Divided NCUA Board Approves Controversial CUSO Rule

A divided National Credit Union Administration board on Thursday adopted a controversial final rule that will allow Credit Union Service Organizations to originate any loan that a federal credit union may originate.

Democratic board Chairman Todd Harper vehemently disagreed with the rule, but the two Republicans on the board, Kyle Hauptman and Rodney Hood, voted in favor of it. The two Republicans last month forced the issue on to the agenda, with Harper’s opposition.

The rule, adopted 2-1, also will provide the board with additional flexibility to approve permissible CUSO activities without going through the regulatory process.

Harper said he believes the board will have a serious economic impact on the credit union system. “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,” Harper said. “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 added that CUSOs making loans will not be subject to the same restrictions as federal credit unions. This, Harper said, will allow CUSOs to become payday lenders and indirect auto lenders. “Consumer advocates agree that these two consumer financial products carry considerable compliance and reputation risk,” he said.

He added that since the NCUA has no supervisory powers over third-party lenders, the agency does not have the power to supervise CUSOs for compliance with federal consumer protection laws. He said that in the past, CUSOs have rejected NCUA reviews and rejected recommendations to mitigate risk.

Hauptman said he believes the rule will not create risks for the credit union system. “CUSOs have been making direct consumer mortgage loans, business loans, and student loans for decades without negatively impacting credit unions,” he said. Hauptman said that without CUSOs, many credit unions would not have the scale to compete in several areas.

Hood disputed the idea that the rule will result in CUSOs becoming payday lenders. “Pernicious payday lenders [run] counter to the ‘people helping people’ credit union mantra, and I believe these concerns are unfounded,” Hood said. “Greater competition in the consumer loan market from FCU-owned entities is likely to introduce better consumer options and greater choice.” He said that CUSOs already engage in lending for mortgages, student loans, business loans and credit cards without serious problems.

Hood said that the rule does not go far enough, adding that CUSOs should be permitted to directly invest in fintech companies. “Without investments in fintechs, the credit union system runs the risk of becoming stagnant in the years ahead as the cooperative system must respond to changing dynamics,” Hood said.

The board also approved a final rule separating liquidity risk and sensitivity risk as part of the CAMEL rating system. All three board members voted in favor of the plan. Harper said other financial regulators already separately rate liquidity and market sensitivity risks.


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