FINAL_3133-0149_CUSO_Final Rule_110921

National Credit Union Administration

SUPPORTING STATEMENT

Credit Union Service Organizations (CUSOs)

12 CFR Part 712

OMB No. 3133-0149

Summary of rulemaking action:

The NCUA published a final rule on October 27, 2021, at 86 FR 59289, that amended to credit union service organization (CUSO) regulation by expanding the list of permissible activities and services for CUSOs to include origination of any type of loan that a Federal credit union (FCU) may originate and granting the Board additional flexibility to approved permissible activities and services. The final rule adopts the proposed rule without any substantive change.

The rule permits CUSOs to originate, purchase, sell, and hold any type of loan permissible for FCUs to originate, purchase, sell, and hold. Accordingly, CUSOs could originate categories of loans previously prohibited under the CUSO rule. The NCUA estimated 60 new CUSOs would enter into an agreement with a FICU (§ 712.3(d)); which would also require the FICU to obtain a written legal opinion prior to investing in a CUSO, as prescribed by § 712.4(b), and that these CUSO would be categorized as complex and be required to complete the expanded information via the CUSO Registry (§ 712.3(d)(5)). It is estimated that the increase in the number of respondents would increase total burden hours by 652.

A. JUSTIFICATION

1. Circumstances that make the collection of information necessary.

Part 712 of the National Credit Union Administration’s (NCUA) regulations implements authority in the Federal Credit Union Act (FCU Act)¹ which relate to federally insured credit union (FICU) lending or investment activity with a credit union service organization (CUSO).

Under the FCU Act, FCUs have the authority to lend up to one percent of their paid-in and unimpaired capital and surplus, and to invest an equivalent amount, in CUSOs.² The NCUA regulates FCUs’ lending to and investment in CUSOs in part 712 of its regulations. In general, a CUSO is an organization: (1) In which a FICU has an ownership interest or to which a FICU has extended a loan; (2) is engaged primarily in providing products and services to credit unions, their membership, or the membership of credit unions contracting with the CUSO; and (3) whose business relates to the routine daily operations of the credit unions it serves. The CUSO rule provides a list of preapproved activities and services related to the routine daily operations of credit unions 12 CFR §712.5.

The rule addresses NCUA’s safety and soundness concerns for activities conducted by CUSOs and imposes certain information collection activities on FICUs that have investment or lending relationships with, or conduct operations through, CUSOs.

2. Purpose and use of the information collection.

The information collection requirement activity prescribed by §712.3(d) is collected by accessing the CUSO Registry. CUSO’s report basic registration information, including the CUSO’s name and address, point of contact, services offered, the names and charter numbers of credit unions investing in, lending to, or receiving services from the CUSO, and investor and subsidiary information. In addition, for any CUSO engaged in complex or high-risk activities, as defined in the rule, the report must contain additional, enhanced, more detailed information, including audited financial statements and more specific customer information. 12 CFR §712.3(d)(4).

A FICU and a CUSO must be operated in a manner that demonstrates to the public the separate corporate existence of the FICU and the CUSO. Section 712.4(b) requires that prior to investing in a CUSO, the FICU must obtain a written legal opinion confirming the CUSO is established in a legally sufficient way to limit the FICU’s exposure to loss of its loans to or investments in the CUSO. 12 CFR §712.4(b).

Section 712.2(d) also requires that a FICU that is or, as a result of recapitalizing an insolvent CUSO, will become less than adequately capitalized must, under certain circumstances, obtain NCUA (or SSA, if applicable) approval to recapitalize a CUSO that has become insolvent.

In summary, Part 712 contains the following information collection requirements:

1. Before making a loan to, or investment in, a CUSO, a FICU must obtain a written agreement from the CUSO (or revise any current agreement the FICU has with a CUSO) that the CUSO will: follow GAAP; prepare financial statements at least quarterly and obtain an annual opinion audit from a certified public accountant; provide access to its books and records to NCUA and the appropriate SSA; and annually report financial and other information directly with NCUA and the appropriate SSA. (Recordkeeping requirement).

2. A FICU with an investment in, or loan to, a CUSO must obtain a written legal opinion confirming the CUSO is established in a legally sufficient way to limit the FICU’s exposure to loss of funds invested in, or loaned to, the CUSO. (Recordkeeping requirement).

3. A FICU that is or, as a result of recapitalizing an insolvent CUSO will become, less than adequately capitalized, must seek NCUA’s or the appropriate SSA’s approval before recapitalizing a CUSO that has become insolvent. (Reporting requirement).

4. A CUSO with an investment or loan from a FICU must annually submit a report directly to NCUA and the appropriate SSA, if applicable, containing financial and other information prescribed in Part 712. (Reporting requirement).

5. An SSA may obtain an exemption for FISCUs from compliance with CUSO accounting, audits and financial statement requirements by submitting a copy of the legal authority pursuant to which it secures the information required and supporting documentation to the NCUA’s regional office having responsibility for that state. (Reporting requirement).

These requirements enable NCUA to monitor a FICU’s involvement with its CUSO for safety and soundness purposes. NCUA notes some elements of the rule reflect sound business judgment and represent usual and customary business practices. For example, obtaining a written agreement with an entity before investing funds in its operations, requiring that its financial statements be prepared in accordance with GAAP, and obtaining a legal opinion as to corporate matters are standard business practices. The burden hours reported in Item 12 below exclude the hours attributable to engaging in these usual and customary business activities.

NCUA conducts regular, periodic examinations of FCUs and participates in examinations of FISCUs. The information collected from CUSO registry is used by NCUA in its review for reporting compliance for credit unions with a loan to or investment in a CUSO. As part of the examination process, NCUA also reviews written agreements, legal opinions, and CPA opinion audits relating to FCU involvement with CUSOs to determine the safety and soundness of the FCU. This information is critical in preventing or minimizing losses to the National Credit Union Share Insurance Fund (NCUSIF), which provides federally guaranteed share (deposit) account insurance for all FICUs.

FISCUs are exposed to significant potential safety and soundness and reputation risks based on their relationship with their CUSOs. Although NCUA has the right to examine books and records belonging to a FISCU, it also needs access to the books and records of the CUSO. Without that access, NCUA cannot thoroughly and accurately evaluate the potential risks CUSOs pose to FISCUs and, ultimately, the risk to the NCUSIF.

It should be noted that not all states impose the same type of relatively strict investment and lending limits in the FCU Act, which limit FCU loans to, and investment in, all CUSOs to one percent of the FCU’s unimpaired capital and surplus, respectively. 12 U.S.C. §1757(7)(I). Similarly, not all states limit the types of activities in which a CUSO may engage. Further, without some assurance that the FISCU is insulated from claims that might be asserted against its CUSO, there is risk that the FISCU could lose more than the value of its investment in its CUSO.

3. Use of information technology.

The CUSO Registry is a web-based system that CUSOs use to provide information directly to NCUA. The information collected is used by NCUA in its examination and supervision of FCUs and FISCUs. In addition to general information like a CUSO’s legal name, address, and contact information, the system collects:

• Information regarding ownership and subsidiaries

• Services offered by the CUSO, including basic financial information as applicable for specific services

• Customer credit unions served by the CUSO

• Expanded information for complex or high-risk activities

No special software is required. The CUSO Registry is a web-based application. The CUSO Registry is accessible using web browsers such as Chrome, Firefox, Microsoft Edge, and Safari. Users should endeavor to use current and vendor supported web browser versions to reduce security risks from using outdated software.

4. Duplication of information.

There is no duplication of this information. The information the rule requires is unique to each credit union or situation.

5. Efforts to reduce burden on small entities.

The burden on small FICUs is minimal because much of the required information collection is already maintained by FICUs that have a relationship with a CUSO.

NCUA considers credit unions having less than $100 million in assets to be small for purposes of the Regulatory Flexibility Act³. As of June 30, 2021, there were 3,276 FICUs with assets under $100 million. Of those 3,276 only 760 (23.2%) reported any interest (loan or investment) in a CUSO.

6. Consequences of not conducting the collection of information.

Failure to require these collections would expose FICUs to significant losses and could result in losses to the NCUSIF.

7. Inconsistencies with guidelines in 5 CFR 1320.5(d)(2).

There are no special circumstances. This collection is consistent with the guidelines in 5 CFR §1320.5(d)(2).

8. Efforts to consult with persons outside the agency.

A Paperwork Reduction Act (PRA) notice was published in the preamble of the proposed rulemaking on February 26, 2021, at 86 FR 11645, providing an opportunity for the public to comment on the information collection requirements prescribed by this rule. Comments will be summarized and addressed in the PRA submission associated with the final rulemaking.

The final rule published on October 27, 2021, at 86 FR 59289, adopting the proposed rule without any substantive change. NCUA received over 1,000 comments on the proposed rule, which have been summarized and addressed in the preamble of the rule. Included in these comments are those associated with the CUSO registry. The CUSO registry is the collection instrument used to providing the reporting requirements under Part 712. These comments are summarized and addressed in the preamble of the final rule.

Under the current CUSO rule, a FICU must obtain a written agreement from a CUSO the FCU loans to or invests in that the CUSO will annually submit to the NCUA a report containing basic registration information for inclusion in the NCUA’s CUSO registry. CUSOs that are engaged in complex or high-risk activities have additional obligations with respect to the CUSO registry. Under the current CUSO rule, complex or high-risk activities are defined to include credit and lending, including business loan origination, consumer mortgage loan origination, loan support services, student loan origination, and credit card loan origination. For consistency, the final rule removes the specific subcategories of lending and instead refers to all loan originations as complex or high risk. Lending activities are considered complex or high risk because they can present a high degree of operational or financial risk. Specifically, FICUs making loans to and investments in CUSOs engaged in credit and lending activities may be exposed to significant levels of credit, strategic, and reputation risks.

Commenters also noted that the CUSO Registry requires all CUSOs to provide data to the NCUA. Several commenters stated that the current reporting requirements are sufficient and the NCUA should not expand reporting requirements, as proposed. The Board is not expanding what must be reported by CUSOs engaging in complex or high-risk activities, but as proposed is incorporating all types of lending in the definition of complex or high-risk activities.

An association of state credit union supervisors expressed concern that state CUSOs with authority to engage in all forms of lending would be required to report additional information under the proposed rule. The organization requested that the NCUA consult with state regulators. The Board notes that when it adopted this provision in 2013, it broadly described credit and lending activities as complex or high-risk and applied this requirement to FICUs. Further, some FISCU-owned CUSOs are reporting the number and dollar amount of their lending activities, even if those lending activities are not explicitly listed in § 712.3(d). The Board, therefore, does not believe the effect of this rule on CUSOs in which only FISCUs have an ownership interest represents a policy change from that final rule.

There was a single comment received through the Paperwork Reduction Act that expressed concern with the competition between CUSOs and credit unions. This comment did not have any specific information collection concerns or impact the burden. The commenter’s regulatory concern is address as part of the preamble under “Growth or Competition.”

9. Payment or gifts to respondents.

NCUA will not make any payment, gift or remuneration to anyone in connection with this collection.

10. Assurance of confidentiality.

The rule addresses documents, such as an agreement between a credit union and its CUSO, and legal opinions, which are and would remain credit union property. There is no requirement that the documents be made public. CUSO reports may contain or consist of trade secrets and commercial or financial information which relate to the business, personal, or financial affairs of a person or organization, are furnished to NCUA. This type of information will be kept private to the extent permitted by law.

11. Questions of a sensitive nature.

Information collected to identify a contact individual covered by the system includes name, address, and telephone number. The CUSO Registry System is covered by System of Records Notice (SORN) NCUA-18, Credit Union Service Organization (CUSO) Register System, and was published in the Federal Register on July 30, 2015, at 80 FR 45557.

12. Burden of information collection.

1. §§ 712.3(d)(1) – (d)(3). FICUs – Written Agreement. *

Prior to investing or lending to a CUSO, a FICU must obtain a written agreement from the CUSO (or revise any current agreement the FICU has with a CUSO) that the CUSO will: follow GAAP; prepare financial statements at least quarterly and obtain an annual opinion audit from a certified public accountant; provide access to its books and records to NCUA and the appropriate SSA; and annually report financial and other information directly with NCUA and the appropriate SSA.

2. FICUs - Written Legal Opinion. *

Prior to investing or lending to a CUSO, a FICU must obtain a written legal opinion confirming the CUSO is established in a legally sufficient way to limit the FICU’s exposure to loss on its loans or investments in the CUSO. Current burden hours for this rule relate to new relationships between credit unions and CUSOs.

3. FCUs - Obtaining regulatory approval.

An FCU that is or, as a result of recapitalizing an insolvent CUSO will become, less than adequately capitalized must apply for and obtain prior written approval from the FCU’s regulator before recapitalizing a CUSO that has become insolvent. According to NCUA’s records, as of June 30, 2021, only 29 FCUs were less than adequately capitalized (net worth of under 6%). Of these FCUs, 10 reported having an interest in a CUSO. NCUA estimates it would take an FCU approximately two hours to complete a request for the regulator’s approval for an investment to recapitalize an insolvent CUSO.

4. FISCUs - Obtaining regulatory approval.

A FISCU that is or, as a result of recapitalizing an insolvent CUSO will become, less than adequately capitalized must apply for and obtain prior written approval from its SSA before recapitalizing a CUSO that has become insolvent. According to NCUA’s records, as of June 30, 2021, only 28 FISCUs were less than adequately capitalized (net worth of under 6%). Of these FISCUs, 13 reported having an interest in a CUSO. NCUA estimates it would take a FISCU approximately two hours to complete a request for the SSA’s approval for an investment to recapitalize an insolvent CUSO.

5. FISCUs - Obtaining regulatory approval.

A FISCU that is or, as a result of recapitalizing an insolvent CUSO will become, less than adequately capitalized, must submit to NCUA a copy of the application sent to the SSA requesting permission to recapitalize the CUSO. According to NCUA’s records, as of June 30, 2021, only 28 FISCUs were less than adequately capitalized (net worth of under 6%). Of these FISCUs, 13 reported having an interest in a CUSO. NCUA estimates it would take a FISCU approximately one hour to submit a copy to NCUA.

6. CUSO reporting to NCUA – basic information. *

According to CUSO registry data, as of December 31, 2020, 5,099 FICUs reported a total of 1,004 unique CUSO interests based upon individual Employer Identification Numbers. NCUA estimates that completing the CUSO registry would require 0.5 hours.

7. CUSO engaged in complex or high-risk activities reporting to NCUA—expanded information. *

According to CUSO Registry data as of December 31, 2020, of the 1,004 CUSO interests reported above, 439 CUSOs are engaging in complex or high-risk activities. These CUSOs must furnish additional detailed information in the report in addition to the basic information described above. NCUA estimates that completing this additional CUSO registry data would require 3.0 hours.

8. SSA Exemption

As of June 30, 2021, there were no exemption requests from SSAs for FISCUs from compliance with CUSO accounting, audits and financial statement requirements. NCUA estimates the request would require five hours to submit.

*The proposed rule will expand the lending authority of CUSOs. NCUA estimates that 60 new CUSOs would emerge as a result of the new authority.

	Citation	Information Collection Activity	Affected Public	Type of Burden	# Respondents	# Responses per Respondent	# Annual Response	Hours per Response	Total Annual Burden	Previously Approved	Difference
1	713.3(d)	Written Agreement	FICU	recordkeeping	180	1	180	4	720	480	240
2	712.4(b)	Written Legal Opinion	FICU	recordkeeping	180	1	180	4	720	480	240
3	712.2(d)(2)(i)	FCUs - Obtaining regulatory approval	FCU	reporting	10	1	10	2	20	18	2
4	712.2(d)(2)(ii)	FISCUs - Obtaining regulatory approval (must apply for and obtaining prior written approval from its SSA before recapitalizing a CUSO that has become insolvent)	FISCU	third-party disclosure	13	1	13	2	26	6	20
5		FISCUs - Obtaining regulatory approval (must submit to NCUA a copy of the application sent to the SSA requesting permission to recapitalize the CUSO)	FISCU	reporting	13	1	13	1	13	3	10
6	712.3(d)(4)	CUSO reporting to NCUA - basic information (via CUSO Registry)	CUSO	reporting	1,004	1	1,004	0.5	502	473.5	29
7	712.3(d)(5)	CUSO engaged in complex or high-risk activities reporting to NCUA - expanded information (via CUSO Registry)	CUSO	reporting	439	1	439	3	1,317	1,200	117
8	712.10(b)	SSA Exemption	SSA	reporting	0	1	0	5	0	5	-5
					1,839	1	1,839	1.804241	3,318	2,666	653

Based on the labor rate of $35 per hour, the total cost to respondents is $116,130.

13. Capital start-up or on-going operation and maintenance costs.

There are no capital start-up or operation and maintenance costs.

14. Annualized costs to Federal government.

NCUA conducts regular, periodic examinations of FCUs and frequently participates in examinations of FISCUs by SSAs. Insofar as these examinations consider all aspects of a credit union’s business, including relationships with any CUSOs, there is no additional cost to NCUA relating to the ICs contained in this rule. In addition, NCUA routinely receives and reviews requests from credit unions on various issues and is prepared to process requests concerning recapitalization of CUSOs without additional cost.

Ongoing costs for maintenance and operation of the CUSO Registry are integrated into NCUA’s budget and are estimated to be approximately $300,000 per year.

15. Changes in burden.

Under the proposed rule, CUSOs would be permitted to originate, purchase, sell, and hold any type of loan permissible for FCU’s to originate, purchase, sell, and hold. Accordingly, CUSOs could originate categories of loans previously prohibited under the CUSO rule. NCUA estimated 60 new CUSOs would enter into an agreement with a FICU (§ 712.3(d)); which would also require the FICU to obtain a written legal opinion prior to investing in a CUSO as prescribed by § 712.4(b), and that these CUSO would be categorized as complex and be required to complete the expanded information via the CUSO Registry (§ 712.3(d)(5)). NCUA estimates that the increase in the number of respondents would increase total burden hours by 653. A total of 3,318 burden hours are requested.

16. Information collection planned for statistical purposes.

The information collection is not used for statistical purposes.

17. Request non-display the expiration date of the OMB control number.

The display of the date of expiration of the OMB approval may be confusing to respondents. This date may be confused with a due to date of the actual collection instrument. A non-display of this date is requested.

18. Exceptions to Certification for Paperwork Reduction Act Submissions.

This collection complies with the requirements in 5 CFR § 1320.9.

2. Collections of Information Employing Statistical Methods

This collection does not involve statistical methods.

1 12 U.S.C. §§1756, 1757(5)(D) and (7)(I), 1766, 1781(b)(9), 1782, 1784, 1785, 1786, and 1789(11)

2 12 U.S.C 1757

3 Interpretive Ruling and Policy Statement (IRPS) 87-2, as amended by IRPS 03-2, 68 FR 30950 (May 29, 2003), IRPS 13-1, 78 FR 4032 (Jan. 18, 2013) and IRPS 15-1, 80 FR 57512 (November 23, 2015).

OMB # 3133-0149; Final Rule November 2021 7