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Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / Rules and Regulations
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was prevalent in the marketplace for the particular type of lending.
Upon reexamination, the Board now believes it is appropriate to permit FCUs to invest in, or lend to, CUSOs that engage in all types of lending permitted for FCUs. As discussed previously, the Board received extensive comments on the proposed rule. The commenters, including credit union commenters, were split on whether permitting CUSOs to originate any loan that an FCU can originate would be ultimately beneficial to credit unions, particularly small credit unions, or detrimental to the long-run interests of credit unions.
Comments are discussed in detail in the following paragraphs.
Safety and Soundness Some commenters who supported the proposed rule generally stated that the rule would not cause safety and soundness concerns and that the current CUSO regulatory framework sufficiently protects FCUs and the NCUSIF.
Commenters pointed to several existing authorities to manage the potential risk from CUSO lending. First, commenters noted that under the current regulation, the NCUA may at any time, based upon supervisory, legal, or safety and soundness reasons, limit any CUSO
activities or services, or refuse to permit any CUSO activities or services.
Commenters further stated that the NCUA can exert pressure on FCUs if CUSOs engaged in unsafe or unsound behavior. Second, an FCU may invest in, loan to, and/or contract with only those CUSOs that are sufficiently bonded or insured for their specific operations and engaged in preapproved activities and services. Third, FCUs are bound by an aggregate limit of loans and investments in CUSOs to two percent of paid-in and unimpaired capital and surplus. Fourth, FCUs as well as FISCUs are required to include provisions in contracts with CUSOs in which they lend or invest to give the NCUA complete access to any books and records of the CUSO and the ability to review the CUSOs internal controls.
Finally, other commenters noted that CUSOs are subject to state lending laws and federal consumer protection laws.
In addition, some CUSOs may be subject to supervision at the state level by way of state licensing requirements or thirdparty oversight authority.
Some commenters discussed that CUSOs currently have extensive lending authority and there have not been any extraordinary losses.
A few commenters also discussed that the bigger safety and soundness risk may arise from not adopting the proposed rule as it permits FCUs to
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remain competitive and build capital.
Commenters also discussed that FCUs could be subject to reputational harm if they cannot provide members the necessary services.
In response to a question in the proposed rule about potential safety and soundness conditions, one commenter urged caution on the potential to apply risk retention requirements to participation loans originated by wholly owned CUSOs. The commenter stated that, since the balance sheets of the CUSO and its parent are consolidated, the participation becomes effectively nonexistent, so a risk retention requirement becomes unnecessary.19
In contrast, some of the commenters who opposed the proposed rule believed that the proposal would have substantial unintended consequences and affect the safety and soundness of FCUs and the NCUSIF. Commenters primarily focused on the NCUAs lack of examination or oversight authority and the systemic risk that arises from a few CUSOs providing services to a large portion of credit unions.
Commenters generally discussed that the NCUA has no examination or oversight authority over CUSOs. One commenter noted that several federal agencies, including the Government Accountability Office and the Financial Stability Oversight Council, have recommended that the NCUA be given supervisory oversight of CUSOs and that the Chairs of every NCUA Board over the past decade, as well as the NCUAs Inspector General, have called for vendor authority. These commenters believed expanding CUSO lending authority at the same time the NCUA
has acknowledged an existing risk related to CUSOs would exacerbate the current problems that arise from the inability to supervise CUSOs. One commenter questioned why the NCUA
would propose providing CUSOs with all the powers of FCUs, but with none of the commensurate prudential supervision or consumer safeguards to mitigate the risk. One commenter recommended a hybrid approach that would enable the NCUA to review a CUSOs loan origination activities, but not permit a complete NCUA
examination.

The Board does not believe that the limited expansion of FCUs ability to lend to, or invest in, CUSOs engaged in lending permissible for an FCU
contradicts its long-stated need for additional examination and enforcement authority of CUSOs and other third-party vendors.20 It is the Boards continuing policy to seek thirdparty vendor authority for the agency from Congress. The Board does not believe this rule undermines its request for such authority as the rule provides only a modest expansion of FCU
authority to lend to, and invest in, CUSOs and results in only an incremental amount of additional risk to the NCUSIF.
The Board also believes there are several factors that may mitigate the risk to the NCUSIF, though the Board acknowledges that despite these mitigating factors CUSOs have caused more than $500 million in losses to FICUs since 2008. First, as commenters in favor of the rule discussed, even though the NCUA does not have examination or enforcement authority over CUSOs, FCUs only have the authority to lend up to one percent of their paid-in and unimpaired capital and surplus, and to invest an equivalent amount, in total to CUSOs. These investment and lending limits mitigate risk to the NCUSIF. Additionally, 712.3d requires all FICUs that obtain an ownership interest in a CUSO to ensure by contract that the NCUA has access to the CUSOs books and records and other information and reports.
CUSOs are also subject to state lending laws and federal consumer protection laws. These and the other regulatory requirements discussed above mitigate the potential risk to the NCUSIF due to the modest expansion of FCU authority to lend to and invest in CUSOs engaged in all lending activities.
The Board also notes that it has broad investigative subpoena authority that agency staff can use to obtain records and testimony in certain extraordinary circumstances.21 This broad authority is not limited to credit unions and may permit NCUA staff to obtain information from third parties in connection with the agencys examinations of credit unions.22 The Board does not currently
19 Note that a CUSOs balance sheet would be consolidated with a credit unions if required by applicable accounting principles. Generally, the NCUA requires credit unions to consolidate a CUSOs balance sheet with the credit unions when the credit union wholly owns or owns a controlling interest in the CUSO. See NCUA Call Report Form 5300 Instructions, Statement of Financial Condition, at 2, effective Sept. 2021, available at https www.ncua.gov/files/publications/
regulations/call-report-instructions-september2021.pdf.

20 The Board also notes that its request for thirdparty vendor authority is more expansive than examination and enforcement authority over CUSOs. The term third-party vendors include any third-party service provider regardless of credit union ownership, a larger category of institutions than just CUSOs. The NCUA currently has very limited oversight of non-CUSO third-party vendors.
21 12 U.S.C 1784a, 1786p.
22 12 U.S.C. 1784a; see United States v. Inst. for Coll. Access & Success, 27 F. Supp. 3d 106, 112

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