NCUA LETTER TO CREDIT UNIONS NATIONAL CREDIT UNION ADMINISTRATION 1775 Duke Street, Alexandria, VA 22314 DATE:
November 2013
LETTER NO.: 13-CU-XX
TO:
Federally Insured Credit Unions
SUBJ:
Changes to NCUA Regulations related to Credit Union Service Organizations
ENCL:
1) Appendix A: CUSO Reporting Requirements 2) 12 CFR Parts 712 and 741, Final Rule
Dear Board of Directors and Chief Executive Officer: On November 21, 2013, the NCUA Board adopted changes to the regulations that address federally insured credit unions’ responsibilities when involved with a credit union service organization (CUSO). This letter outlines the primary changes to the CUSO-related rules, as well as what your credit union needs to do as a result of the changes. These regulatory changes will become effective June 30, 2014. Why did NCUA change the CUSO-related rules? NCUA recognizes that CUSOs provide significant value to the credit union industry by allowing organizations to collaboratively share risk, manage costs, and deliver services to credit union members. The unique collaborative business model of CUSOs fosters cooperation and shared innovation for credit unions, allowing them to achieve economies of scale, retain expertise, and better serve their members. However, CUSOs also pose potentially widespread financial and operational risks to credit unions and the National Credit Union Share Insurance Fund. Since 2008, CUSOs have caused credit unions more than $300 million in direct losses and led to failures of credit unions with combined assets of more than $2 billion. Without these changes to the CUSO regulations, NCUA cannot fully determine the financial condition of CUSOs, the full range of services offered by each CUSO, an accurate number of CUSOs in operation, or the relationship between a specific CUSO 1
and a specific credit union.1 This lack of accurate information limits the agency’s ability to conduct offsite monitoring, assess emergent risks, and manage losses to the Share Insurance Fund. To address these potential risks, the Board has changed the CUSO-related rules to extend certain requirements to all federally insured credit unions and improve the quality of information about credit unions’ use of CUSOs. The final regulations strike a reasonable balance by collecting basic information on all CUSOs and limiting the requirement to provide more extensive information to those CUSOs that provide services that involve higher risk to credit unions. In the future, CUSOs will provide reports directly to NCUA, reducing the current regulatory burden credit unions have in reporting certain CUSO data to the agency.2 What are the primary changes to the CUSO-related rules? The following table summarizes the primary changes to the rule, indicates which credit unions are affected, and outlines what action credit unions need to take in order to comply with the regulations.3 More detailed information on each of the changes appears on the following pages. Table: Summary of Primary Changes to CUSO-Related Rules
Rule Element
Credit Union Action
New for all Federally Insured StateNew for all Chartered Credit Credit Unions Unions
(Required by June 30, 2014) CUSO Subsidiaries – clarifies applicability of the regulations to CUSO subsidiaries. CUSO Registry – requires credit unions to ensure that the CUSOs with which they do business agree to provide certain information directly to NCUA and the state supervisory authority, as applicable, on an annual basis. CUSO Accounting – requires credit unions to ensure that the CUSOs with which they do business agree to comply with generally accepted accounting principles and obtain a financial statement audit.* Less than Adequately Capitalized Federally Insured, State-Chartered Credit Unions – added preapproval process for federally insured, state-chartered credit unions that are, or would be rendered, less than adequately capitalized by an additional investment in a CUSO.* * These provisions previously only applied to federal credit unions.
None Amend written agreement between credit union and CUSO
None
1
Current information is incomplete primarily because NCUA collects information from credit union clients rather than directly from each CUSO. According to NCUA records, of the 4,189 federal credit unions that filed a 5300 call report as of June 30, 2013, more than one third (1,413) reported at least one interest in a CUSO; a total of 3,275 CUSO interests were reported. Further, of the 2,492 federally insured statechartered credit unions that filed a 5300 call report as of June 30, 2013, 46.6 percent (1,161) reported an interest in at least one CUSO; a total of 2,836 CUSO interests were reported. 2 Credit unions currently report certain CUSO data in the CU Online profile and in response to 5300 call reports. 3 The final regulations also include some technical and administrative revisions to the rule text.
2
CUSO Subsidiaries The new CUSO regulations apply to all levels, or tiers, of a CUSO’s structure. Any subsidiary in which a CUSO has an ownership interest of any amount is treated as a CUSO, and is subject to the regulations if it is engaged primarily in providing products or services to credit unions or credit union members.4 There is an inherent risk that a subsidiary CUSO could adversely affect the investing credit union and, ultimately, the NCUSIF. This provision was explicitly included in the regulation to ensure that credit unions and CUSOs are aware that the requirements of the NCUA regulations, and applicable state rules, apply to all subsidiary entities in which a CUSO invests. This includes entities with the appearance of being formed to evade the CUSO-related rules. CUSO Registry Before investing in or lending to a CUSO, your credit union must obtain a written agreement from the CUSO indicating that it will provide information to NCUA and the state supervisory authority, as applicable, on an annual basis.5 CUSOs will submit this information directly to NCUA via an online registration system by December 31, 2015, as soon as the agency’s reporting system is fully operational. Appendix A outlines the new reporting requirements planned for CUSOs. CUSO Accounting Before investing in or lending to a CUSO, your credit union must obtain a written agreement from the CUSO indicating that it will:6
Account for all transactions in accordance with generally accepted accounting principles; Prepare quarterly financial statements; and Obtain an annual financial statement audit of financial statements by a licensed certified public accountant in accordance with generally accepted auditing standards.7
4
The provision will not apply to third parties with whom a CUSO contracts or otherwise does business where they do not have an ownership interest. 5 See NCUA Rules & Regulations - Section 712.3(d)(4) 6 See NCUA Rules & Regulations - Section 712.3(d)(1) and Section 712.3(d)(2) 7 A separate audit is not required for a wholly owned CUSO if it is included in the consolidated audit of the investing credit union.
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Less than Adequately Capitalized Federally Insured, State-Chartered Credit Unions8 The regulations establish a limit on additional investments in a CUSO by a federally insured, state-chartered credit union that is, or would be rendered, less than adequately capitalized. A federally insured, state-chartered credit union in this situation must obtain prior written approval from its state supervisory authority and notify the NCUA regional director if its aggregate cash outlay exceeds the investment limit in the state in which the credit union is chartered. If there is no limit in the state in which the credit union is chartered, then the credit union’s aggregate cash outlay is limited to one percent of paidin and unimpaired capital and surplus. Conclusion If you have or plan to make a loan to or investment in a CUSO, you need to familiarize yourself with the requirements of the final regulations. Please contact your regional office or state supervisory authority if you have questions regarding this letter. Sincerely,
Debbie Matz Chairman Enclosures
8
See NCUA Rules & Regulations - Section 712.2(d)(3). Conditions for recapitalization of CUSOs previously applied only to federal credit unions (FCUs).
4
Appendix A: CUSO Reporting Requirements Effective June 30, 2014, the final regulations require federally insured credit unions (FICUs) to obtain a written agreement from a CUSO, prior to investing in or lending to the CUSO, that the CUSO will provide information to NCUA and the state supervisory authority, as applicable, on an annual basis.9 In light of the comments received on the proposed rule, the scope and application of the reporting requirement in the final rule primarily focuses on CUSOs that engage in certain complex or high-risk activities.10 As shown in the table below, these CUSOs must provide more detailed information in addition to the information required for basic registration. Table: CUSO Reporting Requirements What information is required? Tax ID Legal name Address Telephone number Website address (URL) Contact person Services offered FICUs that invest in, lend to, or receive services from the CUSO Parent/subsidiary CUSO information (if applicable) Services provided to each FICU customer Investment, loan, or level of activity of each FICU Annual financial statements (upload process) Total dollar amount of loans outstanding Total number of loans outstanding Total dollar amount of loans granted year-to-date Total number of loans granted year-to-date
Who must report this information?
All CUSOs (information is required for basic registration)
CUSOs that offer one or more complex or high risk service(s) CUSOs that offer credit or lending services
9
While NCUA does not have direct statutory and regulatory authority over CUSO operations, Section 107 of the Federal Credit Union Act provides the agency the authority to regulate federal credit unions’ lending and investment in CUSOs. NCUA has regulated this lending and investment authority in the CUSOrelated rules since 1979, when this statutory provision was implemented through the promulgation of the first CUSO regulation. The final rule is both historically and legally consistent with NCUA’s statutory authority to regulate this lending and investment authority. Title II of the Federal Credit Union Act provides the NCUA Board with the broad authority to insure members’ accounts and administer the NCUSIF and to prescribe regulations for FICUs that are necessary to carry out that purpose. All FICUs, through their application for insurance, have agreed to comply with those regulations. To protect the NCUSIF from any such risk, it is necessary and within NCUA’s authority to implement regulations that require credit unions to enter into agreements with CUSOs requiring CUSOs to submit reports directly to NCUA and the appropriate state supervisory authorities, if applicable. 10 Complex or high-risk services include credit and lending, information technology, custody, safekeeping, and investment management services for FICUs.
5
The registration system through which CUSOs will report information directly to NCUA will be available by December 31, 2015. Once the CUSO registry is ready to use, NCUA will provide notice that the reporting system is available, as well as training material on how to use the system. The Freedom of Information Act (FOIA), as well as the applicable exemptions in NCUA’s FOIA regulations, applies to any information a CUSO submits to NCUA, including the information required under the final rule. NCUA anticipates that CUSO submissions will contain or consist of trade secrets and privileged or confidential commercial or financial information that is subject to withholding under Exemption 4 of the FOIA. NCUA will not release information reported by a CUSO that is contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of NCUA; this information will remain confidential and non-public under Exemption 8 of the FOIA. For those state supervisory authorities that have signed written information sharing agreements with the agency, NCUA will share information regarding CUSOs in their respective states.
6