NEWPORT BEACH, Calif.—Among those keeping a keen eye on NCUA’s revised risk-based capital rule are credit unions with investments in CUSOs and CUSOs themselves.
In an early analysis, the National Association of CUSOs (NACUSO) said it is still wading through the revised proposal, but that in general the association sees regulatory over-reach given the limited risk CUSOs pose to credit unions, and it called some of what NCUA is proposing a "vain attempt."
Among the changes in the revised RBC rule that apply to CUSOs, along with NACUSO’s initial response:
- If the CUSO's financials are consolidated into a credit union's financial statement under GAAP, there is no separate applicable CUSO investment or loan risk weight.
- If equity investment in a CUSO is unconsolidated, then risk weight is 150%, which NACUSO said is “an improvement from the 250% in the original RBC proposal, but still unreasonable for CUSOs that pose little risk to their credit union owners.”
- Loans to CUSOs are still risk weighted at 100% for unconsolidated CUSOs.
- Non-CUSO equity investments are risk weighted at 300% for publicly traded entities and 400% for non-publicly traded non-CUSO equity investments.
“Many aspects of the rule beyond the treatment of CUSO investments and loans to CUSOs affect CUSOs because of the nature of CUSO services, but right now we want to analyze the direct treatment of CUSOs,” said NACUSO in a statement to its membership, noting that it is working on sharing its final thoughts on the proposal, which it plans to include in a comment letter to NCUA.
NACUSO said it sees parallels between comments made by NCUA board member Mark McWatters over whether NCUA has statutory authority to issue the risk-based capital rule, and whether the agency has the authority to apply the rule to CUSOs.
“NCUA admits that it does not have the authority to regulate CUSOs or vendors, yet it proceeded to pass a rule devoted entirely to the ‘indirect’ regulation of CUSOs, mandating CUSOs, not their credit union owners, report to NCUA highly confidential and proprietary information,” NACUSO said. “ As we will see later this lack of regulatory authority rears its head again in the risk based capital rule.”
Pleased to Say it Was Heard
NACUSO said it was pleased to see the agency had listened to its concerns and agreed to not include loans and investments in CUSOs if those assets were already consolidated into the credit union's statement of financial condition under generally accepted accounting principles (GAAP).
Noting that NCUA has lowered the risk weight for investments to 150% and left the risk weight for loans at 100% for all unconsolidated asset, and that CUSO loans are tied directly to commercial loans (with an equal100% risk weight), NACUSO said “this approach does not account for the actual risk associated with the loan and if that loan is secured by any collateral.”
“CUSO investments are tied to the treatment of equity investments under FDIC rules where, according to NCUA, these types of investments can range from 100% to 600,” NACUSO said. “Under FDIC rules, investments that are less than 10% of a bank's capital are risk weighted at 100%. FDIC characterizes such investments as insignificant. Because federal credit unions (and most state-chartered credit unions) can only invest up to 1% of their assets in CUSOs in the aggregate, all or nearly all of a well-capitalized credit union's investments in CUSOs should be considered insignificant and be risk rated at 100% as in the FDIC schema.
“The insignificance of CUSO investments is further highlighted by the fact that approximately 98% of credit unions are well capitalized at 7% (a much higher baseline than banks) and evidence shows that approximately 22 basis points of industry assets are invested in CUSOs today,” NACUSO continued n its analysis. “While NCUA states that the risk of loss is central to determining the risk weight of an asset and not the size of the exposure, it is unclear how an insignificant investment in a CUSO creates more risk than in the FDIC setting. Furthermore, Congress by statute limited CUSO investments to 1% of assets specifically to limit risk and NCUA already accounts for such risk by requiring all credit unions to obtain a legal opinion confirming that all CUSO investments are limited to the amount invested.”
NACUSO said NCUA has cited CUSO losses and lack of CUSO/vendor authority to justify the new proposal, including losses to the insurance fund.
“NACUSO continues to question the significance of these losses to the share insurance fund,” the organization said. “We have asked and not received any data to back up the claims of significant losses. Yet, NCUA constantly states that CUSOs pose a significant risk to the fund and have contributed to the failure of several credit unions during the financial crisis. Without the ability to see the data that backs up these claims, NACUSO will continue to take the position that any use of this data as justification for any regulation is tautological.”
A 'Vain Attempt'
Calling it a “vain attempt,” NACUSO further said NCUA’s statements that it lacks knowledge about CUSOs are being used to “postulate that if it had direct regulatory authority over CUSOs (and vendors which is completely irrelevant to the risk based capital rule yet cited nonetheless) the risk weighting may be different. NCUA further explains, in response to comments about the many different types of services provided by CUSOs and the different level of risk associated with those services, the risk weights for CUSOs may change as NCUA gets more information about CUSOs in accordance with the new CUSO rule. NACUSO continues to see this approach to regulation as over-burdensome where the agency uses fear of the unknown to justify such overreach.”
Finally, said NACUSO, it has “grave concern” over the treatment of investments in CUSOs over time.
“Under the newly proposed risk based capital rule, credit unions must risk rate for the appreciation of an asset,” NACUSO said. “For instance, if a credit union makes a good investment for $100,000 in a valuable service offering and that investment appreciates to be worth $500,000, the credit union must hold more capital to offset this appreciation. NACUSO is very concerned that this approach to appreciating assets will deter credit unions from making good investments. In fact, credit unions often get involved in valuable service offerings to have some manner of control over the service and its future benefit to the industry. It is not generally a get in and get out approach to investments. NACUSO also fears that this will change the culture of CUSOs and their effect on the industry turning more CUSOs into vendors as it becomes economically infeasible to hold an investment in a CUSO once it becomes too valuable to the industry.”