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Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / Rules and Regulations
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December 31, 2021,33 FCUs may purchase only eligible obligations of its members for loans the FCU would itself be empowered to grant.34 Section 701.22, most of which applies to FISCUs as well as to FCUs, restricts the types of loan participations that a credit union may purchase to those the credit union is empowered to grant and also requires the originating lender, including a CUSO, to retain at least five percent of the outstanding balance of the loan through the life of the loan 10 percent is required if the originating lender is an FCU.35
The Board believes that these existing restrictions are sufficient to ensure that the loans or loan interests purchased by credit unions from CUSOs will have reasonable terms. At the same time, the Board acknowledges that CUSOs may originate loans that parties other than credit unions purchase. In turn, this would make the restrictions discussed in the preceding paragraph inapplicable.
This is, however, the current situation for loans originated by CUSOs. The commenter who recommended this new restriction did not present persuasive evidence that this new restriction is necessary and further provided no analysis or evidence regarding how the restrictions might hamper CUSO
activities and thus decrease the value of credit union interests in CUSOs.
Accordingly, the Board declines to adopt this recommendation.
Second, regarding the quality of loans, the Board believes that credit unions and other parties who purchase CUSOoriginated loans can perform due diligence and ensure that loans are underwritten and documented appropriately. Further, as part of the examination process, NCUA examiners can continue to request documentation on credit unions due diligence and other policies and procedures associated with their investment, lending, and other interaction with CUSOs. As with the recommendation on the terms of loans, the Board finds no persuasive evidence or analysis of the benefits and risks of such new oversight and declines to adopt the recommendation.
Consumer Protection Commenters who supported the rule did not extensively discuss consumer protection issues. Several commenters stated that CUSOs would likely only issue loans that comply with the NCUAs loan origination rules as generally CUSO-originated loans would 33 85

FR 22010 Apr. 21, 2020; 85 FR 83405 Dec.
22, 2020.
34 12 CFR 701.23b.
35 12 CFR 701.22b3.

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be sold to the parent credit unions.
Another commenter stated that the proposed rule would expand financial inclusion due to the potential for collaboration to develop new technologies. Finally, commenters noted that CUSOs are subject to state lending laws and federal consumer protection laws.
In contrast, commenters who were against the proposed rule generally expressed concerns that the proposed rule would create risk to consumers.
Several commenters expressed concerns that CUSO-originated loans are not subject to the same restrictions as loans originated by FCUs. For instance, the FCU Act limits interest rate, maturity, and prepayment terms for FCUoriginated loans. Commenters were concerned that this rule change would enable an FCU to circumvent statutory lending restrictions through a CUSO
subsidiary. Commenters were especially concerned about abuses because the proposed rule would principally allow payday and auto lending, which may be more likely targeted towards members in low-to-moderate-income communities and underserved areas.
Furthermore, several commenters stated that CUSOs have been responsible for abusive lending in the past. One commenter noted that CUSOs were marketing payday loan products to state-chartered credit unions with triple digit interest rates in Texas until restrictions were implemented on the state level. One noted a 2010 National Consumer Law Center report, which documented that over 40 credit unions were involved with payday lending through CUSOs. This prompted the NCUA to issue a letter to credit unions.
Another commenter stated that the proposal will disproportionately harm communities of color and exacerbate financial exclusion, even as the Board elsewhere emphasizes racial equity and financial inclusion. Another commenter stated that investing in CUSOs that violate the FCU Act usury ceiling creates not only reputation risk, but compliance and legal risk as loans that exceed the usury cap in the FCU Act should not be considered part of the routine operations of credit unions.
Commenters raised several potential solutions to potential consumer harm.
One commenter stated that any expansion of CUSO lending activity should be limited to loans FCUs are themselves empowered to make.
Another commenter recommended changes to the Payday Alternative Loans PALs program if the goal is to encourage more small-dollar lending and included ideas on how to increase credit unions adoption of PALs.

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Another commenter suggested requesting examination findings from the Consumer Financial Protection Bureau, which has requisite authority to examine CUSOs to determine whether consumer protection laws are being followed.
The Board has considered the comments on this point and finds that overall, they provide support for proceeding with adopting the regulatory change to CUSO lending authorities as proposed.
As commenters in support of the expansion of FCU authority with respect to loans to and investments in CUSOs engaged in all lending activities stated, more collaboration and use of financial services technology may positively affect financial inclusion. By authorizing more parties to offer an array of consumer loans, the Board may increase beneficial competition and expand consumer choice. The Board also believes that CUSOs would likely adhere to the statutory and regulatory restrictions on loans that FCUs are empowered to grant in order to be able to sell these loans to FCUs though the Board notes that the purchasing authority provisions may vary for FISCUs because the Boards eligible obligation purchase regulation in 701.23 applies to FCUs only and that CUSOs may not be under the same liquidity pressure for auto and payday loans as other types of loans currently authorized by the CUSO rule. The Board also notes that it recently relaxed some of these protections in light of the COVID19 pandemic.36 As a whole, however, it is the Boards belief that the current authorities governing FCU
purchases of loans would likely result in a substantial amount of CUSO loans being issued on terms equivalent to those in the FCU Act, or what is already permitted for FISCUs.
The Board is, of course, concerned about the risk of unfavorable terms for consumers. As one commenter noted, in 2009, the NCUA Chairman issued a letter to all FCUs on consumer lending, including consumer protection issues.37
The Board has also established two payday alternative loans PALs programs for FCUs to promote shortterm, small-dollar loans for FCUs and their members that can serve as an alternative to loans with less favorable terms. The Boards concerns are partially mitigated, however, by state usury laws and other consumer 36 85

FR 83405 Dec. 22, 2020.
Lending, 09FCU05, July 2009, available at https www.ncua.gov/regulationsupervision/letters-credit-unions-other-guidance/
payday-lending.
37 Payday
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