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Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / Rules and Regulations The Board finds the absence of material CUSO-related losses during this period noteworthy; however, the Board acknowledges it excluded losses that occurred during the 2008 banking crisis and looked at data that occurred during a relatively robust economy. This absence does not guarantee that material losses will not occur in the future, but it illustrates the uncertainty associated with predictions by some commenters.
A past pattern of material losses is not, in the Boards opinion, sufficient evidence that the pattern will continue.
In reconciling these competing perspectives, the Board also has considered the general principles discussed in the introduction to this preamble. Neither the FCU Act nor the NCUAs regulations or policies require the agency to ensure all potential losses to the NCUSIF are avoided. The FCU
Act requires the Board to consider whether a credit union applying for insurance of member accounts poses undue risk to the NCUSIF and to deny the application if the financial conditions and policies are unsafe and unsound or if the applicant poses undue risk to the NCUSIF.30 In its regulations in 741.204d, the Board has further defined undue risk to the NCUSIF as a condition that creates a probability of loss in excess of that normally found in a credit union and which indicates a reasonably foreseeable possibility of insolvency and a resulting claim against the NCUSIF. Similarly, in considering whether a credit unions practices are unsafe and unsound for chartering and field of membership purposes, the Board considers whether the action or lack of action would result in an abnormal risk of loss to the credit union, its members, or the NCUSIF.31
The Board also notes that the ongoing trend of credit union consolidation is already increasing systemic risk. On an aggregate basis, the total number of credit unions has been cut in half over the prior two decades as smaller credit unions have merged or consolidated.
There were over 5,000 fewer credit unions with less than $1.0 billion in total assets in 2020 than there were in 2000. As the number of credit unions has declined, loan portfolios have become increasingly concentrated within the largest credit unions.
Expanding FCUs authority to lend or invest in CUSOs engaged in all lending activities may allow smaller credit unions to combine their resources to remain more competitive within the changing lending landscape, which
32 Dodd-Frank Wall Street Reform and Consumer Protection Act, Title X, Subtitle C, 1036; Public Law 111203 July 21, 2010.

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could result in a reduction of systemic risk.
Separately, the Board already insures FISCUs that may, depending on state law, lend or invest in CUSOs that engage in all lending activities. In its role as insurer, the Board finds it would be unreasonable to decline to expand FCU authority on a risk basis when it currently allows the activity for FISCUs.
Based on these standards and principles, the Board does not find that the expanded FCU authority to lend to or invest in CUSOs engaged in all lending activities provided by this rule are likely or more likely than not to result in material losses to the NCUSIF
or unsafe and unsound practices posing an undue risk to the NCUSIF.
Regarding the concern over concentration risk, the Board believes that existing limitations in 701.22
and 701.23 on the amount of eligible obligations that FCUs may purchase and on the amount of loan participations that all federally insured credit unions may purchase from a single source will provide significant protection against this concern. Additionally, the Board believes there is some potential benefit to small credit unions buying loans from CUSOs. In such a case, many credit unions may be purchasing loans from the same entity leading collectively to enhanced due diligence on the CUSO.
Commenters also discussed the risk for reputational harm. For example, the ownership structure of CUSOs may result in the publics linking any aggressive or improper CUSO lending activity with the lending activity of FCUs themselves.
The Board agrees that confusion over the status of CUSOs or mistaken belief that they are federally insured and subject to the NCUAs full oversight would be problematic. The Board notes that certain FCU practices related to the promotion of CUSO services or CUSOs with names related to their FCU parents may raise unfair, deceptive, or abusive acts or practices issues.32 FCUs should pay particular attention to their marketing and ensure that members are informed and understand the legal significance between FCU-originated loans and CUSO-originated loans. For example, FCUs should ensure that members clearly understand that the NCUA may have a more limited ability to address member complaints related to CUSO-originated loans. The Board notes that standardized disclaimers in loan origination documentation may be insufficient to address this concern. The
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Board, however, finds that the current regulations, including the prohibition on unfair, deceptive, or abusive acts or practices, reasonably guard against the concern about member confusion. First, 712.4a specifies that an insured credit union must take several steps to ensure corporate separateness from a CUSO, including that each is held out to the public as separate enterprises.
Adherence to this requirement, and proper enforcement of it by the NCUA, is likely to mitigate much or all of the concern regarding confusion. Second, and similarly, the NCUAs advertising regulation in 740.2 requires, among other matters, that an insured credit union using a trade name in advertising must use its official name in loan agreements and account statements.
This requirement may further safeguard against the risk of confusing a credit union with an associated CUSO with a similar name because the official loan documentation would disclose which entity or entities are involved. Each of these provisions on their own, therefore, and when considered in concert, may work to address this concern.
Commenters also noted that CUSO
lending activities are currently considered complex or high risk. The Board acknowledges that CUSO lending activity has the potential to create material financial risk. This is why lending CUSOs are currently subject to additional reporting requirements in 712.3d. As discussed above, however, the Board does not believe this rule represents an undue safety and soundness risk; rather, the Board believes it only represents an incremental risk to credit unions and the NCUSIF. This relatively modest, incremental risk is further mitigated, as discussed above, by the existing regulatory and supervisory controls and standards in place.
Finally, one commenter recommended that loans purchased from a CUSO be subject to the same limitations as loans purchased from other credit unions and recommended that the NCUA have a process to ensure the quality of CUSO loans.
The Board has considered this recommendation and declines to adopt it. First, regarding new limitations on loans, the Board underscores that currently, 701.22 and 701.23 of the Boards regulations restrict loan and loan participation purchases by credit unions. Subject to various exceptions, including those provided in the temporary COVID rule in effect through
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