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khammond on DSKJM1Z7X2PROD with PROPOSALS

Federal Register / Vol. 86, No. 37 / Friday, February 26, 2021 / Proposed Rules targeting lending products traditionally provided by credit unions, including auto finance, small-dollar consumer lending, and unsecured consumer credit.26 Nonbank companies now account for a significant percent of the outstanding non-mortgage consumer loan market.27
The U.S. Treasury Department noted that nonbank digital lenders have gained outsized attention in recent years, driven in part by their rapid rate of growth and employment of new technology-intensive approaches to lending. 28 These firms, particularly lenders active in consumer and small business lending, have digitized the customer acquisition, origination, underwriting, and servicing processes.
Moreover, these lenders are creating customer experiences that may be more timely and seamless than the techniques employed by some credit unions, and these changes also appear to reduce expenses, which lowers the cost of credit as well as providing greater access to credit. In contrast, many credit unions have yet to digitize their lending at a similar level. The U.S. Treasury Department stated that, key elements of digitization employed by new digital lenders are rapidly expanding across the wider banking and financial institution landscape and are expected to permeate all major lending segments over time. 29
To compete effectively in a market with a rising prevalence of these technology-based lenders, FCUs may need to rely increasingly on pooling their resources to fund CUSOs and to build the necessary infrastructure. The costs for research and development, acquisition, implementation, and specialized staff capable of managing these new technologies may be prohibitive for all but a very few of the largest FCUs. CUSOs may provide the means for FCUs to address these challenges and may enable FCUs to collaboratively develop technologies that better serve their members.
The Board recognizes that CUSOs provide significant value to the credit union industry by facilitating cooperation among credit unions. With CUSOs collaborative business model, CUSOs are able to foster shared innovation among credit unions to achieve economies of scale, develop expertise, and better serve their members. These attributes allow CUSOs to offer financial services to credit union members more efficiently than an 26 Id.

at 87.
at 84.
28 Id. at 85.
29 Id.
27 Id.

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individual credit union may otherwise be able to offer, particularly for small credit unions.30 The cooperation and transfer of knowledge among credit unions through CUSOs can have longterm positive implications for the safety and soundness of the credit union system.
Accordingly, under the proposed rule, CUSOs would be permitted to originate, purchase, sell, and hold any type of loan permissible for FCUs to originate, purchase, sell, and hold. Therefore, CUSOs could originate types of loans previously prohibited by the CUSO rule, including general consumer loans, direct auto loans, and unsecured loans and lines of credit. CUSOs could also purchase vehicle-secured retail installment sales contracts RICs from vehicle dealers. In proposing this change, the Board acknowledges and recognizes the importance of existing relationships that FICUs have with local vehicle dealers in connection with originating vehicle loans. The Board intends for this proposed rule to protect and maintain those relationships.
Under the proposed rule, CUSO
originated loans would not be subject to the same restrictions as loans originated by FCUs. For example, part 701 of the NCUAs regulations imposes conditions on FCU lending relating to loan terms such as interest rate, maturity, and prepayment.31 These restrictions would not apply to CUSO-originated loans because CUSOs, even wholly owned CUSOs, are separate entities from FCUs and are not subject to direct NCUA
supervision. However, an FCU may not purchase a loan from a CUSO unless the loan meets the requirements of the NCUAs eligible obligations rule.32
Similarly, an FCU may not purchase a loan participation from a CUSO unless it complies with the NCUAs loan participations rule.33
Loan Participations In addition to specifically permitting CUSOs to engage in consumer mortgage, business, and student loan origination, the current CUSO rule also permits CUSOs to buy and sell participation interests in such loans. The inclusion of this authority to buy and sell participation interests in such loans stems from the FCU Act and the NCUAs loan participation rule, which classifies a CUSO as a credit union 30 47 FR 30462 July 14, 1982. One of the original purposes of CUSOs was to permit small credit unions to join together to perform functions and engage in activities at a lesser cost than could be accomplished by an individual credit union.
31 12 CFR part 701.
32 See, 12 CFR 701.23b.
33 12 CFR 701.22.

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organization authorized to engage in the purchase and sale of loan participations.34 The NCUAs loan participation rule, however, does not permit the sale to FCUs of participation interests in open-end, revolving credit.35 Therefore, the current CUSO
rule only permits CUSOs to originate credit card loans, but not the authority to buy and sell participation interests in credit card loans. To remain consistent with the NCUAs loan participation rule, this proposed rule would grant CUSOs the authority to only purchase and sell participation interests that are permissible for FCUs to purchase and sell.
CUSO Registry Under the current CUSO rule, a FICU
must obtain a written agreement from a CUSO the FCU loans to or invests in that the CUSO will annually submit to the NCUA a report containing basic registration information for inclusion in the NCUAs CUSO registry CUSO
Registry.36 CUSOs that are engaged in complex or high-risk activities have additional obligations with respect to the CUSO Registry.37 Under the current CUSO rule, complex or high-risk activities are defined to include credit and lending, including business loan origination, consumer mortgage loan origination, loan support services, student loan origination, and credit card loan origination.38 For consistency, the proposed rule would remove the specific subcategories of lending and instead refer to all loan originations as complex or high risk. Lending activities are considered complex or high risk because they involve credit unions core business function, tend to affect a large number of credit unions, and present a high degree of operational and financial risk.39 Specifically, FICUs making loans to and investments in CUSOs engaged in credit and lending activities may be exposed to significant levels of credit, strategic, or reputation risks.40
34 12

U.S.C. 17575E; 12 CFR 701.22a.
FR 79307 Dec. 29, 2008.
36 12 CFR 712.3d.
37 Id. Complex or high-risk CUSOs must agree to include in their report: 1 A list of services provided to certain credit unions, and 2 the investment amount, loan amount, or level of activity of certain credit unions. Complex or highrisk CUSOs must also agree to provide the CUSOs most recent year-end audited financial statements to the NCUA. CUSOs engaged in credit and lending services are also required to report the total dollar amount of loans outstanding, the total number of loans outstanding, the total dollar amount of loans granted year-to-date, and the total number of loans granted year-to-date.
38 12 CFR 712.3d5i.
39 78 FR 72537 Dec. 3, 2013.
40 Id.
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