Banking Regulators—But Not NCUA—Issue Third-Party Servicer Guidance

On July 13, when federal banking regulators issued proposed guidance governing financial institution monitoring of third-party service providers, one agency was notably absent: the National Credit Union Administration.

The NCUA is the only banking regulator that lacks power over third-party servicers.

That is an important omission, according to NCUA Chairman Todd Harper. “Without this authority, we leave thousands of credit unions, millions of credit union members, and billions of dollars in assets potentially exposed to unnecessary risks in a regulatory blind spot,” Harper told Washington Credit Union Daily, in a statement following the release of the proposed guidance. “Activities fundamental to the credit union mission are being outsourced to entities outside of the NCUA’s regulatory oversight.”

Congress would have to pass legislation to give the NCUA power over servicers.

The Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency are inviting comment on the proposed guidance.

In a footnote in the guidance, the agencies assert their authority over outside companies. “The agencies generally have the authority to examine and to regulate banking-related functions or operations performed by third parties for a banking organization to the same extent as if they were performed by the banking organization itself,” they said.

And they outlined the risks involved. “A banking organization can be exposed to substantial financial loss if it fails to manage appropriately the risks associated with third-party relationships,” they said, in the guidance published in the Federal Register.

The agencies proposed that examiners be permitted to evaluate safety and soundness risk, the financial viability of a servicer, the ability of a company to fulfill its obligations and the firm’s compliance with anti-money laundering rules. “The agencies may pursue appropriate corrective measures, including enforcement actions, to address violations of law and regulations or unsafe or unsound banking practices by the banking organization or its third party,” the proposed guidance states.

Harper noted that the Government Accountability Office, the Financial Stability Oversight Council and the NCUA’s inspector general all have called on Congress to provide the credit union agency with similar powers, but to no avail. That should change, Harper said. “The NCUA needs the authority to assess all the risks present in the credit union system,” he said.

Members of Congress have proposed giving the NCUA the power, but traditionally, credit union trade groups have opposed it.

Related:

Federal Reserve System, FDIC, OCC: Proposed Interagency Guidance on Third-Party Relationships: Risk Management

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