The Board of Directors of the National Credit Union Administration approved a final rule which will allow credit unions to conduct any type of lending that is permitted for federal credit unions.
Currently, CUSOs – companies owned by credit unions to provide financial or operational services to institutions or their members – are only allowed to offer mortgages, student loans, credit cards, and business loans. The new rule would now allow CUSOs to expand into other credit categories, including auto and payday loans.
The rule was passed 2-1 at the board meeting on Thursday, with Chairman Todd Harper casting the dissenting vote. Calling the regulation “the wrong rule at the wrong time,” Harper said the agency must protect the stock insurance fund, which insures members’ deposits with state-insured credit unions, from losses.
“Instead, these rulings are likely to increase such losses in the years to come,” he said. âMy fear of future losses to the stock insurance fund is not hypothetical. It’s a fact.”
According to calculations by NCUA employees, at least 73 credit unions suffered losses from CUSOs between 2007 and 2020, Harper said. The ultimate failure of 11 of these credit unions caused the stock insurance fund to lose $ 305 million. Combined with the losses caused by CUSO to credit unions that did not fail, the system’s total losses came to nearly $ 600 million, he said.
But board member Rodney Hood said it was difficult to assess the correlation between the losses and the CUSOs, or even the causality in these particular cases.
Harper said the agency didn’t have to look far to find previous examples of CUSOs giving the NCUA a headache. One CUSO focused on corporate lending that went amok during the Great Recession, and the regulator eventually had to raise a $ 60 million line of credit to keep the credit union that owned it from failing , he said.
He added that earlier this year the NCUA was forced to liquidate a small credit union because of its troubled mortgage lending CUSO. “With this rule, I’m afraid we’ll open the door to similar situations in the future, but this time in the payday and auto loan business,” said Harper.
But Hood and NCUA vice chairman Kyle Hauptman said that allowing the CUSOs to grant auto loans would keep that business within the credit union system.
Consumers are now using their cell phones to compare the best car and finance without ever going to a dealer, Hauptman said. The pandemic has accelerated this trend, he said, and it could hurt some small credit unions if they are not also able to provide these loans.
“The technology and scale necessary to compete in an online consumer and auto marketplace is beyond the reach of most individual credit unions,” Hauptman said.
Hood agreed, saying that indirect auto loans are vital for credit unions, so the NCUA must provide them with the tools to scale and compete in the online marketplace.
“We can’t sit back and watch the automotive market develop without doing something about it,” he said.
The CUSO rule doesn’t go far enough, Hood said. He also wants CUSOs to be allowed to invest in fintechs.
These investments are critical to keeping the credit union system safe and sound over the long term, and so these institutions should partner with fintechs at the table, Hood said.
“Without investing in fintechs, there is a risk that the credit union system will stagnate in the years to come as the cooperative system has to respond to the changing dynamics,â he said. “And so should the industry regulator.”
Harper was not alone in his opposition to the CUSO rule.
The American Bankers Association said the rule creates more risk for consumers and the credit union industry by allowing the largest credit unions to expand into “high-risk forms” of lending without proper oversight from the NCUA.
“Banks, small credit unions and the NCUA chairman himself have raised concerns about this move, which will further undermine the character and purpose of the credit union charter,” said ABA spokesman Ian McKendry.
The NCUA said it received more than 1,000 letters on the rule, one of the largest public comments the agency has ever received.
Hood and Hauptman said CUSOs have been providing direct consumer credit for decades without negatively affecting credit unions. Without CUSOs, many credit unions – especially small ones – would not have been the size to compete in the mortgage, business, credit card, and student loan businesses.
But Harper, who had spoken out against the rule from the start of the trial in January, said the regulator had set its priorities wrong as the country continues to deal with the pandemic.
âIn the current economic environment, the NCUA board should work to put rules in place, protect consumers, and prepare the system for the credit losses likely to come when the COVID-19 bailouts expire. This rule is not pandemic aid, âsaid Harper.