The National Credit Union Administration board
Currently, CUSOs — companies that are owned by credit unions to provide financial or operational services to the institutions or their members — are permitted to offer only mortgages, student loans, credit cards and business loans. The new rule would now permit CUSOs to expand into other lending categories including automobile and payday loans.
The rule passed by a 2-1 vote at the board’s Thursday meeting with Chairman Todd Harper casting the dissenting vote. Calling the regulation “the wrong rule at the wrong time,” Harper said the agency needs to protect the Share Insurance Fund, which insures members' deposits in federally-insured credit unions, from losses.
“Instead, this rulemaking will likely increase such losses in the years ahead,” he said. “My fear of future losses to the Share Insurance Fund is not hypothetical. It is a fact.”
According to NCUA staff calculations, at least 73 credit unions incurred losses due to CUSOs between 2007 and 2020, Harper said. The ultimate failure of 11 of those credit unions caused $305 million in losses to the Share Insurance Fund. When combined with the CUSO-caused losses at credit unions that did not fail, the total losses to the system were nearly $600 million, he said.
But board member Rodney Hood said it is difficult to assess the correlation between the losses and the CUSOs or even causation in those specific cases.
Harper said the agency doesn’t have to look hard to find prior examples of CUSOs causing headaches for the NCUA. A CUSO focused on business lending “ran amok” during the Great Recession, and the regulator ultimately had to provide a $60 million line of credit to prevent the credit union that owns it from failure, he said.
He added that earlier this year, the NCUA was forced to liquidate a small credit union because of its troubled mortgage-lending CUSO. “With this rule, I fear that we are opening the door for similar situations in the future, but this time in payday and auto lending,” Harper said.
But Hood and NCUA Vice Chairman Kyle Hauptman said allowing CUSO's to make auto loans would keep that business within the credit union system.
Consumers are now using their mobile phones to comparison shop for the best car and financing without ever having to go into a dealership, Hauptman said. The pandemic accelerated this trend, he said, and it could hurt lending for some small credit unions if they are not also able to make those loans.
“The technology and scale necessary to compete in an online consumer and auto marketplace is beyond the reach of most individual credit unions,” Hauptman said.
Hood agreed, saying indirect auto lending is critical for credit unions, so the NCUA needs to give them the tools to scale and compete in the online marketplace.
“We can’t sit back and watch the automobile market evolve without doing anything about it,” he said.
The CUSO rule does not go far enough, Hood said. He also wants to see CUSOs be permitted to invest in fintechs.
Those investments are critical to keep the credit union system safe and sound in the long term, and so those institutions should be at the table working with fintechs, Hood said.
“Without investments in fintechs, the credit union system runs the risk of becoming stagnant in the years ahead as the cooperative system must respond to changing dynamics,” he said. "And so too should the industry’s regulator.”
Harper was not alone in his opposition to the CUSO rule.
The American Bankers Association said the rule creates more risk for consumers and the credit union industry by allowing the largest credit unions to expand into “risky types” of lending without proper oversight by the NCUA.
“Banks, small credit unions and the chair of the NCUA himself have raised concerns about this action, which will further erode the character and purpose of the credit union charter,” said ABA spokesman Ian McKendry.
The NCUA said it received more than 1,000 letters on the rule, one of the largest sets of public comments the agency has ever received.
Hood and Hauptman said CUSOs have been making direct consumer loans for decades without negatively impacting credit unions. Without CUSOs many credit unions — especially small ones — would not have had the scale to compete in mortgage, business, credit card and student lending.
But Harper, who opposed the rule from the start of the process back in January, said the regulator has its priorities misplaced as the country continues to deal with the pandemic.
“In the current economic environment, the NCUA board should be working to adopt rules, protect consumers, and prepare the system for the likely coming credit losses as COVID-19 relief programs come to an end. This rule is not pandemic relief,” Harper said.
