Expansion of CUSO Powers Poised for Positive Impact

At its January meeting, the National Credit Union Administration Board approved a proposed rule with a 30-day comment period that would allow credit union service organizations the authority to work with credit unions to originate all types of loans that a federal credit union may originate. This rule change would allow credit union-owned CUSOs to bring scale and share costs and risks while offering collaborative solutions to help credit unions remain competitive in the ever-evolving financial services market.  

Over the years, CUSOs have successfully brought scale and expertise as well as cost- and risk-sharing to other lending areas such as mortgage, member business, credit card and student lending. Under this rule change, credit union service organizations would be allowed to bring competitive solutions to the evolving auto lending and personal lending areas, including technology that enables members to apply for and obtain auto loans in minutes, not days, as they see such tech being offered by well-funded, deeply capitalized and largely unregulated fintech competitors.

CUSOs can serve two roles in lending. They can provide credit unions with the expertise to source, originate and service loans credit unions make. Through collaborations and economies of scale, CUSOs bring high levels of lending expertise to credit unions at costs significantly lower than if each credit union hired the expertise separately. As has already been stated, CUSOs can already originate mortgage, member business, credit card and student loans. There is no logical or safety and soundness reason to treat auto loans and unsecured loans differently since CUSOs have proven themselves as capable and responsible lenders with more complicated types of loans.

Let’s take a look at why it’s important for credit unions that CUSOs have the power to source and originate auto loans. The auto sales and lending market has been changing dramatically over the years—and so much more so during the past year as the pandemic forced the closure of in-person shopping at dealerships and moved to online shopping with remote delivery as an acceptable option.

Large national car-buying services have developed to make the process of purchasing a new vehicle easier and less time-consuming, a one-stop experience of buying a car and getting a loan. These national service providers, while convenient for members, do not want the friction of having to work with thousands of individual credit union lenders as they are closing sales. They want to work with large lenders. 

This is an area where CUSOs can help, working with the dealers and car-buying services to be the intermediary that makes the initial vehicle loan to a consumer. As a CUSO can serve both members and non-members, there is not a membership qualification step to slow the buying and lending process. Within days after making the loan, the CUSO will identify a credit union that has the borrower as a member and sell the loan to the credit union. If a borrower cannot be associated with a credit union, the CUSO will sell the loan to a non-credit union lender. CUSOs act as the intermediary to funnel as many lending opportunities as possible to their credit union owners and customers.

Will CUSOs compete with the credit unions for auto loans? No, for two reasons. First, CUSOs are owned and managed by credit unions, and credit unions will ensure that the interest of credit unions come first. Second, there are strict limitations on the amounts credit unions may invest in CUSOs, which means that CUSOs do not have the capital to originate and hold large volumes of loans.

Now, let’s look at unsecured loans. One of the primary benefits that CUSOs bring to their credit union owners and clients is the focus on adaptability, innovation and collaboration. We do not know what the next secured or unsecured lending opportunity will be. More and more sellers of goods and services make loan offers at the point-of-sale. Consumers love the convenience. Sellers love the quick sales. Credit unions without a relationship with the sellers offering point-of-sale lending never see their lost lending opportunities. The credit unions just know that their loan origination is down again this month. 

Point-of-sale lending is not only occurring at auto dealers, but also when consumers buy solar power, boats, RVs, smart home products and home improvement projects to accommodate home offices that may continue operating long after the pandemic has been controlled. Managing the seller relationships and generating enough volume to interest sellers to do business with you requires the scale and expertise that CUSOs can provide. CUSOs are the answer to keeping credit unions in this growing segment of the loan business but only if they have the power to work with all types of loans a credit union is able to make.  

We have heard the statement that if CUSOs were given the power to make unsecured loans, they would become payday lenders. There is no reason to conclude that the philosophy of serving members vanishes when credit unions form CUSOs. Giving CUSOs the ability to make unsecured loans will actually help credit unions defeat payday lenders. Some states, such as Washington, permit CUSOs owned by state-chartered credit unions to provide unsecured loans. The CUSO model was used to enable credit unions to provide payday lending alternatives to help members break free from predatory payday lenders. By leveraging technology developed by the CUSO, credit unions were able to afford the high cost of providing payday alternative loans.   

If finalized, this new rule will allow CUSOs to serve their credit union owners and clients more efficiently with shared solutions. While this proposed rule provides additional flexibility for the NCUA Board to approve permissible activities and services, NCUA already has effective oversight of CUSOs. Whenever a credit union chooses to work with, invest in or collaborate with a CUSO, it is required to have a provision that allows the regulator to look at the CUSO’s books and records. NCUA has been performing CUSO reviews (i.e. CUSO examinations) since it amended the CUSO rule in 2013. The agency has an existing CUSO registry and review authority so it can track credit union CUSO investment and how CUSOs are impacting credit unions from a safety and soundness perspective. NCUA has the power to compel credit union CUSO owners to take action if their CUSO is incurring reputation or credit risk for the credit union.

In the NCUA Regulatory Reform Task Force Report dated Dec. 13, 2018, NCUA concluded that the agency “plans to issue a 2019 proposed rule allowing CUSOs to originate any loan that a credit union may provide.” The report found that the change would require a low amount of effort to implement but have a high degree of positive impact.  

NACUSO appreciates NCUA’s willingness to modify regulations to enable credit unions to remain competitive in the changing financial marketplace. This proposed rule is a welcome modernization of CUSO regulations that will allow credit unions to remain competitive with innovative, industry-owned solutions to ever-evolving lending markets and loan competitors. With this expansion, the NCUA Board is giving the industry more tools to survive and thrive in the financial marketplace without putting undue risk on the share insurance fund. It will allow credit unions to serve more of their members’ needs by connecting with them where they are doing business at the point-of-sale, instead of hoping they will come into the branch.

Jack Antonini was appointed president/CEO of the National Association of Credit Union Service Organizations in 2010. Previously he was president/CEO of USAA Federal Savings Bank and a member of USAA’s Executive Council (the top 10 leaders of this diversified financial services company), when USAA FSB was recognized as “Best Bank in America” by Money magazine. NACUSO was formed in 1985 to help credit unions explore the use of CUSOs and the delivery of non-traditional products and services. Over the years, the organization’s focus has evolved to educating credit unions on the benefits of collaboration, helping credit unions find innovative collaborative partners and solutions, and helping CUs form multi-owned CUSOs that help them achieve economies of scale, reduce risk and obtain expertise. It is also the collaboration-focused regulatory and legislative advocate for CUSOs and their credit union owners.