What are the risks and benefits of a credit union service organization?
- Credit union service organizations (CUSOs) allow credit unions to work together to deliver internal support or member services more cost-effectively. This can help credit unions take advantage of economies of scale, but it also carries risks because CUSOs operate as third-party vendors with their own goals.
- While credit union service organizations are not formally regulated by the NCUA, they are subject to certain NCUA requirements governing their relationships with credit unions and must give NUCA examiners access to their books upon request.
- Work with a third-party risk management advisor with a credit union background to understand the benefits and challenges of a CSUO relationship and responsibly manage your risk.
Credit unions face uncertainty, high interest rates and a changing regulatory environment. This has left leaders looking to limit expenses while simultaneously growing revenue.
To square this circle, more credit unions are joining forces to form credit union service organizations (CUSOs). A CUSO allows several credit unions to share costs and efficiencies on both internal and member-facing support services, helping them streamline processes, expand capabilities and better serve their members.
However, before joining a CUSO, you need to be sure you understand the organizational structure, conduct appropriate due diligence and follow the applicable regulations. Keep reading to learn more.
What is a credit union service organization (CUSO)?
CUSOs are support organizations that help credit unions strengthen their internal operations, member services or both. 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.
What is the purpose of a CUSO?
A CUSO provides services like lending, insurance, estate planning, accounting, IT and cybersecurity or analytical services to credit unions or their members. One or more credit unions will typically own or help fund a CUSO, which then offers additional services beyond the core competencies of the credit unions themselves.
This allows multiple credit unions to band together on IT costs, for example, and take advantage of economies of scale rather than each paying for their own in-house IT capabilities.
How are CUSOs structured?
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.
Who regulates credit union service organizations?
CUSOs are neither chartered nor insured by the National Credit Union Association (NCUA). However, the NCUA establishes certain compliance requirements around the relationships between CUSOs and credit unions and also has the right to review the books, records and internal controls of all CUSOs due to the potential for systemic risk.
There can sometimes be confusion between what the NCUA defines as a CUSO and other service organizations that provide services to credit unions. Not all service organizations that provide services to credit unions necessarily meet the definition of a CUSO as outlined by the NCUA.
What are the major CUSO regulations and compliance requirements?
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 CUSO’s 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.
What are the risks and benefits to a CUSO relationship?
Forming or joining a CUSO can help credit unions operate more efficiently or better serve their members. But being part of a CUSO also carries risks, because CUSOs operate as for-profit, third-party vendors whose interests may not necessarily align with a credit union’s own.
What are the benefits of a CUSO relationship?
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. Essentially, CUSOs allow credit unions to take advantage of economies of scale, with several credit unions banding together to reduce operational support costs or offer new services to members.
CUSOs also offer an avenue for credit unions to compete with larger banks, which typically have greater internal capacities and provide a broader range of services to their customers.
What are the risks of a CUSO relationship?
Mismanaged CUSOs can bring risks to credit unions’ reputation, operations and finances. Some key potential risk areas include financial losses, cash flow interruptions, litigation or compliance challenges, fair lending issues and data security breaches.
Because CUSOs are third-party vendors, there can also be challenges around alignment.
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 can you mitigate the risks of joining a CUSO?
Work with a third-party risk advisor that has specific credit union experience to understand and mitigate the risks of a CUSO-credit union relationship. Your advisor can help you watch for red flags, maintain compliance with NCUA requirements and conduct responsible due diligence.
How Wipfli can help
We help financial institutions like credit unions manage risk, maintain compliance and adapt to a fast-changing market. Let’s talk about your challenges, goals and how specific strategies like joining a CUSO could help you grow or better serve your members. Start a conversation.
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