Companies known as CUSOs – credit union service organizations – are often a major force in credit unions’ business operations, sometimes heavily influencing the bottom line by underwriting or selling loans on credit unions’ behalf. But for all that, critics note, CUSOs are not directly regulated.

As of July, the National Credit Union Administration (NCUA) is seeking to change that, proposing the companies submit financial statements to the agency directly. CUSO reactions are mixed: While some acknowledge the requirement is not particularly onerous, they’re worried it’s a bad sign for the future.

“Maybe this is a stepping stone to something else – we don’t know that,” said Robert Cipriani, president of Littleton-based Octant Business Services, which underwrites and services business loans for nine Massachusetts-based credit unions.

CUSOs are usually subsidiaries owned by a credit union or group of credit unions, and can provide a wide variety of services including loan underwriting and technology services.

In some cases, they bill themselves as a helpful supplement to credit unions’ in-house expertise. If a credit union has little experience in business lending, for example, it can work with a specialized CUSO, which will analyze accounts and make recommendations on whether to go ahead with a loan.

Path To Regulation

Cipriani said Octant already submits audited financial statements to its member credit unions, so the NCUA proposal wouldn’t initially generate any extra costs. CUSOs such as his keep credit union affiliates informed on all financial workings, Cipriani added, or else they would have no confidence in the company and might sever the relationship.

That’s just a good business practice, concurred Bill Beardsley, president of Michigan Business Connection and a member of the Regional CUSO Alliance along with Cipriani. Beardsley said his company, like many others, allows examiners full access to its books and records upon request for the same reason.

“I have two NCUA examiners 40 feet from me right now,” he told Banker & Tradesman during a phone interview from his office.

Still, the current level of oversight is insufficient for the NCUA, which is expanding its requirements for financial reporting to all CUSOs, not just those owned by federally chartered credit unions.

Beardsley said he is concerned the NCUA’s finalized details might prove burdensome, but the bigger worry is whether the step will spark a trend of further regulation down the road. That worry was echoed by the National Association of Credit Union Service Organizations this month, as it urged members to contact NCUA and argue against the proposal.

“NCUA has made it very clear,” the group said in a statement posted on its website. “They are headed down the path toward the direct regulation of CUSOs. The proposed amendment to the CUSO regulation is the first step.”

Time Will Tell

The dangers of mismanaged CUSOs have already been demonstrated by the case of New Jersey-based CU National Mortgage, whose president was discovered to have sold member credit unions’ mortgage loans to Fannie Mae – unbeknownst to them. The scheme took in about $139.6 million.

The executive pocketed the money from the sales while member credit unions believed those mortgages were still on their own books, said Thomas Pinkowish, owner of Connecticut-based Remoc Assoc., citing it as an example of a CUSO behaving badly.

The NCUA’s proposal is a rational extension of requirements already in place for federally chartered institutions, Pinkowish added. A CUSO’s missteps or fraud could mean the collapse of credit unions that rely on it, so it’s reasonable to include the service organizations in regulatory filing requirements.

Claude Hanley, partner with Washington, D.C.-based researcher Capital Performance Group, called the regulation “inevitable.”

Previously, he said, the assumption was that if the credit unions themselves were being regulated properly, the CUSOs must also be fine.

While many organizations are kept in check by state regulators, it’s likely some aren’t regulated at all. And CUSOs are becoming increasingly important to the industry, as more credit unions expand their offerings and try to keep up in a tough competitive environment.

More regulation may be the sensible thing, but Hanley said he wouldn’t make predictions as to whether the latest steps might prove to be the start of something bigger.

“I guess only time will tell.”