ALEXANDRIA, Va.–Over the “strong opposition” of its chairman, the NCUA board has voted 2-1 in favor of expanding lending authority for credit union service organizations (CUSOs) to allow loans to be made directly to credit union members.
Essentially, the final CUSO rule allows a CUSO to engage in any permissible loan that can be made by federal credit unions.
Board members Kyle Hauptman and Rodney Hood voted in favor, while Chairman Todd Harper voted against, arguing it will ultimately only drive further credit union consolidation.
NCUA reported it received more than 1,000 comment letters on the proposal. Those opposed included consumer groups–which called on NCUA to “abandon” the proposal– banking trade groups and even some credit unions. Those in favor, NCUA staff said, included some credit unions and the CU trade groups.
The divisions in the board members’ positions was stark. While Harper also said he believes the new rule will lead to losses for the NCUSIF and offered a lengthy statement on why he opposed the proposal, Hood said he not only supports the rule he would like to see it expanded even further.
The only thing Harper said he could find to like in the new CUSO rule is language in the preamble that reaffirms the board’s continuing policy to seek third-party vendor authority from Congress.
But overall, said Harper, he has a “classic philosophical difference,” saying that while his colleagues believe the final CUSO rule will help small credit unions to compete and remain viable, he believes “unleashing such competition within the credit union system will lead to lower earnings for smaller credit unions because of the earnings that CUSOs will siphon off the top from participating credit unions. This will then lower returns on loans and lower credit union returns on average assets. As a result, this rule in the long run will likely result in further industry consolidation.”
Harper said he remains hopeful the board can reach an agreement on matters such as field of membership shared facility requirements and mortgage servicing rights in the coming months.
Undermining Financial Protections
Among the points raised by Harper in his opposition to the rule:
- “CUSOs making loans under this proposal would not be subject to the same loan restrictions as federal credit unions. As a result, they could exceed the limits on maturity, interest rates, and prepayments that federal credit unions must follow. The final rule would give CUSOs the ability to become indirect auto lenders and payday lenders. Consumer advocates agree that these two consumer financial products carry considerable compliance and reputation risk.”
- Harper said several CUSOs a decade ago engaged in predatory lending, including the NIX check-cashing stores purchased by Kinecta Credit Union in California in 2007 for $45 million, which he said were charging an effective 262% APR. Harper also cited the CUSO product “CUonPayday,” which he said had a true APR ranging from 141% to 876%.
- Harper said NCUA spent considerable time developing its Payday Alternative Loans, but stated during the meeting that the final rule will allow CUSOs to engage in payday lending that exceeds rate caps and without other consumer protection guardrails. “That action will set back the agency’s long-term efforts to create access to credit for provident and productive purposes and runs counter to the spirit of the Federal Credit Union Act,” he said.
Fostering Regulatory Arbitrage
Harper said that because the agency lacks the third-party vendor authorities that the other federal banking agencies and several state regulators have, the NCUA has no power to supervise CUSOs for compliance with federal consumer financial protection laws and regulations and compliance with prudential standards like concentration limits, maximum loan-to-value ratios, and minimum capital levels.
“A lack of supervision is a reason for even more guardrails, not fewer. Yet, in adopting the final rule today, we will not be taking substantive action to close these regulatory blind spots,” said Harper. “Instead, this final rule will create an unregulated wild west within the credit union space with little accountability for protecting consumers and credit unions…In allowing CUSOs to make loans that exceed rate caps and maturity limits, we are evading these statutory obligations. Previously, the courts have affirmed the NCUA’s decision to dissolve a federal credit union on the grounds that it failed to promote thrift as required by its charter. Here, however, we are now allowing CUSOs to make such loans within the credit union system without any authority to shut problematic lending and activities down.”
Harper paraphrased one person who filed a comment letter as asking, “Why are we providing CUSOs with all the powers of federal credit unions without applying commensurate prudential supervision or consumer safeguards to mitigate risk?”
Potential CUSO Losses
Harper said his fear of future losses to the Share Insurance Fund is “not hypothetical, it is a fact. And, when the losses do occur it will be the surviving credit unions and their members who will pay the bill for the misdeeds of others. That deeply troubles me.”
NCUA staff indicated CUSOs have led to approximately $305 million in losses to the NCUSIF between 2010-20 (see separate story in CUToday.info).
In his extensive comments, Harper also addressed issues that included:
- Closing the “regulatory blind spot”
- Competitive effects
- Incomplete economic analysis
- Why the rule and its effect are “lopsided”
Harper’s full statement can be found here.
The Majority View
While Harper strongly opposed the expanded authority for CUSOs, Vice Chairman Hauptman and Board Member Hood said there are strong reasons to move forward with the expanded powers, which, as Hauptman noted, have been under discussion at NCUA since 2018.
Hood, a strong supporter of the new rule, spoke first, followed by Hauptman.
“To not leave anyone in suspense, let me be clear that I believe that credit union service organizations are what will help credit unions, and in particular mid-size and smaller credit unions, stay relevant in the years ahead by continuing to grow and scale in the cooperative spirit while ensuring the industry is responding to the rapidly changing landscape,” said Hood.
As an example of why he supports the expanded powers for CUSOs, Hood pointed to a changed auto market in which consumers no longer step into dealerships and buy vehicles online, which is affecting credit union auto lending.
“Indirect auto lending is so critical for credit unions, so we need to give credit unions the tools to scale and compete in the online marketplace,” said Hood. “We can’t sit back and watch the automobile market evolve without doing anything about it."
Citing the comment letters received by the agency, many of which he said were “identical form letters,” he said concerns raised by some that the rule change will turn credit unions into payday lenders, Hood said he disagrees, and that “greater competition in the consumer loan market from FCU-owned entities is likely to introduce better consumer options and greater choice.
The ‘Clear’ Choice
“If the board decided to limit innovation and expansion out of concern for potential consumer harm, it may perpetuate a lack of consumer choice and access,” Hood said. “Regardless of what action the board takes today, other parties will continue to lend in the marketplace and may lack the same grounding in the credit union mission and industry that would tend to mitigate the risk of abusive lending practices. Confronted with this choice, it is clear that CUSOs will be more likely than other lenders to offer only reasonable terms to consumers and be held accountable by the NCUA, other federal agencies, or state authorities.
Responding to Harper’s description of the new CUSO rule as creating a “wild west” within credit unions with little accountability for consumers, Hood said the track record to date shows such abuse has not been an issue, and that CUSOs, which are not chartered by NCUA but by the state in which they are headquartered, must comply with existing state consumer laws and rate caps.
“Saying this would create a wild west is an assault on all of our fellow state regulators. And I believe this industry is best served by a strong dual system of regulation, with mutual respect between federal and state regulators,” said Hood.
Pooled Resources
Hood said the new CUSO rule also reflects a market reality.
“In today’s marketplace, credit unions need to increasingly rely on pooling their resources to fund CUSOs, to build the infrastructure consumers are demanding and to compete with captive auto lenders,” he said. “Today’s rule is a natural evolution and allows CUSOs to compete in a marketplace that is very important for credit unions. I certainly believe that now is the right time to reconsider the types of lending that are permissible for CUSOs and whether additional opportunities for collaboration will help credit unions, especially our smaller credit unions, our MDIs, our low-income designated and our CDFI credit unions.”
Hood said he believes the expanded CUSO rule also enhances competition in the automobile marketplace without undermining credit unions who already competing in this space.
In addition, disagreeing with a point raised by Harper, Hood said he does not believe the agency should wait on the CUSO rule until it has vendor oversight authority, saying that is a decision for Congress.
Going Further
While he said the rule is “significant,” Hood also said he does not believe it goes far enough.
“I would like to see the CUSOs be able to invest in fintechs with the property safety and soundness guardrails. In 2021, this requirement is overly prescriptive. In fact, many commenters supported us reconsidering our view. Several commenters stated that federal credit unions can get left out of the development of fintech because of the requirement to primary serve members. Several commenters stated that additional investment authority would ensure the industry has better leverage, control, and influence in the development of new technology. We don’t need to watch credit unions get left behind because of fintechs. And that is happening right now since CUSOs cannot invest in fintechs unless they become a CUSO—something that isn’t workable for a lot of fintech companies.”
Hauptman: The Need for ‘Scale’
Like Hood, Vice Chairman Hauptman also pointed to the track record of CUSOs to date in playing down any risks, and said the future makes clear credit unions will need to continue to come together to compete.
“…CUSOs have been making direct consumer mortgage loans, business loans, and student loans for decades without negatively impacting credit unions. Without CUSOs many credit unions – especially small ones --- would not have had the scale to compete in the mortgage, business, credit card and student lending areas,” said Hauptman. “Credit unions – through their CUSOs -- have been able to provide members with more choice in the marketplace.
“In 2008, the NCUA declined to allow CUSOs the authority to make direct consumer loans,” he continued “A lot has happened since 2008, and that is why we are here today.”
Hauptman, pointing to the change in TV advertisements for automobiles in which there are fewer ads for places like Bethesda Chevrolet and more for new online services like Carvana, said consumers are now using their mobile phones to comparison shop for the best car and financing without ever having to go into a dealership.
“The technology and scale necessary to compete in an online consumer and auto marketplace is beyond the reach of most individual credit unions,” said Hauptman. “The U.S. Treasury Department has noted that ‘nonbank digital lenders have gained outsized attention…driven in part by their rapid rate of growth and employment of new technology intensive approached to lending.’
‘Why Would They Take a Worse Deal?’
“From the consumer angle, this rule just adds one new way to buy a car. All the other methods remain in place,” Hauptman continued. “And obviously the best consumer protection has always been a competitive market. In a world where consumers use their mobile phone to comparison shop for pricing – why would they take a worse deal if they know they can get a better deal someplace else?”
Hauptman said CU members will still be able to get pre-approved by their credit union and have a check-in-hand while talking to an auto dealer, and that CUSOs must follow state and federal consumer protection laws.