The Board of Directors of the National Credit Union approved a final rule which will allow credit union service organizations to enter into any type of loan authorized for federal credit unions.
Currently, CUSOs – businesses that belong to credit unions to provide financial or operational services to institutions or their members – are only allowed to offer mortgages, student loans, credit cards. and commercial loans. The new rule would now allow CUSOs to expand their activities into other categories of loans, including auto loans and payday loans.
The rule was passed by a 2-1 vote at the board meeting Thursday with President Todd Harper casting the dissenting vote. Calling the settlement “the wrong rule at the wrong time,” Harper said the agency must protect the Equity Insurance Fund, which insures members’ deposits in federally insured credit unions, against loss.
“Instead, this regulation will likely increase these losses in the years to come,” he said. “My fear of future losses for the Equity Insurance Fund is not hypothetical. It’s 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 Equity Insurance Fund. Combined with the losses CUSO caused to credit unions that did not go bankrupt, 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 for many earlier examples of CUSO causing NCUA headaches. A CUSO focused on business lending “broke loose” 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, he said. he declared.
He added that earlier this year, NCUA was forced to wind up a small credit union because of its mortgage problems, CUSO. “With this rule, I’m afraid we will open the door to similar situations in the future, but this time in payday loans and auto loans,” Harper said.
But Hood and NCUA vice president Kyle Hauptman said allowing CUSO to provide auto loans would keep the business in the credit union system.
Consumers now use their cell phones to compare prices for the best car and the best financing without ever having to visit a dealership, Hauptman said. The pandemic has accelerated this trend, he said, and it could hurt the loans of some small credit unions if they are not able to provide 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 that the indirect auto loan is essential for credit unions, so the NCUA must give them the tools to scale and compete in the online market.
“We cannot stand idly by and watch the auto market evolve and do nothing,” 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 strong over the long term, and therefore these institutions should be at the table to work with fintechs, Hood said.
“Without investments in fintechs, the credit union system runs the risk of stagnating for years to come, as the cooperative system has to respond to changing dynamics,” he said. “And the same goes for the regulator of the industry.”
Harper was not alone in opposing the CUSO rule.
The American Bankers Association said the rule created more risk for consumers and the credit union industry by allowing larger credit unions to grow into “risky loan types” without proper oversight from the NCUA. .
“Banks, small credit unions and the president of NCUA himself have expressed concerns about this action, which will further erode the character and purpose of the credit union charter,” said ABA spokesperson 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 had provided direct consumer loans for decades without harming credit unions. Without CUSOs, many credit unions, especially small ones, would not have been large enough to compete with mortgage, business, credit card and student loans.
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 should strive to adopt rules, protect consumers, and prepare the system for the likely credit losses to come as COVID-relief programs 19 end. This rule is no relief in a pandemic, ”said Harper.