By Ray Birch
BIRMINGHAM, Ala.—Could an NCUA proposal to expand the lending authorities of CUSOs be what saves many small credit unions?
Former NCUA Chairman Dennis Dollar believes that’s only one of the benefits that would result should the agency’s new CUSO proposal becoming a final rule. Dollar, principal at Dollar Associates, called the proposed rule a tremendous expansion of options for credit unions and a “way to do what we have always done—but even better.”
As CUToday.info reported, the proposal, put out for comment during the Jan. 14 board meeting, would allow CUs to fund any type of loan premissable for a natural-person credit union.
“The CUSO rule is a commendable step in regulatory modernization and realization by NCUA of the realities of today’s competitive lending market,” stated Dollar. “Most credit unions would not be in the shared branching, ATM network, credit card, mortgage, student lending or business lending market today if it were not for their participation in or ownership of a CUSO.”
Dollar pointed out that CUSOs—such as CO-OP Financial Services, PSCU, Trellance, CU Direct and others—have greatly expanded many credit unions’ offerings.
Bringing Scale
“Many could not offer a number of their current products with their own resources, particularly smaller- and moderate-sized credit unions,” said Dollar. “With CUSOs they can do so in a collaborative model that brings scale and shares costs and risk.”
Dollar noted CUSOs have additionally benefitted credit unions and their members in the credit card, mortgage and business lending arenas, yet they have limited by regulation from helping credit unions fund auto lending and personal lending.
“This proposed regulation extends the value of collaboration and risk sharing to the bread-and-butter areas of auto and personal lending,” said Dollar.
CUs, Dollar reminded, do not have to use a CUSO under the proposal.
“Every credit union that wants to continue to do auto lending and personal lending on its own without a partnership collaboration will be able to continue to do so as always,” he said. “Those credit unions that have found the auto lending and personal lending market to become more and more challenging will be able to consider a CUSO option, either in conjunction with other credit unions or with a wholly owned CUSO. It is a tremendous expansion of options for credit unions, even though many credit unions will not choose to go the CUSO route in auto or personal lending. But the option is there.”
Less Bread, Less Butter
Dennis Dollar
Auto lending has been one of the biggest areas of lending facilitated by CUSOs. But that volume has trended down in recent years, Dollar pointed out.
“Even before COVID brought new auto sales down from a normal 16 million units sold per year to around 10 million, the credit union share of the auto lending market has begun shrink,” Dollar said. “Anytime an industry is losing out on its historical percentage of its bread-and-butter business, there needs to be another look at ways to do what we have always done—but even better. The CUSO collaborative model for auto lending, and perhaps even for personal lending with some creative technological offerings that would help members finance their furniture purchases with the credit union rather than at Rooms-to-Go, could save some smaller- and moderate-sized credit unions.”
Dollar stressed the importance of scale, and that CUs striving for scale is leading to greater industry consolidation.
“CUSOs can provide scale for credit unions that lack the scale themselves to compete long term in areas of lending that they have depended upon in the past,” he said. “Even in this age where we have averaged one merger per business day since 2000, there are documented cases where credit unions that were considering merger instead went in with other credit unions and formed or joined a CUSO. CUSO involvement saved a large number of smaller credit unions.”
A ‘Real Winner’
And while CUSOs are not a fit for every credit union, the option is there.
“CUSOs have been a service and cost-saving option that has been a real winner for many, many credit unions,” Dollar said. “NCUA is correct to expand the CUSO option for those credit unions that see value and want to utilize them.”
CUSOs also impact credit union market reach, Dollar added.
“Remember that CUSOs can do business with nonmembers as well as members of the credit unions that own them, as long as at least 50% of the CUSO’s business is with members of the owner credit union or credit unions,” Dollar reminded. “The opportunities that the CUSO model offer for credit unions to expand their market base is no small matter and the scale CUSOs can provide are really competitive positives for credit unions.”
Dollar emphasized the collaborative model of not-for-profit, member-owned financial cooperatives—either on their own or in conjunction with others—is one of the “great differentiators” of the credit union industry from banking competitors “who cannot get over their competition with each other enough to truly collaborate.
‘Well Thought Out’
Dollar believes NCUA is right to expand CUSO authority.
“NCUA has an existing CUSO registry and review authority in regulation so that they can track credit union CUSO investment and how those CUSOs are impacting credit unions from a safety and soundness perspective,” he said. “This proposed rule puts no more at stake, safety and soundness wise, than did previous CUSO rules that allowed credit unions to form or use CUSOs to keep themselves competitive in the credit card, mortgage, business and student lending fields. It is a well-thought-out and balanced expansion of the CUSO option for credit unions of all sizes and in all areas of their crucial lending programs.”