NCUA CUSO Rule - Michigan Credit Union League

June 2014

Volume 15, Issue 5

NCUA CUSO Rule

Effective on June 30, 2014, the NCUA's CUSO rule becomes effective. This final rule expands the requirements of the CUSO regulation to apply to federally insured, state-chartered credit unions (FISCUs). Previously, provisions of the CUSO rule applied only to FCUs. The new requirements include obtaining written agreements from CUSOs mandating the use of GAAP accounting practices and annual audits of financial statements by a licensed certified public accountant (CPA). Credit unions (state and federally chartered) that invest or lend to CUSOs are encouraged to read the final rule to make sure they are in compliance. Below are frequently asked questions that are designed to assist credit unions, but were not created to be all-inclusive of the requirements in the final rule.

Please Note: Michigan Credit Union League & Affiliates services are designed to provide accurate information with regard to the subject matter covered, with the understanding that the League does not render legal services. For specific legal advice, please consult with your credit union's attorney.

Q.1. What part of the new rule applies to state-chartered credit unions? A.1. The final rule expands CUSO regulations concerning permissible investment limits for less than adequately capitalized credit unions and requires FISCUs to obtain a written agreement from CUSOs regarding annual audits of financial statements and the use of GAAP accounting practices.

Q.2. What does a credit union need to do before the June 30th effective date? A.2. Prior to June 30, 2014, credit unions need to have written agreements in place from the CUSO that they invest in or lend to that indicates the CUSO will:

1. Account for all transactions in accordance with GAAP; 2. Prepare quarterly financial statements; 3. Obtain an annual financial statement audit of financial statements by a licensed CPA in

accordance with GAAP; 4. Submit relevant reports to the NCUA and DIFS (or state supervisory authority), including more

detailed information for CUSOs engaged in "complex" or "high-risk activities."

Q.3. What activities does the NCUA consider "complex" or "high-risk?" A.3. For purposes of this rule, the NCUA considers the following activities and services to be complex or high-risk:

Credit and Lending o Business loan origination; o Consumer mortgage loan origination; o Loan support services, including servicing; o Student loan origination; and o Credit card loan origination.

Headquarters: 101 S. Washington Square, Suite 900, Lansing MI 48933-1703 Mailing Address: P.O. Box 8054, Plymouth, MI 48152-7097 Toll-Free: 800.262.6285 ? Web:

 Information Technology o Electronic transaction services; o Record retention, security, and disaster recovery services.

Payroll Processing Services o Custody, safekeeping, and investment management services for credit unions.

Q.4. Beginning on June 30th, will CUSOs need to start submitting their reports under the new rules? A.4. No. CUSOs will begin submitting reports to NCUA under 712.3(d)(4) when the agency's reporting system is fully operational. This is expected to be completed by December 31, 2015.

Q.5. Federal credit unions are limited to loans or investments in a CUSO to a maximum of 1% of paid-in and unimpaired capital and surplus. Will that limit now apply to FISCUs? A.5. No. State chartered credit unions in Michigan are still subject to 490.401(2)(gg) of the Michigan Credit Union Act, which states that investments and loans shall not in aggregate exceed 12% of the assets of the domestic credit union, and without prior approval of the commission not exceed 6% of the assets of the domestic credit union. Instead to minimize the NCUA's perceived risk, the rule imposes certain recapitalization restrictions (712(d)(2)) and CUSO accounting, audits and financial statement disclosures (712.3(d)) on FISCUs.

Q.6. What are the restrictions on CUSO activities for FISCU's who are less than adequately capitalized for Prompt Corrective Action (PCA) purposes? A.6. The final rule added a similar requirement for FISCUs that exists for FCUs. If a FISCU is less than adequately capitalized or the investment will result in the FISCU being less than adequately capitalized, the FISCU must obtain written approval from DIFS before making an investment in a CUSO that will result in an aggregate cash outlay (cumulative) that exceeds the state investment limit (see question #5). The FISCU must also submit its request to the appropriate NCUA regional office.

Q.7. How does the new rule apply to subsidiary CUSOs? A.7. A subsidiary CUSO is defined as an entity in which a CUSO has an ownership interest of any amount, engaged primarily in providing products or services to credit unions or credit union members. FCUs investing in a CUSO with a subsidiary CUSO must insure the subsidiary CUSO satisfies all of the requirements in the CUSO rule. A FISCU can only invest in a CUSO with a subsidiary CUSO if it complies with all state laws and rules regarding CUSOs, and complies with the requirements of the final rule applicable to FISCUs.

Q.8. What does a credit union need to do in order to maintain corporate separateness from the CUSO? A.8. According to the NCUA rules, the following good business practices dictate:

1. Each entity must operate respective business transactions, accounts and records separately, not intermingled;

2. Each entity must observe the formalities of its separate corporate procedures; 3. Each entity is adequately financed as a separate entity; 4. Each entity is held out to the public as a separate entity; 5. The FICU cannot dominate the CUSO to the extent the CUSO is treaded as a department of

the FICU; and 6. Unless the FICU has guaranteed a loan obtained by the CUSO, all borrowings by the CUSO

indicate that the FICU is not liable.

Additionally, the FICU needs to obtain written legal advice as to whether the CUSO is established in a manner that will limit potential exposure of the FICU to no more than the loss of funds invested in, or loaned to the CUSO.

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