Frequently Asked Questions

What is a CUSO?
A credit union service organization or CUSO is a subsidiary of one or more credit unions that provides financial services and operational services primarily to credit unions and/or members of affiliated credit unions.  CUSOs enhance the ability of credit unions to serve members and earn revenue from additional sources.  A CUSO is a corporation, limited liability company or limited partnership in which a credit union has an investment or loan.  CUSOs are subject to certain restrictions.  There are aggregate CUSO investment and loan limits.  The services must be permitted under the regulations and the customers served must be primarily credit unions or members of affiliated credit unions (credit unions with an investment, loan or contract with the CUSO).  The NCUA CUSO Regulation is Part 712.  
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What services can a CUSO offer?
CUSOs can offer a variety of financial and operational services.  The specific permitted services for federally chartered credit unions are listed in Part 712.5 of the NCUA Regulations. Most states permit state chartered credit unions to engage in the same activities as federally chartered credit unions.  Some states have their own regulations for state chartered credit unions.
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Why form a CUSO?
CUSOs provide an opportunity to enhance financial services to members while generating non-interest revenue.  Providing access to additional financial services is essential to serving the financial needs of the members.  CUSOs provide credit unions with the means to generate additional non-interest income that is essential for credit unions to survive and thrive in the future.  Most credit unions will not be able to survive in the long term on the spread between interest income and the cost of funds.  CUSOs are also used as a vehicle to combine resources among credit unions and achieve economies of scale for both financial and operational services.  In other situations where the service could be provided in either the credit union or the CUSO, CUSOs offer advantages over the credit union. The following are some specific reasons to form a CUSO.

1.         Legally Required for Some Services.  CUSOs are still legally needed for some services (e.g. trust services and insurance agency services).

2.         Collaborative Ventures. CUSOs are the vehicle to permit credit unions to enter into collaborative arrangements.  Credit unions are using CUSOs to combine resources to enable them to more efficiently and effectively provide both financial and operational services to enable them to successfully compete against other financial service providers.  These arrangements also share the risk among several credit unions rather than a single credit union shouldering all the risk.  The economies of scale can provide significant competitive advantages.

3.         Greater Control Over the Delivery of Services.  CUSOs offer greater control over delivery of services.  The people providing the services are CUSO employees and not the employees of third party vendors that may or may not serve members as the credit union desires.

4.         Greater Control Over the Business.  The use of a CUSO can help maintain better control over the business if there is a transition in vendors.  While both credit unions and CUSOs can build in some control over the business at the termination of a vendor relationship, CUSOs can actually own the business, in some types of business models.  This puts the CUSO in a better position to control the book of business when there is a vendor transition.

5.         Serving Non-Members.  CUSOs are needed if the business model includes the service of non-members.  The CUSOs customer base can include 49% non-members.

6.         Additional Risk Protection.  CUSOs are used to insulate the credit union from additional risk.  CUSOs provide a layer of protection to the credit union and its assets should there be a situation that creates liability from a CUSO activity.  This extra layer of protection does not exist if the service is run directly through the credit union.

7.         Raising Outside Capital.  CUSOs are used to raise outside capital.  If a credit union has a service that will need additional capital to grow and the credit union is unable or unwilling to risk additional credit union capital, CUSOs provide the vehicle to bring in outside investors, which are usually, but not exclusively, other credit unions.

8.         Creating Marketable Value.  Successful CUSOs create equity and marketable value that credit unions may sell in whole or in part in the future.  Several credit unions have sold off all or a part of their CUSO investments and made significant gains.

9.         Effect of Entrepreneurial Culture.  CUSOs have a for-profit entrepreneurial culture.  The credit union culture has traditionally been much more conservative and risk adverse.  While there are challenges to reconciling the two cultures, the blend has often given credit unions new perspectives and models to serve members.  The world of financial services is a predominantly a for-profit and entrepreneurial environment.  It is important for credit unions to understand and embrace the best elements of that culture, while keeping the credit union's core values.   Unfortunately, in some cases, the process has worked the other way and the inability of the credit union to see the advantages of fully supporting the CUSO has stymied the CUSO and its development.

10.       Attracting and Retaining Staff.  As an entrepreneurial entity with a bigger potential customer base and different compensation structures, CUSOs offer additional career path opportunities that will attract and retain more talented and skilled employees than the credit union could attract and retain on its own.
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What are CUSO success indicators?
Credit unions considering CUSOs often ask what are the success indicators for CUSOs.  Most of these success indicators can also apply to credit unions offering non-traditional services through Incidental Powers.  The following are some that we have observed:

1.         Full support of credit union board and staff.  CUSOs need to have the full support for their products and services from the credit union.  This support must be from the board of directors to the member service representatives.  The credit union must see the CUSO products as core products that are of equal importance as any loan, certificate of deposit or other traditional credit union product.  Successful CUSOs and their credit union owners have a "we" mentality and not an "us" and "them" mentality.  There is a shared vision for the credit union and CUSO that is communicated at all levels of the organizations.  There is also a shared definition of success.  The credit union board and the CUSO board understand what a CUSO has to do to be successful.

2.         Integration.  Successful CUSOs are able to integrate their products with the credit union products so that a member can access the products and information about them as efficiently as possible, regardless of whether the member obtains the product at a credit union branch, phone center or web site, given practical and legal considerations.  Product integration must take into consideration the legal framework that only licensed persons can sell securities and insurance products and the Letter 150 space distinctions and disclosures.  There must also be the integration of performance evaluations.  Key credit union and CUSO staff should be reviewed on their direct or indirect contribution to the combined success of the credit union and CUSO.  Key credit union people will buy into the success of the CUSO if they have some personal stake in the CUSOs success.  It is human nature, plain and simple.

3.         Good Business Plan.  As with every well thought out business venture, a good business plan is essential.  A good business plan will identify the people, resources and actions necessary to implement the strategic goals.  A plan will indicate when the CUSO can expect to achieve profitability and benchmarks along the way that can be used to measure and indicate the progress to the CUSO, the credit union investor and regulators. 

4.         Well Capitalized.  Successful CUSOs are given sufficient capital to be successful, not just enough to get by.  Adequate capitalization is also essential to protect the credit union from liability and the "piercing of the corporate veil".  The adequacy of a subsidiary's capitalization by the parent organization is one of the factors that a court examines to determine if there is sufficient separateness to protect the parent organization from the liability caused by the subsidiary.  If the credit union has invested enough capital for the CUSO to stand on its own over time, the likelihood that a court will respect the separateness of the CUSO and insulate the credit union from liability for acts of the CUSO will be greatly enhanced.

5.         Dedicated and Qualified CUSO Management.  One would not expect a credit union to be successful if a part-time president ran it.  Likewise, the more successful CUSOs have full time presidents or managers that run the business and take responsibility to manage the business, including the identification of new business opportunities. 
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What regulations apply to CUSOs?
Federally chartered credit unions must follow Part 712 of the NCUA Regulations that set forth the rules and conditions of an investment in or a loan to a CUSO.  State chartered credit unions must follow their respective state's investment power provisions.  If the state has a federal parity statute (empowering state credit union to do everything that a federal credit union can do), Part 712 of the NCUA Regulations can be followed.  Often, the state credit union laws are very vague, permitting CUSO investments in "service organizations that assist in the daily operations of credit unions".  In these states, it is important to see how the state regulator interprets those powers.  Some states have different investment caps and some require prior approval by the regulator.  NCUA does not require prior approval as long as the proposed activity of the CUSO is a pre-approved service listed in Part 712.5 of the NCUA Regulations.
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What are the CUSO investment and loan limitations?
Under NCUA Rules and Regulations, a federal credit union's investment in CUSOs is limited to one percent (1%) of the credit union's paid-in and unimpaired capital and surplus.  Federal credit unions may loan another one percent (1%) of paid-in capital and surplus.  The limitations are in the aggregate for all of a credit union’s CUSO investments and loans.
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Who can the CUSO serve?
CUSOs can serve anyone.  The primary customers of the CUSOs business must be credit unions or members of affiliated credit unions (50% plus 1).  There is no required method of measuring this business mix.  Due to the fact that there are so many different types of CUSO activities, the credit union is given the opportunity to propose the method of measuring the primarily serves requirement, e.g., number of persons served, gross income source, or net income source.
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How do you form a CUSO?
The first thing you do is obtain the advice of professionals who are experienced with the process and procedures. 
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Should you form a CUSO as a corporation, limited liability company or limited partnership?
A credit union can be a shareholder in a corporation, a member of a limited liability company and a limited partner in a limited partnership.  Prior to 1998, credit union could not form limited liability companies and most credit unions chose corporations as the CUSO entity.  Limited partnerships are not commonly chosen as the business entity because limited partners may not manage the CUSO.  Credit unions can not be the general partner in a limited partnership due to the unlimited liability of general partners.  Few credit union board of directors feel comfortable turning over all management powers to a third party.  The corporation is a familiar model and gives the credit union the power to elect the CUSO board of directors.

In 1998, the NCUA Regulations permitted CUSO investments in limited liability companies ("LLCs").  LLCs offer flexibility and tax advantages.  In a multiply owned LLC, the CUSO can be flexible as to management powers, profit sharing and ownership rights.  It is not necessarily one share (or unit), one vote.  The parties are free to structure the relationship as they prefer.  The tax advantage is that there is no tax at the LLC level, the tax burden is passed through the LLC to the owner and the owner's tax status controls.  As a non-profit entity, there is no income tax generated by the credit union's tax status.  However, if the CUSO activity is not within the purposes for which the credit union was granted non-profit status, unrelated business income tax ("UBIT") must be paid.  UBIT treats this unrelated business activity as if the charitable tax exemption did not exist and taxes it.  Note that this is only a potential issue for state chartered credit unions.  The good news for federal credit unions is that since they enjoy their tax status under the Federal Credit Union Act and not as a charitable exemption under the IRS Code, UBIT does not apply to them and there is no UBIT tax.  This tax advantage is compelling for federal credit unions to choose the limited liability company as their CUSO entity.  There are three caveats:  (1) make sure that state law permits LLCs to have the same pass through tax treatment; (2) if the CUSO is to be wholly owned by a credit union, that state laws permit a singly owned LLC; and (3) confirm with your accountants that they will treat the tax situation in a manner that you anticipate in arriving at your decision to form an LLC.

Is there any difference in tax treatment to running a service directly through the credit union under Incidental Powers or through a limited liability company ("LLC") CUSO?
The answer is no.  The LLC is a disregarded tax entity and therefore the answer as to whether any tax is due is determined solely by the tax status of the credit union.  In situations where the choice is using the credit union's Incidental Powers or using a CUSO formed as an LLC the income tax issue is neutral.  The UBIT issue is neutral as well.  If UBIT is due from a state chartered credit union who has services running through their CUSO, it will also be due if the services are run through the credit union under Incidental Powers.

Who may own an interest in a CUSO?
Anyone may own an ownership interest in a CUSO (along with a credit union) with the exception of the senior officials of the credit unions.  Part 712.3 of the NCUA Regulations prohibits the credit union directors, CEO, Vice-CEO and CFO (and their immediate family members) from receiving any direct or indirect benefit from the CUSO.  This includes an ownership interest in the CUSO.
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What are the factors that determine whether the credit union should produce revenue directly under Incidental Powers or through a CUSO? 
Many services, can be offered with or without a CUSO.  NCUA has broadly construed the Incidental Powers of federal credit union to include Finder Activity income.  This is the ability to enter into an arrangement with any vendor that desires to market their services to credit union members and receive revenue from the vendor.  Of course, the arrangement must be otherwise legal and if there are some licenses under state law that the credit union must obtain to legally receive the income (e.g. an insurance license or mortgage broker license), then the credit union must obtain the applicable license.  Credit unions that choose to provide the services through the Finder Activity Incidental Power should insure that they are satisfied with (a) a third party vendor exclusively providing the services, (b) the business control provisions in the vendor agreement, (c) the fact that the revenue sharing services are limited to members, (d) assuming the risk of the business without the CUSO layer of protection, (e) the ability of the credit union alone to meet the capital requirements for its responsibilities in the business arrangement, (f) the fact that the credit union will not be building up any equity in the business, (g) the lack of economies of scale and risk assumption without other partners and (h) passing upon the creation of an entrepreneurial opportunity and the resulting potential benefits to attracting and retaining additional staff expertise and talent.
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