NCUA Finalizes New CUSO Registration & Reporting
12/6/2013
Credit union losses from CUSO operations are infrequent, but the magnitude of recent CUSO losses has led to increased regulation.
On November 21, 2013, the NCUA Board issued amendments to the CUSO Rule (Part 712) to add registration and reporting requirements for all CUSOs and to further extend its regulatory reach over CUSOs of federally insured state chartered credit unions.
As expected, NCUA's final rule closely tracks its proposal. However, NCUA adopted risk targeted reporting by complex or high risk CUSOs and delayed the effective date for reporting.
The new CUSO rule amendments include:
• National CUSO Registry – all CUSOs must register on NCUA's future online registration system
• CUSO Annual Reporting – all CUSOs must submit annual reports to NCUA
• CUSOs conducting complex or high risk activities must register and report additional detailed business & financial information
• Current financial & accounting requirements were extended to CUSOs of federally insured state chartered credit unions, and
• Restrictions on recapitalizing CUSOs were extended to federally insured state chartered credit unions.
In addition to the final CUSO rule, on November 21, 2013, NCUA issued Letter to Credit Unions 13-CU-13 providing an overview of the CUSO Rule changes and reporting requirements.
Generally the CUSO rule amendments are effective June 30, 2014, except the new registration and reporting requirements will begin when NCUA's new reporting system is operational, which NCUA expects no later than December 31, 2015.
CUSO Losses – More Regulation
According to NCUA, since 2008 CUSOs have caused credit unions more than $300 million in direct losses and still pose potentially widespread financial and operational risks to credit unions and the National Credit Union Share Insurance Fund (NCUSIF). NCUA claims it has not been able to conduct offsite monitoring to assess these potential risks because they lacked access to financial and operational information from CUSOs. NCUA has always had full access to any CUSO information, just not in an organized registry. Whether the increased regulation will reduce CUSO losses over time is questionable. NCUA's supervisory enforcement authority over credit unions and corporates has not resulted in reduced losses or risk to the NCUSIF.
National Registry & Annual Reporting for CUSOs
NCUA added significant new requirements applicable to all CUSOs for registration and annual reporting of operational information to NCUA. The new online registration and reporting will apply to all CUSOs, including all currently existing CUSOs, whether or not operational; new CUSOs within 60 days of formation, and business acquisitions that become CUSOs. Again, the new CUSO registration and reporting are not immediate, but are delayed until 2015.
a. Basic Registration for All CUSOs. All CUSOs must register with NCUA. A CUSO's registration will be made on an online registration system to be developed by NCUA by 2015. The basic registration includes CUSO administrative data as well as some proprietary information, as follows:
1. CUSO Legal Name
2. Tax ID Number
3. Physical Address,
4. Telephone number
5. Website address (URL)
6. Primary CUSO contact person
7. CUSO services offered
8. Names & charters of credit union owners
9. Names & charters of credit union lenders
10. Customer Information: names & charters of all federally insured credit union service recipients/customers
11. Names and information about CUSO owned subsidiaries.
Based upon rulemaking comments for a more 'risk based" scope for reporting, NCUA decided to require additional financial statement and CUSO service information for riskier CUSOs, not all CUSOs. However, most CUSOs engage in activities that will require the higher standard of reporting.
b. Additional Registration Data for Complex/High Risk CUSOs.
CUSOs that engage in the following activities are deemed to be complex or high risk CUSOs subject to more extensive data registration and reporting:
• Credit & lending activities – MBL origination; consumer mortgage origination; loan servicing & support; student loan origination; and credit card origination
• Information technology – electronic transaction services; record retention, security, disaster recovery services, and payroll processing
• Custody, safekeeping & investment management services
For riskier, complex CUSOs, NCUA will require reporting of detailed, proprietary business and financial data, in addition to the basic registration data above, including:
1. Service Information – services provided to each credit union owner, lender or service recipient and the level of activity conducted 2. Investor Information – investment amount of each credit union owner
3. Lender Information – loan amounts of each credit union lender
4. CUSO Financials – most recent annual audited financial statements 5. CUSOs providing credit & lending services - detailed loan information categorized by each type of loan:
• The total number and dollar amount of outstanding loans
• The total number and dollar amount of loans granted year-to-date
c. Annual Reporting for All CUSOs.
All CUSOs will be required to submit an annual report to NCUA and the CUSO's state regulator, if applicable. Thus, large national CUSOs with credit union owners throughout the country will need to establish multi-state reporting procedures. The annual report will include current basic registration data, plus business and financial information for complex/high risk CUSOs. The annual reports will be submitted via the NCUA online system.
In its Letter to Credit Unions 13-CU-13, NCUA stated that the Freedom of Information Act (FOIA) and applicable exemptions in NCUA's FOIA regulation apply to any information a CUSO submits to NCUA. NCUA also gave assurances that NCUA will safeguard and not release information reported by a CUSO. NCUA can and will share information with state regulators
Financial & Accounting Requirements – Extended to CUSOs of FISCUs
NCUA extended several CUSO rule requirements of FCUs to FISCUS. Currently NCUA requires CUSOs to enter a written agreement with their FCU owners to ensure that the FCU and NCUA have full access to the CUSO's financial books and records. The CUSO is also required to keep its books and records in accordance with GAAP, prepare quarterly financial statements and (except for wholly owned CUSOs) obtain an annual CPA financial statement audit.
NCUA extended these requirements to all CUSOs of FISCUs. Now NCUA can gain complete access to any books and records and internal controls of CUSOs of FISCUs. Also, now that CUSOs of FISCUs are subject to the financial and accounting requirements under 712.3(d). these CUSOs will need to revise or establish a new written agreement with their credit union owners to address the additional NCUA requirements.
New CUSO Written Agreements
Prior to investing in a CUSO, a credit union must obtain the CUSO's written agreement to the financial and accounting standards and information access. These written agreements with CUSOs will need to be revised for all CUSOs before June 30, 2014. For CUSOs of FCUs, the update is necessary to reflect the new registry and reporting requirements. For CUSOs of FISCUs, the written agreement is entirely new, due to NCUA's rule extension.
Restrictions on Recapitalizing CUSOs – Extended to FISCUs
Currently FCUs that are less than adequately capitalized or would be after making a CUSO investment, must obtain prior written approval from the applicable NCUA Regional office to recapitalize its CUSO. NCUA has extended this rule from FCUs to FISCUs, too. The rule restricts additional investments in a CUSO by an FISCU that is or would be rendered, less than adequately capitalized. A FISCU must obtain written approval from its state regulator and notify their NCUA Regional office before further investing in a CUSO that will result in an aggregate, cumulative cash outlay (up to 7 years) that exceeds the applicable state CUSO investment limit or if none, the federal limit (1% paid-in & unimpaired capital & surplus).
CUSO Subsidiaries.
In the final rule, NCUA clarified its position and the general understanding of the industry that any subsidiary entity in which a CUSO forms, operates or just invests is, itself, a CUSO subject to the applicable requirements of NCUA Part 712.
NCUA's increased regulation of CUSOs has not stifled CUSO innovation and collaboration in the past and should not diminish their innovation and collaboration ability in the future, only their resources.
Brian Witt represents credit unions in Oregon, Washington and nationwide in the formation of CUSOs and advises CUSO clients on corporate and ownership issues, licensing, operations and compliance, and state and federal regulatory matters.
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