capital deposit or pay premiums to the Share Insurance Fund during times of economic stress, when they can least afford it,” he said.

Harper also brought up the need for third-party vendor authority when asked during a call with news reporters last week about the woes of Partner Colorado Credit Union ($690.1 million in assets, 35,472 members).

The Denver-area credit union sold its cannabis banking services CUSO in September 2022 for $185 million. But the deal went into the red this year with losses to the credit union of $44.4 million in the first quarter and $9.3 million in the second quarter. The second quarter loss was attributed to a contractual personnel expense.

Stock in Safe Harbor Financial (Nasdaq: SHFS) closed Monday at $0.46. The company’s CEO is Sundie Seefried, who was president/CEO of the credit union until 2021, when she resigned to become CEO of the CUSO that was spun off.

In the call, CU Times asked: “Partner Colorado Credit Union had an unusual thing of having a spinoff of a CUSO into a public company, where the CUSO CEO was a former CEO of the credit union. And now it’s been a net loss for members of that credit union and they’ve got a penny stock. Does that kind of a situation suggest there needs to be further oversight of CUSOs or other aspects of credit union management? And if so, how?”

Harper responded: “First, we cannot comment on an individual credit union case overall. It would be improper. That said, the agency has long said we need to have vender authority so that we can appropriately oversee credit union service organizations and other third-party services providers. This is a growing regulatory blind spot within the system.

“We do know that losses at CUSOs have come back onto credit union books in the past. Those losses have led not only to losses at credit unions, but they’ve also ultimately led to the failure of several credit unions.

“Congress providing us with CLF authority — which is something the Government Accountability Office has called for, the Financial Stability Oversight Council has called for as well as the Inspector General here at the NCUA has called for — would help us to have better oversight in this area to make sure things were operating in a safe, sound manner, as well as addressing consumer financial protection, BSA, ALM issues as well as cybersecurity.”