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Compliance Update with Amy K by Amy Kleinschmit, Chief Compliance Officer NCUA Proposed Rule – CUSOs Comments for the National Credit Union Administration’s (NCUA) proposed rule regarding credit union service organizations (CUSO) are due March 29 and can be found here. As discussed earlier in the Memo, in an effort to reduce regulatory burden the NCUA issued a proposed rule to update the list of permissible CUSO lending activity, specifically to permit CUSOs to originate any type of loan that an FCU may originate. The proposal would also grant the NCUA additional flexibility to approve permissible CUSO activities and services outside of notice and comment rulemaking. Of note, the American Bankers Association have taken notice of this proposed rulemaking and filed a comment requesting an extension of the comment deadline, stating “ABA as well as all interested parties need adequate time to read, understand, analyze, and evaluate the Proposal and the nature and extent of its impact and the risks imposed upon consumers, communities, and the financial services industry.” At the time of writing this article no such extension has been granted. Looking for feedback – what are your thoughts? Directions for submitting your comments directly to NCUA can be found at the link above in the proposed rule, however, feel free to give your two cents on this proposed rulemaking to me, Amy Kleinschmit, as I draft our comment letter. At this point, the NCUA has only granted CUSOs lending authority for four types of loans, namely: business; consumer mortgage; student; and credit cards. As discussed in the proposed rule, “The NCUA historically has been reluctant to grant CUSOs general lending authority for all loans for several reasons. First, the NCUA has been hesitant in granting CUSOs authority to provide consumer loans as it may be perceived as a dilution of the FCU common bond requirement. Specifically, because CUSOs may serve people that are not members of a FCU, the NCUA has been concerned about FCUs benefiting from CUSO profits generated from non-members. Second, the NCUA has also expressed concern that if member loans were being made by CUSOs, the NCUA would have a duty to examine such loans and that would lead to stricter NCUA examination authority over CUSOs. Finally, the NCUA has also limited CUSO lending authority due to concerns that permitting CUSOs to engage in a core credit union function could negatively affect affiliated credit union services.” However, the NCUA is reassessing its stance on permitted CUSO lending activity “noting that recent technological developments have further increased the benefits of allowing CUSOs to engage in expanded loan originations.” Nonbank firms constitute a significant share of the consumer lending market and are increasingly targeting lending products traditionally provided by credit unions, including auto finance, small-dollar consumer lending, and unsecured consumer credit. The proposed rule noted that “to compete effectively in a market with a rising prevalence of these technology-based lenders, FCUs may need to rely increasingly on pooling their resources to fund CUSOs and to build the necessary infrastructure. The costs for research and development, acquisition, implementation, and specialized staff capable of managing these new technologies may be prohibitive for all but a very few of the largest FCUs. CUSOs may provide the means for FCUs to address these challenges and may enable FCUs to collaboratively develop technologies that better serve their members.” The NCUA included several questions within its proposed rule and welcomes feedback on all aspects of the proposal. Some of the questions posed include: Would the proposed rule enable FCUs to offer additional technology-based lending services that FCUs may otherwise be unable to offer their members? The Board is also considering whether permitting CUSOs to originate additional types of loans would facilitate FCUs’ access to securitization markets. It may be cost prohibitive for FCUs to securitize loans because securitizations are most cost effective with a large volume of loans. FCUs may also have difficulty aggregating loans to complete a securitization due to restrictions on purchasing loans and market concerns relating to varying underwriting standards. Therefore, the Board solicits comment on whether a CUSO could serve as an aggregator of loans to allow FCUs better access to securitization markets. Does the proposed rule expose FCUs to unnecessary safety and soundness risks? If so, are there steps the Board should consider to mitigate such risks? Would permitting CUSOs to engage in any type of lending as FCUs lead to additional reputational risk for FCUs? Loans from affiliated CUSOs may not comply with the same consumer protection limits as FCU loans, for example FCUs are subject to usury restrictions and a regulatory structure for issuing payday alternative loans (referred to as PALs). Does expanding CUSO lending authority to include additional core FCU lending categories create unnecessary competition for FCUs, particularly small FCUs? Instead of adopting a provision similar to the corporate CUSO provision that allows the NCUA to add additional categories of permissible activities for all CUSOs on its website, should the Board require individual FCUs to petition the Board for permission to lend to or invest in CUSOs that do additional activities or services not already listed in § 712.5? Should the Board publish on its website any conditions imposed on activities permissible through the approval process? Should the Board consider additional changes to the permissible activities list for CUSOs? Be sure to contact Amy Kleinschmit at akleinschmit@dakcu.org with any questions or comments.
Compliance Update with Amy K
by Amy Kleinschmit, Chief Compliance Officer
NCUA Proposed Rule – CUSOs
Comments for the National Credit Union Administration’s (NCUA) proposed rule regarding credit union service organizations (CUSO) are due March 29 and can be found here.
As discussed earlier in the Memo, in an effort to reduce regulatory burden the NCUA issued a proposed rule to update the list of permissible CUSO lending activity, specifically to permit CUSOs to originate any type of loan that an FCU may originate. The proposal would also grant the NCUA additional flexibility to approve permissible CUSO activities and services outside of notice and comment rulemaking.
Of note, the American Bankers Association have taken notice of this proposed rulemaking and filed a comment requesting an extension of the comment deadline, stating “ABA as well as all interested parties need adequate time to read, understand, analyze, and evaluate the Proposal and the nature and extent of its impact and the risks imposed upon consumers, communities, and the financial services industry.” At the time of writing this article no such extension has been granted.
Looking for feedback – what are your thoughts?
Directions for submitting your comments directly to NCUA can be found at the link above in the proposed rule, however, feel free to give your two cents on this proposed rulemaking to me, Amy Kleinschmit, as I draft our comment letter.
At this point, the NCUA has only granted CUSOs lending authority for four types of loans, namely: business; consumer mortgage; student; and credit cards.
As discussed in the proposed rule, “The NCUA historically has been reluctant to grant CUSOs general lending authority for all loans for several reasons. First, the NCUA has been hesitant in granting CUSOs authority to provide consumer loans as it may be perceived as a dilution of the FCU common bond requirement. Specifically, because CUSOs may serve people that are not members of a FCU, the NCUA has been concerned about FCUs benefiting from CUSO profits generated from non-members. Second, the NCUA has also expressed concern that if member loans were being made by CUSOs, the NCUA would have a duty to examine such loans and that would lead to stricter NCUA examination authority over CUSOs. Finally, the NCUA has also limited CUSO lending authority due to concerns that permitting CUSOs to engage in a core credit union function could negatively affect affiliated credit union services.”
However, the NCUA is reassessing its stance on permitted CUSO lending activity “noting that recent technological developments have further increased the benefits of allowing CUSOs to engage in expanded loan originations.” Nonbank firms constitute a significant share of the consumer lending market and are increasingly targeting lending products traditionally provided by credit unions, including auto finance, small-dollar consumer lending, and unsecured consumer credit. The proposed rule noted that “to compete effectively in a market with a rising prevalence of these technology-based lenders, FCUs may need to rely increasingly on pooling their resources to fund CUSOs and to build the necessary infrastructure. The costs for research and development, acquisition, implementation, and specialized staff capable of managing these new technologies may be prohibitive for all but a very few of the largest FCUs. CUSOs may provide the means for FCUs to address these challenges and may enable FCUs to collaboratively develop technologies that better serve their members.”
The NCUA included several questions within its proposed rule and welcomes feedback on all aspects of the proposal. Some of the questions posed include:
Would the proposed rule enable FCUs to offer additional technology-based lending services that FCUs may otherwise be unable to offer their members?
The Board is also considering whether permitting CUSOs to originate additional types of loans would facilitate FCUs’ access to securitization markets. It may be cost prohibitive for FCUs to securitize loans because securitizations are most cost effective with a large volume of loans. FCUs may also have difficulty aggregating loans to complete a securitization due to restrictions on purchasing loans and market concerns relating to varying underwriting standards. Therefore, the Board solicits comment on whether a CUSO could serve as an aggregator of loans to allow FCUs better access to securitization markets.
Does the proposed rule expose FCUs to unnecessary safety and soundness risks? If so, are there steps the Board should consider to mitigate such risks?
Would permitting CUSOs to engage in any type of lending as FCUs lead to additional reputational risk for FCUs? Loans from affiliated CUSOs may not comply with the same consumer protection limits as FCU loans, for example FCUs are subject to usury restrictions and a regulatory structure for issuing payday alternative loans (referred to as PALs).
Does expanding CUSO lending authority to include additional core FCU lending categories create unnecessary competition for FCUs, particularly small FCUs?
Instead of adopting a provision similar to the corporate CUSO provision that allows the NCUA to add additional categories of permissible activities for all CUSOs on its website, should the Board require individual FCUs to petition the Board for permission to lend to or invest in CUSOs that do additional activities or services not already listed in § 712.5?
Should the Board publish on its website any conditions imposed on activities permissible through the approval process?
Should the Board consider additional changes to the permissible activities list for CUSOs?
Be sure to contact Amy Kleinschmit at akleinschmit@dakcu.org with any questions or comments.