The vast majority of people who work at NCUA and the state credit union regulatory agencies fully appreciate that credit unions need economies of scale and more expertise in order to survive and thrive in today’s regulatory climate. Combining operational services can be very effective. Many credit unions have collaborated in such services as business lending, indirect lending, mortgage lending, IT support, collections, and marketing to name a few. Having a common platform for these services leverages resources to reduce costs and increases expertise but the downside is that errors are also leveraged. If a CUSO provides poor services or commits a regulatory violation, multiple credit unions are affected and this makes the regulators understandably nervous.
Credit unions manage risk and regulators manage the risk managers. The regulators do not object to credit unions handing over certain operational services to a CUSO but they do object if the credit union does not monitor, understand and manage that risk. For example, many credit unions use their CUSO to originate and service business loans. NCUA tells me that it is not uncommon for an examiner to ask a credit union about its business loans and be told to go ask the CUSO. That is not an acceptable response. While the credit union staff may not have sufficient expertise to underwrite and service business loans, they need to have sufficient knowledge to be able to intelligently assess the risk with the help of the CUSO and with independent education. The credit union staff should always be knowledgeable about its business loan portfolio and able to discuss the portfolio, including details of problem loans with the examiner. If there are problems, the regulator wants to know that the credit union staff can spot them and have the ability to take action, including cutting off its relationship with the CUSO.
My metaphor for this is the driver training car with two steering wheels. The CUSO is the driver and the credit union is the passenger that is also watching out the window to see how the CUSO is doing. If there is an emergency that the CUSO cannot handle, the credit union always has the ability to timely take the wheel.
As collaboration becomes more prevalent, this means that credit unions might have to change the skills of its staff. There will be more risk monitoring functions and less active operational functions.
My advice for CUSOs and credit unions served by CUSOs is for the CUSOs to provide training to credit union staff in order to assure that they have the knowledge and the means to monitor the performance of the CUSO. Credit unions will have to institute policies and procedures to insure that meaningful monitoring occurs that can be reported to the senior staff, the credit union board and the examiner.
The upside of all of this is that if (1) a CUSO is effectively providing a needed operational service, (2) there is a program in place to assure that there is proper monitoring of the service by the client credit unions and (3) the regulators are educated about the first two points, the CUSO may be able to cut its marketing budget in half. You will find the examiner talking about the CUSO in a positive light and maybe even quietly encouraging a call or two to the CUSO for services. What more could a CUSO and the investing credit unions ask for?