Proposed CUSO Rule Comment

The American Bankers Association today filed a comment letter with NCUA with respect to its proposed credit union service organization (CUSO) regulation.

ABA believes that the proposed rule is an appropriate step given the fact that NCUA does not have the authority to examine third party vendors like other federal banking regulators; but does not go far enough to mitigate the risk to the National Credit Union Share Insurance Fund (NCUSIF).

ABA has concerns about the section of the proposed rule, which allows undercapitalized federally-insured state chartered credit unions (FISCU) to invest in a CUSO to the permissible state limit, does not adequately address safety and soundness concerns and the potential risk to the NCUSIF.

ABA made several points in its letter with regard to the investment limits.

First, some state laws have very high CUSO investments limits. For states with more permissive investment limits, such an investment by a FISCU could represent a significant contingent claim on the net worth of the credit union if the CUSO fails; and thus could pose a significant risk to the credit union and the NCUSIF.

Second, the degree of risk to a FISCU depends on the nature of the services provided by the CUSO. Rather than following a one-size-fits-all state CUSO investment limit for a specific state where the FISCU is chartered, NCUA should set different CUSO investment limits for all undercapitalized credit unions, both federal charters and state charters, based upon the activities of the CUSO.

Third, under NCUA’s prompt corrective action regulations, restricting transactions with and ownership of a CUSO is a discretionary supervisory action, not a mandatory action, with respect to a credit union that is undercapitalized with a net worth ratio below 5 percent. ABA believes that discretionary supervisory action is not sufficient. ABA recommended that NCUA should amend its PCA regulations so that once a credit union becomes significantly undercapitalized there is a presumption of a restriction on investments with CUSOs. And a critically undercapitalized credit union should not be able to engage in any transaction with a CUSO without first receiving an approval from the NCUA.

Read the letter.