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Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / Rules and Regulations
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use this authority broadly to obtain information from CUSOs, but the Board could potentially instruct NCUA staff to employ these oversight tools to their full potential to guard against risks to the NCUSIF associated with CUSO activity in the absence of direct statutory examination and enforcement authority over CUSOs.
Further, regarding its enforcement authority, the Board also notes that it may have statutory enforcement authority in certain cases over CUSOs that commit misconduct. Specifically, an insured credit unions independent contractor may be subject to the Boards enforcement powers under the FCU Act if it knowingly or recklessly participates in certain violations that cause or are likely to cause more than a minimal financial loss to, or a significant adverse effect on, the insured credit union.23
Thus, the Board may have greater power in certain circumstances than opposing commenters acknowledge.
The Board also believes that the risk to the NCUSIF is mitigated because in its experience most CUSO loans are sold to credit unions, which are subject to NCUA enforcement and examination authority. In addition, the Board also believes that the additional risk is mitigated because most CUSOs are wholly owned by the parent credit union as of the end of 2020, for instance, approximately 72 percent of natural person CUSOs were wholly owned by credit unions,24 which provides the NCUA additional leverage if a CUSO is engaging in unsafe or unsound lending practices. In both situations, the NCUA would likely have additional insight into the risk of the CUSOs lending. The Board acknowledges, however, that there may be gaps in its jurisdiction for certain CUSOs that may retain its loans, sell them to third parties, or are not wholly owned by credit unions.25 It is the Boards belief that this risk is limited and is outweighed by the potential benefits of the final rule.
As some commenters supporting the proposed rule observed, the expanding lending authority may be beneficial to D.D.C. 2014 an agency Inspector Generals administrative subpoena to third party in an investigation was enforceable even though third party was not an entity subject to agencys regulatory jurisdiction.
23 12 U.S.C. 1786r.
24 CUSOs at a Glance 2020, available at https
www.ncua.gov/analysis/cuso-economic-data/cusosglance.
25 The Board notes that such risk is already present in the credit union system as the NCUA
insures FISCUs that may be subject to substantially less restrictive CUSO requirements. For example, many states do not restrict, or have higher limits for, FISCU investments in CUSOs.

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FCUs by enhancing their competitiveness and ability to generate capital. Increased credit union capital would strengthen the NCUSIF by reducing the potential for losses due to credit union failures. The Board believes that the potential benefits of the expanded authority for FCUs to lend to or invest in CUSOs engaged in all lending activities may outweigh the potential costs of the rule including additional risk to the NCUSIF, decreased credit union lending due to increased competition, and increased consolidation, particularly among smaller credit unions. In any event, the Board considers the potential benefit to credit unions and the NCUSIF to be at least a partial mitigating factor against the potential incremental risks.
Other commenters expressed concerns about systemic risk. For example, one commenter quoted former NCUA Board Chair Mark McWatters to highlight how CUSOs contribute to systemic risk: Since 2008, CUSOs have caused more than $500 million in losses to federally insured credit unions, and they have contributed to the failure of 11 credit unions . . . more than half of the NCUAs institutions hold less than $33 million in assets and average approximately three to four full-time employees per institution. These institutions are heavily dependent on third-party outsourced services and do not possess the resources to independently perform full due diligence on all of their critical services providers. Another commenter stated that a large CUSO operating as a loan originator and selling participations or whole loans could produce systemic risks within the industry as evidenced by prior events caused by single originators, a concentrated group of originators, or by overconcentration within a sector.
As discussed in its responses to other comments in the preceding section, the Board has considered the potential benefits and risks of FCUs lending to or investing in CUSOs engaged in broader types of lending. The Board recognizes that several present and prior Board Members, the Inspector General, and other government bodies have found that the NCUA needs statutory enforcement authority over third-party vendors, including CUSOs, to manage the associated risks appropriately. The NCUA has also documented significant previous losses to the NCUSIF that were attributed to CUSOs, particularly between 2008 and 2015.
The Board, however, does not find it necessary to continue to limit FCUs authority to invest in, or lend to, CUSOs engaged in lending activities
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permissible for FCUs until the FCU Act is amended to add enforcement authority over CUSOs. Such a response is disproportionate to the modest expansion permitted in this final rule.
The Board also finds that prior statements about losses to the NCUSIF
do not support any firm prediction that similar losses will occur in the future because of this final rule or even with a mere continuation of the current authorities.26 For example, the Board considers what has occurred since 2015, as reflected in the Inspector Generals regular reports. Under the FCU Act, the Inspector General must submit a written report to the Board, the Comptroller General of the United States, and other parties when the NCUSIF incurs a material loss an insured credit union, with material loss defined as one exceeding $25 million and 10 percent of total assets of the credit union.27 These reports must include a description of the reasons that the problems of the credit union resulted in a material loss to the NCUSIF and recommendations for preventing any such loss in the future.28 For losses that are not material as defined in this section of the FCU
Act, the Inspector General must identify losses occurring in each 6-month period and report semi-annually to the Board and Congress on whether any of those losses warrant an in-depth review.29
Since 2015, the NCUAs Inspector General has not issued any Material Loss Review reports in which CUSO
activity was cited as the reason, or part of the reason, for the losses. The NCUA
also looked at the total losses due to CUSOs in failed FICUs from 2015 to June 30, 2021. The Board found that failed FICUs lost approximately $4
million due to CUSOs during this period. And, the NCUSIF lost only an amount estimated to be under $1
million due to CUSOs during this period as most of the failed FICUs with CUSO-related losses were merged into other institutions without substantial loss to the NCUSIF.
26 The Board also notes that there have been significant changes to laws, regulations, and industry practices for loan underwriting and credit administration since the 2008 financial crisis.
Therefore, the Board also believes that the historical losses attributed to CUSOs that were discussed in the comments are not reflective of the current standards and practices, so the referenced historical losses may not necessarily be predictive of future losses.
27 12 U.S.C. 1790dj1, 2.
28 12 U.S.C. 1790dj1.
29 12 U.S.C. 1790dj4. This discussion provides only a general description of these requirements and the Inspector Generals duties and activities.
More information is available on the Inspector General website and in its Semi-Annual Reports to Congress.

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