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Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / Rules and Regulations protection laws that may be enough to curtail the risk of predatory lending by CUSOs. The Board acknowledges, however, that the majority of states permit payday lending and therefore state laws only provide some mitigation relating to the concern of CUSOs offering loans at excessive interest rates.38 The Board plans to monitor new practices closely and take aggressive action when it can to protect consumers from abusive terms that are contrary to law. When the Board lacks direct authority, it can partner with other federal agencies, such as the CFPB, or state authorities to address any such situations. Ultimately, the Board and other parties, in combination, have tools available to protect consumers and curb abusive practices.
At the same time, the Board disagrees with commenters who believe that the expanded FCU authority to lend to or invest in CUSOs engaged in all lending activities would open up a new area of lending above the FCU interest rate cap and that such activity is contrary to the FCU Act.
First, the Board finds greater competition in the consumer loan market from FCU-owned entities is likely to introduce better consumer options and greater choice. If the Board decides to limit innovation and expansion out of concern for potential consumer harm, it may actually perpetuate a lack of consumer choice and access. Regardless of what action the Board takes, other parties will continue to lend in the marketplace and may lack the same grounding in the credit union mission and industry that would tend to mitigate the risk of abusive lending practices. Confronted with this choice, the Boards judgment is that CUSOs will be more likely than other lenders to offer only reasonable terms to consumers and be held accountable by the NCUA, other federal agencies, or state authorities. Second, regarding one commenters opinion about the daily operations of credit unions not including lending above the FCU interest rate ceiling, the Board finds that the FCU Acts broad wording should not be read so narrowly. Reading this limitation into the phrase would, if applied to other areas of CUSO activity, such as trustee and fiduciary activity that is not generally within the power of an FCU, limit CUSOs to only those activities that FCUs may perform within all limitations of the FCU Act. CUSOs have long been permitted to engage in activities that are not specifically bound 38 See the CFPB final rule, Payday, Vehicle Title, and Certain High-Cost Installment Loans, 85 FR
44382, 44383 July 22, 2020.

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by these limitations. In particular, since originally authorizing CUSOs to engage in limited lending activity, the Board has not imposed the interest rate ceiling or other restrictions applicable to FCUmade loans to CUSO-made loans. The concern, therefore, that some commenters raise is not specific to this rulemaking and has long stood as the agencys position on CUSO activities, including lending.
Ultimately, when faced with the choice between limiting or proceeding with this expansion of FCU authority to lend to, or invest in, CUSOs engaged in all lending activities, the Board finds in its judgment that the regulatory changes carry the potential to benefit consumers and FCUs through greater choice. At the same time, the Board will closely monitor the expanded activity given the importance of consumer protection.
In addition, the Board notes that amending the PALs program is beyond the scope of the CUSO rulemaking but will take commenters input on that program into account in any future action on that program.
Innovation Some of the commenters who supported the proposed rule generally stated that CUSOs enable necessary innovation. Many commenters discussed how CUSOs can pool resources for various projects each credit union could not afford to embark on individually, especially smaller credit unions. With innovation and technology continuously evolving at a significant pace, giving FCUs the option to start or partner with a CUSO to advance their technology capabilities would help FCUs remain competitive as they often lack the resources to build and maintain the technology infrastructure. Commenters stated that CUSOs are currently helping credit unions survive in the rapidly changing financial industry and several credit unions credited CUSOs with assisting them in reaching members, including low-to-moderate income members.
Many commenters mentioned fintechs and that CUSOs are enabling credit unions to compete with fintechs and large banking organizations that have the resources to develop new technologies. Several commenters stated that credit unions must continue to innovate, reduce costs, and generate income, especially as traditional sources of income, like net interest margins, are no longer sufficient.
Some of the commenters who were opposed to the proposed rule stated that CUSOs are already able to facilitate FCUs collective investment in technology without having their lending
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powers broadened. CUSOs permissible activities include loan support services, including loan processing, servicing, and sales, which means CUSOs can currently play a support role in FCU lending according to one commenter.
When discussing current CUSO
authorities to do indirect lending, another commenter stated that small FCUs struggle to engage in indirect lending, which requires significant investment and oversight. The commenter further stated that managing relationships with dealers and monitoring the quality of loans an FCU
receives is paramount to the success of an indirect lending program. As a result, the indirect lending channel is often closed to small FCUs.
The Board has considered the wide variety of viewpoints on this issue. As several commenters noted, broadening the permissible CUSO lending categories may foster innovation and partnerships. Conversely, some commenters contended that the rule change is not needed for this purpose because credit unions already partner effectively with CUSOs to develop technology to support FCU lending. The Board views this difference of opinion and predictions similarly to how it views other general predictions about the risks and benefits of the rule change.
The Board recognizes that the expanded FCU authority to lend to or invest in CUSOs engaged in all lending activities may not result in enhanced partnerships and cooperation with CUSOs and other credit unions because it is not possible to predict the future of the marketplace with certainty. Alternatively, the regulatory changes may enhance this collaboration for some credit unions in some type of lending but not in all.
However, the Board in its judgment also finds that expanded areas of activity and investment would naturally tend to increase collaboration and cooperation. Affording greater opportunities for FCUs to lend to and invest in CUSOs engaged in a broader range of lending may facilitate more partnerships that position FCUs better to work with new entities and technologies in financial services. For this reason, the Board continues to find this a good basis to proceed with the regulatory changes.39
39 The Board also notes that innovation and collaboration were not the sole basis for the proposed rule. As discussed in the preamble to the proposed rule, another basis for the rule was to enable FCUs to better serve their members. The Board views the various bases in the proposed rule as independently sufficient to support the rule. 86
FR 11645, 11646 Feb. 26, 2001.

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