[Federal Register Volume 86, Number 37 (Friday, February 26, 2021)]
[Proposed Rules]
[Pages 11645-11651]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01398]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 86, No. 37 / Friday, February 26, 2021 /
Proposed Rules
[[Page 11645]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 712
RIN 3133-AE95
Credit Union Service Organizations (CUSOs)
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
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SUMMARY: The NCUA Board (Board) is seeking comment on a proposed rule
that would amend the NCUA's credit union service organization (CUSO)
regulation. The proposed rule would accomplish two objectives:
Expanding the list of permissible activities and services for CUSOs to
include originating any type of loan that a Federal credit union (FCU)
may originate; and granting the Board additional flexibility to approve
permissible activities and services. The NCUA is also seeking comment
on broadening FCU investment authority in CUSOs.
DATES: Comments must be received by March 29, 2021.
ADDRESSES: You may submit written comments, identified by RIN 3133-
AE95, by any of the following methods (Please send comments by one
method only):
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Fax: (703) 518-6319. Include ``[Your Name]--Comments on
Proposed Rule: Credit Union Service Organizations (CUSOs)'' in the
transmittal.
Mail: Address to Melane Conyers-Ausbrooks, Secretary of
the Board, National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
Public Inspection: You may view all public comments on the Federal
eRulemaking Portal (http://www.regulations.gov) as submitted, except
for those we cannot post for technical reasons. The NCUA will not edit
or remove any identifying or contact information from the public
comments submitted. Due to social distancing measures in effect, the
usual opportunity to inspect paper copies of comments in the NCUA's law
library is not currently available. After social distancing measures
are relaxed, visitors may make an appointment to review paper copies by
calling (703) 518-6540 or emailing [email protected].
FOR FURTHER INFORMATION CONTACT: Policy and Analysis: Jacob McCall,
(703) 518-6624; Legal: Rachel Ackmann, Senior Staff Attorney, (703)
548-2601; or by mail at National Credit Union Administration, 1775 Duke
Street, Alexandria, VA 22314.
SUPPLEMENTARY INFORMATION:
I. Introduction
Legal Authority and Background
The Board is issuing this rule pursuant to its authority under the
Federal Credit Union Act (FCU Act).\1\ Under the FCU Act, the NCUA is
the chartering and supervisory authority for FCUs and the Federal
supervisory authority for federally insured credit unions (FICUs). The
FCU Act grants the NCUA a broad mandate to issue regulations governing
both FCUs and FICUs. Section 120 of the FCU Act is a general grant of
regulatory authority and authorizes the Board to prescribe regulations
for the administration of the FCU Act.\2\ Section 209 of the FCU Act is
a plenary grant of regulatory authority to the NCUA to issue
regulations necessary or appropriate to carry out its role as share
insurer for all FICUs.\3\ Accordingly, the FCU Act grants the Board
broad rulemaking authority to ensure that the credit union industry and
the NCUSIF remain safe and sound.
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\1\ 12 U.S.C. 1751 et seq.
\2\ 12 U.S.C. 1766(a).
\3\ 12 U.S.C. 1789.
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Under the FCU Act, FCUs 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 CUSOs.\4\ The NCUA regulates FCUs'
lending to and investment in CUSOs in part 712 of its regulations (CUSO
rule).\5\ In general, a CUSO is an organization: (1) In which a FICU
has an ownership interest or to which a FICU has extended a loan; (2)
is engaged primarily in providing products and services to credit
unions, their membership, or the membership of credit unions
contracting with the CUSO; and (3) whose business relates to the
routine daily operations of the credit unions it serves.\6\ The CUSO
rule provides a list of preapproved activities and services related to
the routine daily operations of credit unions.\7\
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\4\ 12 U.S.C. 1757.
\5\ 12 CFR part 712. All sections of part 712 apply to FCUs.
Sections 712.2(d)(2)(ii), 712.3(d), 712.4, and 712.11(b) and (c)
apply to federally insured, state-chartered credit unions (FISCUs),
as provided in Sec. 741.222 of the chapter. FISCUs must follow the
law in the state in which they are chartered with respect to the
sections in part 712 that only apply to FCUs. Corporate credit union
CUSOs are subject to part 704. Any amendments to part 704 would
occur through a separate rulemaking and are not included in this
proposed rule.
\6\ See 12 CFR 712.1(d), 712.3(b), and 712.5.
\7\ 12 CFR 712.5.
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The list of preapproved activities and services in the CUSO rule
has not been substantively revised since 2008.\8\ The 2008 final rule
added two new categories of permissible CUSO activities: (1) Credit
card loan origination and (2) payroll processing services. The 2008
final rule also added new examples of permissible CUSO activities and
clarified that FCUs may invest in and loan to CUSOs that buy and sell
participations in loans they are authorized to originate. In the 2008
final rule, commenters requested additional CUSO lending authority.
Specifically, commenters requested the authority to make car loans,
including direct lending and the purchase of retail installment sales
contracts from vehicle dealerships, and to engage in payday lending.
The NCUA, however, declined further expansions of CUSO lending
authority at that time.\9\
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\8\ 73 FR 79307 (Dec. 29, 2008).
\9\ The NCUA's rationale for not extending CUSO lending
authority more broadly is discussed in detail in Section II,
Proposed Rule.
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II. Proposed Rule
The Board proposes to amend the CUSO rule to permit CUSOs to
originate any type of loan that an FCU may originate and grant the
Board additional flexibility to approve permissible CUSO activities and
services outside of notice
[[Page 11646]]
and comment rulemaking.\10\ Each proposed change is discussed in detail
below.
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\10\ Originate means to fund or make loans. This is separate
from the already recognized authority of CUSOs to engage in loan
support services that include loan processing and servicing under
Sec. 712.5(j).
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Expansion of Permissible CUSO Lending Activity
The Board has reconsidered its 2008 position on permitting CUSOs to
engage in all types of lending. The Board now believes that permitting
CUSOs to originate any type of loan that an FCU may originate may
better enable FCUs to compete effectively in today's marketplace and
better serve their members.
As discussed above, the FCU Act permits an FCU to lend to or invest
in a CUSO that provides services associated with the routine and daily
operations of credit unions. The NCUA has interpreted this statutory
authority broadly to permit an FCU to lend to and invest in a CUSO that
does most of the same activities and services permissible for an
FCU.\11\ However, to date CUSOs have not been permitted to originate
certain kinds of loans.\12\
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\11\ 12 CFR 712.5.
\12\ See, 62 FR 11779 (Mar. 13, 1997).
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The NCUA historically has been reluctant to grant CUSOs general
lending authority for all loans for several reasons. First, the NCUA
has been hesitant in granting CUSOs authority to provide consumer loans
as it may be perceived as a dilution of the FCU common bond
requirement.\13\ Specifically, because CUSOs may serve people that are
not members of an FCU, the NCUA has been concerned about FCUs
benefiting from CUSO profits generated from non-members. Second, the
NCUA has also expressed concern that if member loans were being made by
CUSOs, the NCUA would have a duty to examine such loans and that would
lead to stricter NCUA examination authority over CUSOs.\14\ Finally,
the NCUA has also limited CUSO lending authority due to concerns that
permitting CUSOs to engage in a core credit union function could
negatively affect affiliated credit union services.\15\
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\13\ Id.
\14\ Id.
\15\ 68 FR 16450 (Apr. 4, 2003).
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Due to these concerns, the NCUA has previously found compelling
justification for expanding CUSO lending authority for only four types
of loans: (1) Business; (2) consumer mortgage; (3) student; and (4)
credit cards.\16\ In granting CUSOs these lending authorities, the NCUA
has considered factors specific to each type of lending, such as
whether these activities require specialized staff or economies of
scale, and, as discussed below, whether loan aggregation was prevalent
in the marketplace for the particular type of lending.
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\16\ Id. See also, 73 FR 79307 (Dec. 29, 2008).
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For example, when the NCUA permitted CUSOs to engage in credit card
origination, the agency expressed concern that the scale, expertise,
and back office operational support required to be successful in the
credit card business was causing many FCUs without such resources to
sell their credit card portfolio to other financial institutions.\17\
The NCUA has also permitted expanded CUSO lending when economies of
scale, which an individual FCU may not have, made lending more
economically viable.\18\ When the NCUA granted CUSOs the ability to
originate consumer mortgage loans, it stated that economies of scale
are essential to provide mortgage loans in a cost effective and
professional manner.\19\ The Board has stated that enabling FCUs to
realize the benefits of economies of scale offered by CUSOs may allow
FCUs to offer services to their members that otherwise could not be
offered. For example, in permitting CUSOs to engage in business loan
origination, the NCUA noted that FCUs could afford their small business
members access to loans that the FCU may otherwise not be able to
offer.\20\ In addition, the NCUA has also permitted CUSOs to engage in
lending where loan aggregation for resale on a secondary market is
customary such as consumer mortgage and student loan origination.\21\
The Board has previously cited the strict rules in the secondary market
as justification for expanding CUSO lending authority.\22\
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\17\ 73 FR 79307 (Dec. 29, 2008). See also, 73 FR 23982 (May 1,
2008).
\18\ 51 FR 10353 (Mar. 26, 1986).
\19\ Id.
\20\ 68 FR 56537 (Oct. 1, 2003).
\21\ 63 FR 10743 (Mar. 5, 1998).
\22\ Id.
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In past rulemakings, the NCUA has also discussed why the agency
declined to expand CUSO lending authority more broadly. The NCUA stated
that a primary rationale for allowing CUSOs to engage in a particular
kind of loan origination is that an FCU may not possess the level of
expertise or resources required for a successful loan program, whereas
the CUSO may. With respect to vehicle loan origination, the NCUA stated
that most FCUs are able to successfully originate vehicle loans and do
not need the expertise of a CUSO.\23\ Similarly, in declining to expand
CUSO lending authority to general consumer loans, the NCUA described
such loans as ``relatively easy to offer and process'' and did not
believe such loans shared similar characteristics with other more
sophisticated lending categories permissible for CUSOs.\24\
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\23\ 73 FR 79307 (Dec. 29, 2008).
\24\ 63 FR 10743 (Mar. 5, 1998).
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After reexamining CUSO authority, the Board is now considering
whether it is appropriate to expand CUSO lending authority. It is
currently permissible for CUSOs to engage in several types of lending,
including consumer mortgage, business, student, and credit card. These
categories of permissible CUSO lending represent several core areas of
FCU business. The proposed rule would permit a reasonable expansion of
CUSO lending authorities, and the Board expects the proposed rule would
principally result in CUSOs originating automobile loans and small
dollar consumer loans.
One reason the NCUA has historically been hesitant to expand CUSO
lending is the concern that if CUSOs engaged in a core credit union
function, it could negatively affect affiliated credit union services.
As discussed above, CUSOs, however, have been originating loans that
are also core FCU lending products for over 30 years without negatively
impacting FCUs. Given this extensive history, the Board does not
believe the expansion of CUSO lending authority in the proposed rule
would be disruptive to FCUs.
The Board also believes that recent technological developments have
further increased the benefits of allowing CUSOs to engage in expanded
loan originations. As noted by the U.S. Treasury Department, consumer
expectations for financial services are expanding with unprecedented
speed. The market to originate loans has grown increasingly complex as
technological changes, including digitization, help drive changes to
the established lending landscape.\25\ Digital lending is increasingly
common throughout the household and small business lending market as
consumers derive credit from a highly diverse mix of financial
institutions and nonbank firms. For example, nonbank firms constitute a
significant share of the consumer lending market and are increasingly
[[Page 11647]]
targeting lending products traditionally provided by credit unions,
including auto finance, small-dollar consumer lending, and unsecured
consumer credit.\26\ Nonbank companies now account for a significant
percent of the outstanding non-mortgage consumer loan market.\27\
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\25\ See U.S. Treasury, ``A Financial System That Creates
Economic Opportunity: Nonbank Financials, Fintech, and Innovation,''
July 2018. Available at https://home.treasury.gov/sites/default/files/2018-07/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financi....pdf.
\26\ Id. at 87.
\27\ Id. at 84.
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The U.S. Treasury Department noted that ``[n]onbank digital lenders
have gained outsized attention in recent years, driven in part by their
rapid rate of growth and employment of new technology-intensive
approaches to lending.'' \28\ These firms, particularly lenders active
in consumer and small business lending, have digitized the customer
acquisition, origination, underwriting, and servicing processes.
Moreover, these lenders are creating customer experiences that may be
more timely and seamless than the techniques employed by some credit
unions, and these changes also appear to reduce expenses, which lowers
the cost of credit as well as providing greater access to credit. In
contrast, many credit unions have yet to digitize their lending at a
similar level. The U.S. Treasury Department stated that, ``[k]ey
elements of digitization employed by new digital lenders are rapidly
expanding across the wider banking and financial institution landscape
and are expected to permeate all major lending segments over time.''
\29\
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\28\ Id. at 85.
\29\ Id.
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To compete effectively in a market with a rising prevalence of
these technology-based lenders, FCUs may need to rely increasingly on
pooling their resources to fund CUSOs and to build the necessary
infrastructure. The costs for research and development, acquisition,
implementation, and specialized staff capable of managing these new
technologies may be prohibitive for all but a very few of the largest
FCUs. CUSOs may provide the means for FCUs to address these challenges
and may enable FCUs to collaboratively develop technologies that better
serve their members.
The Board recognizes that CUSOs provide significant value to the
credit union industry by facilitating cooperation among credit unions.
With CUSOs' collaborative business model, CUSOs are able to foster
shared innovation among credit unions to achieve economies of scale,
develop expertise, and better serve their members. These attributes
allow CUSOs to offer financial services to credit union members more
efficiently than an individual credit union may otherwise be able to
offer, particularly for small credit unions.\30\ The cooperation and
transfer of knowledge among credit unions through CUSOs can have long-
term positive implications for the safety and soundness of the credit
union system.
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\30\ 47 FR 30462 (July 14, 1982). One of the original purposes
of CUSOs was to permit small credit unions to join together to
perform functions and engage in activities at a lesser cost than
could be accomplished by an individual credit union.
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Accordingly, under the proposed rule, CUSOs would be permitted to
originate, purchase, sell, and hold any type of loan permissible for
FCUs to originate, purchase, sell, and hold. Therefore, CUSOs could
originate types of loans previously prohibited by the CUSO rule,
including general consumer loans, direct auto loans, and unsecured
loans and lines of credit. CUSOs could also purchase vehicle-secured
retail installment sales contracts (RICs) from vehicle dealers. In
proposing this change, the Board acknowledges and recognizes the
importance of existing relationships that FICUs have with local vehicle
dealers in connection with originating vehicle loans. The Board intends
for this proposed rule to protect and maintain those relationships.
Under the proposed rule, CUSO originated loans would not be subject
to the same restrictions as loans originated by FCUs. For example, part
701 of the NCUA's regulations imposes conditions on FCU lending
relating to loan terms such as interest rate, maturity, and
prepayment.\31\ These restrictions would not apply to CUSO-originated
loans because CUSOs, even wholly owned CUSOs, are separate entities
from FCUs and are not subject to direct NCUA supervision. However, an
FCU may not purchase a loan from a CUSO unless the loan meets the
requirements of the NCUA's eligible obligations rule.\32\ Similarly, an
FCU may not purchase a loan participation from a CUSO unless it
complies with the NCUA's loan participations rule.\33\
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\31\ 12 CFR part 701.
\32\ See, 12 CFR 701.23(b).
\33\ 12 CFR 701.22.
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Loan Participations
In addition to specifically permitting CUSOs to engage in consumer
mortgage, business, and student loan origination, the current CUSO rule
also permits CUSOs to buy and sell participation interests in such
loans. The inclusion of this authority to buy and sell participation
interests in such loans stems from the FCU Act and the NCUA's loan
participation rule, which classifies a CUSO as a ``credit union
organization'' authorized to engage in the purchase and sale of loan
participations.\34\ The NCUA's loan participation rule, however, does
not permit the sale to FCUs of participation interests in open-end,
revolving credit.\35\ Therefore, the current CUSO rule only permits
CUSOs to originate credit card loans, but not the authority to buy and
sell participation interests in credit card loans. To remain consistent
with the NCUA's loan participation rule, this proposed rule would grant
CUSOs the authority to only purchase and sell participation interests
that are permissible for FCUs to purchase and sell.
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\34\ 12 U.S.C. 1757(5)(E); 12 CFR 701.22(a).
\35\ 73 FR 79307 (Dec. 29, 2008).
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CUSO Registry
Under the current CUSO rule, a FICU must obtain a written agreement
from a CUSO the FCU loans to or invests in that the CUSO will annually
submit to the NCUA a report containing basic registration information
for inclusion in the NCUA's CUSO registry (CUSO Registry).\36\ CUSOs
that are engaged in complex or high-risk activities have additional
obligations with respect to the CUSO Registry.\37\ Under the current
CUSO rule, complex or high-risk activities are defined to include
credit and lending, including business loan origination, consumer
mortgage loan origination, loan support services, student loan
origination, and credit card loan origination.\38\ For consistency, the
proposed rule would remove the specific subcategories of lending and
instead refer to all loan originations as complex or high risk. Lending
activities are considered complex or high risk because they involve
credit unions' core business function, tend to affect a large number of
credit unions, and present a high degree of operational and financial
risk.\39\ Specifically, FICUs making loans to and investments in CUSOs
engaged in credit and lending activities may be exposed to significant
levels of credit, strategic, or reputation risks.\40\
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\36\ 12 CFR 712.3(d).
\37\ Id. Complex or high-risk CUSOs must agree to include in
their report: (1) A list of services provided to certain credit
unions, and (2) the investment amount, loan amount, or level of
activity of certain credit unions. Complex or high-risk CUSOs must
also agree to provide the CUSO's most recent year-end audited
financial statements to the NCUA. CUSOs engaged in credit and
lending services are also required to report the total dollar amount
of loans outstanding, the total number of loans outstanding, the
total dollar amount of loans granted year-to-date, and the total
number of loans granted year-to-date.
\38\ 12 CFR 712.3(d)(5)(i).
\39\ 78 FR 72537 (Dec. 3, 2013).
\40\ Id.
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[[Page 11648]]
Expansion of Permissible CUSO Activities to Other Activities as
Approved by the Board in Writing
Currently, the list of permissible CUSO activities in Sec. 712.5
includes many of the core services and activities associated with the
daily and routine operations of credit unions. The list, however, does
not provide the Board flexibility to consider additional activities and
services without engaging in notice and comment rulemaking. In
contrast, part 704 permits corporate CUSOs to engage in any category of
activity as approved in writing by the NCUA and published on the NCUA's
website.\41\ Amending part 712 to be similar to part 704 has the
potential to reduce regulatory burden by allowing the rule to expand as
technology shapes the routine and daily operations of credit unions.
Accordingly, under the proposed rule, the list of permissible
activities in Sec. 712.5 would include a catchall category for other
activities as approved in writing by the NCUA and published on the
NCUA's website. The proposed rule would also provide that once the NCUA
has approved an activity and published that activity on its website,
the NCUA would not remove that particular activity from the approved
list, or make substantial changes to the content or description of that
approved activity, except through formal rulemaking procedures.
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\41\ 12 CFR 704.11(d)(3)(ii). Approved activities are listed on
the NCUA's website at: https://www.ncua.gov/regulation-supervision/corporate-credit-unions/corporate-cuso-activities/approved-corporate-cuso-activities.
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III. Request for Comment on the Proposed Rule
The above proposed changes are consistent with the Board's ongoing
efforts to reduce regulatory burden while assuring that FCUs operate in
a safe and sound manner. The Board welcomes comment on all aspects of
the proposal,\42\ including, but not limited to, the following
questions:
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\42\ Many FCUs have considerable experience with CUSO lending
relationships, therefore the Board is not providing the usual 60-day
comment period for this proposal which would relieve a regulatory
prohibition on certain forms of CUSO lending. See NCUA Interpretive
Ruling and Policy Statement (IRPS) 87-2, as amended by IRPS 03-2 and
IRPS 15-1. 80 FR 57512 (Sept. 24, 2015), available at https://www.ncua.gov/files/publications/irps/IRPS1987-2.pdf.
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(1) Is the term ``any type of'' loan sufficiently clear such that
FCUs would be able to comply with the proposed rule? Are there any
types of loans that FCUs cannot originate that CUSOs currently do
originate?
(2) Please discuss, and provide supporting information, on the
costs of the development or acquisition, implementation, and
maintenance of technology-based lending services.
(3) Would the proposed rule enable FCUs to offer additional
technology-based lending services that FCUs may be otherwise unable to
offer their members?
(4) The Board is also considering whether permitting CUSOs to
originate additional types of loans would facilitate FCUs' access to
securitization markets. It may be cost prohibitive for FCUs to
securitize loans because securitizations are most cost effective with a
large volume of loans. FCUs may also have difficulty aggregating loans
to complete a securitization due to restrictions on purchasing loans
and market concerns relating to varying underwriting standards.
Therefore, the Board solicits comment on whether a CUSO could serve as
an aggregator of loans to allow FCUs better access to securitization
markets.
(5) Does the proposed rule expose FCUs to unnecessary safety and
soundness risks? If so, are there steps the Board should consider to
mitigate such risks?
a. For example, should the NCUA gather additional data about CUSO
lending activities? If so, what data?
b. Should the NCUA consider additional constraints on an FCU's
ability to purchase and hold loans originated by a CUSO?
c. Should the NCUA consider risk retention requirements for CUSO
lending activities? The Board notes that FCUs that sell loan
participations must maintain 10 percent of the loan.
(6) Would permitting CUSOs to engage in any type of lending as FCUs
lead to additional reputational risk for FCUs? Loans from affiliated
CUSOs may not comply with the same consumer protection limits as FCU
loans, for example FCUs are subject to usury restrictions and a
regulatory structure for issuing payday alternative loans (referred to
as PALs).
(7) Does expanding CUSO lending authority to include additional
core FCU lending categories create unnecessary competition for FCUs,
particularly small FCUs?
(8) Instead of adopting a provision similar to the corporate CUSO
provision that allows the NCUA to add additional categories of
permissible activities for all CUSOs on its website, should the Board
require individual FCUs to petition the Board for permission to lend to
or invest in CUSOs that do additional activities or services not
already listed in Sec. 712.5?
(9) Should the Board publish on its website any conditions imposed
on activities permissible through the approval process?
(10) Should the Board consider additional changes to the
permissible activities list for CUSOs?
IV. Request for Comment on the Authority To Invest
An FCU's authority to lend to and invest in a credit union
organization is provided for in two separate provisions of the FCU Act.
The FCU Act authorizes an FCU to lend to credit union organizations
provided the extensions of credit do not exceed one percent of the
FCU's paid-in and unimpaired capital and surplus.\43\ A credit union
organization is defined as any organization, as determined by the
Board, which is established primarily to serve the needs of its member
credit unions and whose business relates to the daily operations of the
credit unions they serve. In contrast, the FCU Act authorizes FCUs to
invest up to one percent of its total paid in and unimpaired capital
and surplus, with the approval of the Board, in the shares, stocks, or
obligations of any other organization providing services which are
associated with the routine operations of credit unions.\44\
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\43\ 12 U.S.C. 1757(5)(D).
\44\ 12 U.S.C. 1757(7)(I). Provided, however, that such
authority does not include the power to acquire control directly or
indirectly, of another financial institution, nor invest in shares,
stocks or obligations of an insurance company, trade association,
liquidity facility or any other similar organization, corporation,
or association, except as otherwise expressly provided by the FCU
Act.
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There are significant differences between these lending and
investment authorities in the FCU Act. The lending authority refers to
``credit union organizations'' and limits such entities to those that
primarily serve the needs of their member credit unions. In contrast,
the investment authority does not use the term ``credit union
organization'', but instead generally refers to an ``organization''. In
addition, the investment authority is not limited to organizations that
primarily serve the needs of their member credit unions.
The NCUA has historically interpreted the lending and investment
authority under the FCU Act as referring to the same types of
organizations.\45\ The NCUA's first CUSO rule explicitly stated that
``an organization described at Section 107(7)(I) of the [FCU Act], and
a `credit union organization,' as described at Section 107(5)(D) of the
[FCU Act], are identical entities.'' \46\ The NCUA explained its
interpretation in the preamble to its 1977 final rule after several
commenters questioned the
[[Page 11649]]
definitional section of the proposed rule that defined ``credit union
service corporation'' to be both the entity described at Section
107(7)(1) and Section 107(5)(D). In the preamble, the NCUA discussed
that the thrust of the comments was that the definition was unduly
restrictive and was not legally mandated. In response, the NCUA stated
that ``in light of the mandate in the legislative history by
Congressman St Germain that [investment] authority is to be `exercised
on a carefully controlled basis by NCUA,' the Administration feels
justified in tying the two definitions together.'' \47\ The NCUA also
stated that it found no substantive difference in an organization
``which is established primarily to serve the needs of its member
credit unions, and whose business relates to the daily operations of
the credit unions they serve'' and an organization ``providing services
which are associated with the routine operations of credit unions.''
\48\ The NCUA also stated that the legislative history indicated that
the House committee stands ready to review investment interpretation
matters upon request from NCUA ``[s]hould a case be made for a more
liberal interpretation of the provisions.'' \49\
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\45\ 44 FR 12401 (Mar. 7, 1979).
\46\ Id.
\47\ Id.
\48\ Id.
\49\ Id.
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The NCUA also noted that the FCU Act specifically ``intertwines the
lending and investment powers. For instance, section 107(7)(A) allows a
Federal credit union to ``invest'' its funds in ``loans exclusively to
members.'' \50\ Due to the preceding analysis, the NCUA believed that
its interpretation of sections 107(5)(D) and 107(7)(I) were justified.
The NCUA stated that ``[w]hile it may restrict the permissible
activities for Federal credit unions in this field, legislative history
mandates a rather conservative approach.'' \51\
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\50\ Id.
\51\ Id.
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The NCUA is now considering whether to reconsider this longstanding
interpretation. Specifically, the NCUA is considering adopting separate
definitions for the types of organizations that an FCU may invest in or
lend to, which potentially would expand the types of organizations
eligible for FCU investment. For example, the NCUA could permit FCUs to
invest in organizations that do not primarily serve credit unions or
credit union members, but still provide services that relate to the
routine operations of FCUs. Under such an interpretation of the FCU
Act, FCUs could potentially invest in companies that broadly serve the
financial service community, but do not primarily serve credit unions
and their members. For instance, an FCU could form an organization with
community banks to create a lending platform that could be used by both
the FCU's members and the community banks' customers.
The Board notes that the statutory limitations on the amount of
investments would remain unchanged. An FCU is only authorized by the
FCU Act to invest up to one percent of its total paid in and unimpaired
capital and surplus in organizations. An FCU that has already invested
one percent of its total paid in and unimpaired capital and surplus in
CUSOs would not be authorized to invest any additional money. Instead,
such an FCU would have to reallocate its investments if it sought to
make any investments that were previously prohibited.
The Board invites comments on whether it should reconsider its
longstanding interpretation of the lending and investment authorities
under the FCU Act. In addition, the Board invites comments on the
following specific questions:
1. Do specific provisions and the legislative history of the FCU
Act suggest that the NCUA could take a less conservative approach to
interpreting the lending and investment authorities?
2. The investment authority under the FCU Act states that Board
approval is required before an FCU can make an investment in an
organization. Currently, the regulation provides for this approval
through the pre-approved permissible activities list in Sec. 712.5. If
the Board were to consider permitting investments that are not included
in Sec. 712.5, should approval be required for each investment to
determine if the activities of the organization relate to the routine
operations of FCUs? If the Board requires separate notice requirements,
should current investments be grandfathered?
3. Please discuss appropriate safety and soundness limitations that
the Board should consider if it reinterprets its interpretation. Should
the Board impose a requirement that the FCU's ownership interest in the
organization not be speculative? For example, should an FCU be
permitted to have an investment in an organization that is still
developing a product? If the Board reinterprets its interpretation,
should the Board impose a separate capital treatment for new
investments that are currently prohibited?
V. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a notice of proposed rulemaking, an agency prepare and
make available for public comment an initial regulatory flexibility
analysis that describes the impact of a proposed rule on small entities
(defined for purposes of the RFA to include credit unions with assets
less than $100 million).\52\ A regulatory flexibility analysis is not
required, however, if the agency certifies that the rule will not have
a significant economic impact on a substantial number of small entities
and publishes its certification and a short, explanatory statement in
the Federal Register together with the rule.
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\52\ See 80 FR 57512 (Sept. 24, 2015).
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This proposed rule would not have a significant economic impact on
a substantial number of small entities. The proposed rule imposes no
requirement or costs on small entities and only expands the list of
permissible activities for CUSOs. The proposed rule would expand the
list of activities that are considered complex or high risk for
purposes of the CUSO Registry, however, the Board does not expect the
additional reporting requirements to entail substantial regulatory
burden. Accordingly, the NCUA certifies that the proposed rule would
not have a significant economic impact on a substantial number of small
FICUs.
Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or modifies an existing burden (44 U.S.C. 3507(d)). For
purposes of the PRA, a paperwork burden may take the form of a
reporting, recordkeeping, or a third-party disclosure requirement,
referred to as an information collection.
The NCUA is seeking comments on proposed revisions to the
information collection requirements contained 12 CFR part 712, which
has been submitted to the Office of Management and Budget (OMB) for
review and approval under OMB control number 3133-0149. Under the
proposed rule, CUSOs would be permitted to originate, purchase, sell,
and hold any type of loan permissible for FCU's to originate, purchase,
sell, and hold. Accordingly, CUSOs could originate categories of loans
previously prohibited under the CUSO rule. The NCUA estimated 60 new
CUSOs would enter into an agreement with a FICU (Sec. 712.3(d)); which
would also require
[[Page 11650]]
the FICU to obtain a written legal opinion prior to investing in a
CUSO, as prescribed by Sec. 712.4(b), and that these CUSO would be
categorized a complex and be required to complete the expanded
information via the CUSO Registry (Sec. 712.3(d)(5)). It is estimated
that the increase in the number of respondents would increase total
burden hours by 690.
OMB Control Number: 3133-0149.
Title of information collection: Credit Union Service Organizations
(CUSOs), 12 CFR part 712.
Estimated number of respondents: 1,843.
Estimated number of responses per respondent: 1.
Estimated total annual responses: 1,843.
Estimated burden per response: 1.82.
Estimated total annual burden: 3,356.
The NCUA invites comments on: (a) Whether the proposed collection
of information is necessary for the proper performance of the functions
of the agency, including whether the information will have practical
utility; (b) the accuracy of the agency's estimate of the burden of the
proposed collection of information, including the validity of the
methodology and assumptions used; (c) ways to enhance the quality,
utility and clarity of the information to be collected; and (d) ways to
minimize the burden of the collection of information on those who are
to respond, including through the use of appropriate automated,
electronic, mechanical, or other technological collection techniques or
other forms of information technology; and (e) estimates of capital or
start-up costs and cost of operation, maintenance, and purchase of
services to provide information.
All comments are a matter of public records. Due to the limited in-
house staff, email comments are preferred. Comments regarding the
information collection requirements of this rule should be (1) mailed
to: [email protected] with ``OMB No. 3133-0149'' in the subject
line; faxed to (703) 837-2406, or mailed to Dawn Wolfgang, NCUA PRA
Clearance Officer, National Credit Union Administration, 1775 Duke
Street, Suite 6032, Alexandria, VA 22314, and to the (2) Office of
Information and Regulatory Affairs, Office of Management and Budget, at
www.reginfo.gov/public/do/PRAMain. Select ``Currently under 30-day
Review--Open for Public Comments'' or by using the search function.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, the NCUA, an
independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the principles of the Executive order. This
rulemaking will not have a substantial direct effect on the states, on
the connection between the National Government and the states, or on
the distribution of power and responsibilities among the various levels
of government. The NCUA has determined that this proposal does not
constitute a policy that has federalism implications for purposes of
the Executive order.
Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this proposed rule will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Public Law 105-277, 112
Stat. 2681 (1998).\53\
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\53\ Public Law 105-277, 112 Stat. 2681 (1998).
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List of Subjects in 12 CFR Part 712
Administrative practices and procedure, Credit, Credit unions,
Insurance, Investments, Reporting and recordkeeping requirements.
By the National Credit Union Administration Board on January 14,
2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons discussed above, the Board proposes to amend 12 CFR
part 712 as follows:
PART 712--CREDIT UNION SERVICE ORGANIZATIONS (CUSOs)
0
1. The authority citation for part 712 continues to read as follows:
Authority: 12 U.S.C. 1756, 1757(5)(D) and (7)(I), 1766, 1782,
1784, 1785, and 1786.
0
2. Amend Sec. 712.3 by revising paragraphs (d)(5)(i), (d)(5)(ii)
introductory text, and (d)(5)(iii) to read as follows:
Sec. 712.3 What are the characteristics of and what requirements
apply to CUSOs?
* * * * *
(d) * * *
(5) * * *
(i) Credit and lending:
(A) Loan support services, including servicing; and
(B) Loan origination, including originating, purchasing, selling,
and holding any loan as described in Sec. 712.5(q).
(ii) Information technology:
* * * * *
(iii) Custody, safekeeping, and investment management services for
credit unions.
* * * * *
0
3. Amend Sec. 712.5 as follows:
0
a. Revise paragraph (a) introductory text;
0
b. In paragraph (a)(4), add a semicolon at the end of the paragraph;
0
c. Revise paragraph (b) introductory text;
0
d. In paragraph (b)(11), remove the period and add a semicolon in its
place;
0
e. Remove paragraphs (c), (d), (n), and (s);
0
f. Redesignate paragraphs (e) through (t) as paragraphs (c) through
(p);
0
g. Revise newly redesignated paragraphs (c) introductory text, (d)
introductory text, (e) introductory text, (f) introductory text, (g)
introductory text, and (h) introductory text;
0
h. In newly redesignated paragraph (h)(3), remove the word ``and'';
0
i. Revise newly redesignated paragraphs (i) introductory text, (j),
(k), (l), and (m) introductory text;
0
j. In newly redesignated paragraph (m)(3), remove the period and add a
semicolon in its place;
0
k. Revise newly redesignated paragraph (n);
0
l. In newly redesignated paragraph (o), remove ``CUSO investments in
non-CUSO service providers:'' and remove the last period and add a
semicolon in its place;
0
m. In newly redesignated paragraph (p), remove the period and add a
semicolon in its place; and
0
n. Add new paragraphs (q) and (r).
The additions read as follows:
Sec. 712.5 What activities and services are preapproved for CUSOs?
* * * * *
(a) Checking and currency services:
* * * * *
(b) Clerical, professional and management services:
* * * * *
(c) Electronic transaction services:
* * * * *
(d) Financial counseling services:
* * * * *
(e) Fixed asset services:
* * * * *
(f) Insurance brokerage or agency:
* * * * *
(g) Leasing:
* * * * *
(h) Loan support services:
* * * * *
(i) Record retention, security and disaster recovery services:
* * * * *
(j) Securities brokerage services;
[[Page 11651]]
(k) Shared credit union branch (service center) operations;
(l) Travel agency services;
(m) Trust and trust-related services:
* * * * *
(n) Real estate brokerage services;
* * * * *
(q) Loan origination, originating, purchasing, selling, and holding
any type of loan permissible for Federal credit unions to originate,
purchase, sell, and hold, including the authority to purchase and sell
participation interests that are permissible for Federal credit unions
to purchase and sell; and
(r) Once the NCUA has approved an activity and published that
activity on its website, the NCUA will not remove that particular
activity from the approved list, or make substantial changes to the
content or description of that approved activity, except through formal
rulemaking procedures.
[FR Doc. 2021-01398 Filed 2-25-21; 8:45 am]
BILLING CODE 7535-01-P