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CUSO Final Rule Protects Share Insurance Fund, Cuts CU Paperwork
Friday, November 22, 2013 6:45 AM

The National Credit Union Administration (NCUA) will take a significant step forward on anticipating potential risk from Credit Union Service Organizations (CUSO) with the board’s approval of a final rule (Parts 712 and 741) requiring greater transparency from those organizations.

“CUSOs are an essential part of the credit union system, but they also represent a significant potential risk that is not transparent,” NCUA Chairman Debbie Matz said. “It is very important that NCUA have the information needed to assess that risk. Since proposing this rule two years ago, we have continued an open dialogue with stakeholders. We listened carefully and made substantial changes to reduce reporting burdens and target the final rule at CUSOs posing the most risk.”

Since 2008, nine CUSOs have caused more than $300 million in direct losses to the Share Insurance Fund and led to the failures of credit unions with combined assets of more than $2 billion.

“This rule will finally shed some light on a regulatory blind spot,” Matz said. “Risks that have been moving off of credit unions’ balance sheets to CUSOs will become transparent, and NCUA will be better positioned to inform credit unions if we find CUSOs that pose excessive risks to credit unions or the Share Insurance Fund.”

Matz noted the rule will give credit unions a measure of regulatory relief, as the reporting burden for CUSOs will shift from credit unions to CUSOs. Once the National CUSO Registry is up and running by year-end 2015, NCUA will be able to reduce the amount of CUSO information collected from credit unions on Call Reports and Credit Union Online profiles.

Other provisions of the new rule include:

  • Extension, for consistency, of sections of the current CUSO rule, which currently apply only to federal credit unions, to all federally insured credit unions. A CUSO must agree to:
    • Account for its transactions in accordance with generally accepted accounting principles;
    • Prepare quarterly financial statements; and
    • Obtain an annual financial statement audit by a licensed certified public accountant.
  • A new requirement that CUSOs must agree to report information directly to NCUA and to the state regulator, as applicable. CUSOs that offer complex or high-risk services—like credit and lending; information technology; and custody, safekeeping and investment management services—must report more detailed information, including financial statements and general customer information.
  • Any subsidiary in which a CUSO has an ownership interest in any amount will be subject to the rule if the subsidiary is primarily engaged in providing products or services to credit unions or their members.
  • A requirement that a state-chartered credit union that is or would be rendered less than adequately capitalized by additional investment in a CUSO must obtain approval from its state regulator and notify an NCUA regional director prior to making the investment.

Credit unions will need to update their written CUSO agreements to include the new requirements in the final rule. NCUA will shortly issue a Letter to Credit Unions outlining all changes and actions required with timetables.

The new rule, available online here, will take effect June 30, 2014, and CUSOs will begin submitting reports after Dec. 31, 2015, through a registration system NCUA is creating.