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Understanding the risks and rewards of a CUSO

Aug 30, 2023

With credit unions facing talent shortages and inflationary costs, it’s no wonder that there’s growing interest in the idea of collaborating to gain economies of scale and credit union service organization (CUSO) formation.

CUSOs play an important role in supporting and enhancing the operations of credit unions. These organizations provide a range of services to credit unions, helping them streamline processes, expand capabilities and better serve their members.

Though CUSOs are increasing in popularity, credit unions partnering with CUSOs need to be sure they understand the organizational structure, conduct the appropriate due diligence and follow the applicable regulations.

What is a CUSO?

There can sometimes be confusion between what the National Credit Union Association (NCUA) defines as a CUSO and service organizations that provide services to credit unions. 

Service organizations that provide services to credit unions may not necessarily meet the definition of a CUSO as outlined by the NCUA. Though both types of entities may provide similar services and present similar risks, there are some nuances with the NCUA-defined CUSOs that need to be addressed. 

A CUSO is defined by NCUA Regulation 712.1(d) as an entity in which a federally insured credit union (FICU) has an ownership interest or to which the FICU has extended a loan to, and that entity:

  • Is engaged primarily in providing products or services to credit unions or credit union members or
  • (In the case of checking and currency services to persons eligible for membership in a credit union) any entity that has an investment in, loan from or contract with the credit union.

CUSOs are a separately formed entity, operating as a corporation, LLC or limited partnership.  They can either be wholly owned or owned by a mix of credit unions, trade organizations, individuals or other CUSOs.

CUSO requirements

If a CUSO is determined, the NCUA requires that a federal credit union’s investments in CUSOs must not exceed, in the aggregate, 1% of its unimpaired capital and surplus as of the last calendar year-end financial report. Loans in CUSOs are also limited to 1% of unimpaired capital and surplus. If the credit union is less than adequately capitalized, additional rules apply.

The NCUA also requires that credit unions must have a written agreement with the CUSO before investing or lending to the CUSO. The agreement must include the following responsibilities of the CUSO:

  • Accounting for transactions in accordance with GAAP
  • Preparing quarterly financial statements
  • Obtaining an annual financial statement audit by a licensed CPA in accordance with GAAS. (Wholly owned CUSOs do not need a separate audit if they are consolidated with the annual consolidated financial statement audit of the investing credit union.)
  • Providing NCUA and state supervisory authority complete access to any books or records of the CUSO as deemed necessary
  • Submitting annually to the NCUA, through the NCUA CUSO registry and appropriate state authority, if applicable, a report that includes basic registration information, such as legal name tax identification, address and the names and charter numbers of credit unions investing in, lending to or receiving services from the CUSO. If the CUSO is engaged in complex or high-risk activities, there are additional reporting requirements as noted in 712.3(4)(i) through (iii).
  • Operating in a manner that demonstrates separate corporate existence, such as records maintained separately, separate corporate procedures and formalities, with no liability by the credit union in the CUSOs borrowings
  • Obtaining independent written legal advice prior to the investment that establishes limited exposure to the federally insured credit union, such as inadequate capitalization, lack of separate corporate identity, common boards of directors and employees, control of one entity over another and lack of separate books and records.

Assessing CUSO risk

A CUSO relationship can help credit unions compete in a highly competitive environment, whether through expanding services and products to members, providing cost-effective access to technology or increasing access to talent and expertise.

Yet despite all the benefits a CUSO can bring, it could quickly become a liability if not managed well.

Depending on the relationship status, risks of a CUSO can vary. Regardless of the relationship with the CUSO, they do operate as third-party vendors.

Credit unions that invest in or loan to a CUSO, or receive services from a CUSO, should conduct the appropriate due diligence. For more information, see the NCUA Letter to Credit Unions 07-CU-13, Evaluating Third Party Relationships.

Additionally, the NCUA Examiner’s Guide includes more information on the risks involved with investing in or loaning to a CUSO.

How Wipfli can help

Wipfli understands the challenges financial institutions face in a competitive market. We offer guidance in critical areas, including talent retention, digital strategy and regulatory compliance, so that you can continue growing. Contact us today to learn more about how we can strengthen your credit union.

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Alison J. Herrick, CPA
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