The National Credit Union Board of Directors approved a final rule which will allow credit union service organizations to engage in any type of lending authorized for federal credit unions.
Currently, CUSOs – companies owned by credit unions to provide financial or operational services to institutions or their members – are only authorized to offer mortgages, student loans, credit cards and business loans. The new rule would now allow CUSOs to expand into other loan categories, including car loans and payday loans.
The rule passed by a 2-1 vote at Thursday’s board meeting, with Chairman Todd Harper casting the dissenting vote. Calling the settlement “the wrong rule at the wrong time,” Harper said the agency needed to protect the Share Insurance Fund, which insures members’ deposits at federally insured credit unions, from losses.
“Instead, this regulation will likely increase those losses in years to come,” he said. “My fear of future losses for the Share Insurance Fund is not hypothetical. It is a fact.”
According to NCUA staff calculations, at least 73 credit unions suffered losses from CUSOs between 2007 and 2020, Harper said. The ultimate failure of 11 of these credit unions caused losses of $305 million to the Share Insurance Fund. Combined with the losses caused by CUSO in the credit unions that did not fail, the total losses for the system amounted to nearly $600 million, he said.
But board member Rodney Hood said it was difficult to assess the correlation between losses and CUSOs or even causation in these specific cases.
Harper said the agency didn’t have to look far to find past examples of CUSO causing headaches at the NCUA. A business lending-focused CUSO “went wild” during the Great Recession, and the regulator eventually had to provide a $60 million line of credit to keep the credit union that owns it from going bankrupt, a- he declared.
He added that earlier this year the NCUA was forced to liquidate a small credit union due to its CUSO mortgage issues. “With this rule, I’m afraid we’ll open the door to similar situations in the future, but this time in payday and auto loans,” Harper said.
But Hood and NCUA vice president Kyle Hauptman said allowing CUSO to make auto loans would keep that company in the credit union system.
Consumers are now using their cellphones to compare prices for the best car and the best financing without ever having to visit a dealership, Hauptman said. The pandemic has accelerated that trend, he said, and it could hurt lending from some smaller credit unions if they aren’t able to make those loans as well.
“The technology and scale needed to compete in an online consumer and automotive marketplace is beyond the reach of most individual credit unions,” Hauptman said.
Hood agreed, saying indirect auto loans are essential for credit unions, so the NCUA must give them the tools to scale and compete in the online marketplace.
“We cannot sit idly by and watch the automotive market evolve without doing anything,” he said.
The CUSO rule doesn’t go far enough, Hood said. He also wants CUSOs to be allowed to invest in fintechs.
These investments are critical to keeping the credit union system safe and sound over the long term, and so these institutions should be at the table working with fintechs, Hood said.
“Without fintech investments, the credit union system risks stagnating in the years to come as the cooperative system must respond to changing dynamics,” he said. “And so does the industry regulator.”
Harper wasn’t the only one to oppose the CUSO rule.
The American Bankers Association said the rule creates more risk for consumers and the credit union industry by allowing larger credit unions to expand into “subprime types of lending” without proper NCUA oversight. .
“Banks, small credit unions and the NCUA president 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 providing direct consumer lending 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 has opposed the rule since the process began in January, said the regulator had its priorities misplaced as the country continues to grapple with the pandemic.
“In the current economic environment, the NCUA Board of Directors should work to pass rules, protect consumers and prepare the system for likely future credit losses as COVID-relief programs 19 are coming to an end. This rule is not pandemic relief,” Harper said.