NCUA Issues Guidance on Expansion of Permissible CUSO Activities
Commentary by Jonathan P. Vardeh Jaffe
The National Credit Union Administration ("NCUA") issued guidance on the credit, strategic, compliance and reputational risks to federal credit unions ("FCUs") arising from its Credit Union Service Organization ("CUSO") rule, which became effective on November 26, 2021.
The rule (i) expanded the permissible activities and services for CUSOs and (ii) permitted FCUs to invest in and lend to CUSOs that engage in all types of lending permitted for FCUs, including auto loans, leases, payday alternative loans and other unsecured consumer loans. The NCUA said that the type of risk an FCU may be exposed to will depend on the nature of its relationship with the CUSO.
The NCUA encouraged FCUs engaged in investor, client and lender relationships with CUSOs to perform appropriate risk assessment, conduct thorough due diligence regarding the CUSO's credit and operational risks and consider all possible disruptions or risks associated with poor financial performance or risk management. The NCUA emphasized that CUSOs are separate entities from FCUs, and are not subject to the NCUA's lending regulations, including interest rate caps, loan maturity limits, and prohibitions against prepayment penalties. CUSOs are instead subject to lending laws and consumer financial protection laws.
The NCUA also encouraged FCUs to ensure that partner CUSOs comply with fair lending requirements, especially given the rise in AI-powered and machine learning-based lending decisions.
The NCUA said that it will publicize any new activities that are approved beyond what is listed in the current rule on its dedicated CUSO Activities webpage. Currently, there are no approved activities outside of those included in NCUA Rule 712.5 ("What activities and services are preapproved for CUSOs?").
Commentary
The guidance issued by the NCUA is critically important for the FCUs that it examines because it allows them to develop compliance programs that more effectively address CUSO-related risks. Nevertheless, the costs associated with regulatory compliance and due diligence can be prohibitive, especially for smaller credit unions. Accordingly, more bright-line guidance on how to manage specific FCU/CUSO relationships could significantly help to reduce compliance costs.