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Saying that the National Credit Union Administration’s current rule governing Credit Union Service Organizations is sorely outdated and hampers innovation, the two national credit union trade groups are calling on the agency board to finalize an updated regulation.
The NCUA has proposed a rule that would expand CUSO lending authority by allowing the organizations to originate any loan that may be made by a federal credit union.
“Credit unions, as member owned financial cooperatives, have a unique mission, and must continue to evolve to fulfill this mission,” Lance Noggle, the Credit Union National Association’s senior director of advocacy and counsel, wrote in a letter to the NCUA.
The rule was proposed while Republican Rodney Hood was chairman; Democrat Todd Harper, who became chairman when Joe Biden was sworn in as president, opposes the rule. It remains unclear when—or if—the rule will be brought to the board for a final vote.
Banking trade groups oppose the rule, saying that it exceeds the power Congress gave the NCUA and that the agency lacks the authority to properly supervise CUSOs. The two national credit union trade groups disagree.
Noggle said that the new lending authority would allow CUSOs to make loans that might be impractical for some credit unions to make. He added that keeping up with the services offered by well-funded technology companies and large banks is difficult for community-based financial institutions. In addition, he said CUNA supports a plan to allow the NCUA board to expand the services that CUSOs may offer without going through a formal rulemaking process.
Aminah Moore, the National Association of Federally-Insured Credit Union’s regulatory affairs counsel, noted that the CUSO rule has not been revised since the 2008 financial crisis. “Considering lending has progressed a great deal in 13 years and the nation is facing yet another financial crisis due to the COVID-19 pandemic, it is necessary for the CUSO rule to remain up to date with current lending practices,” Moore wrote. “Therefore, now more than ever, it is important that the CUSO rule be amended to keep credit unions innovative and thriving.”
Moore said, however, that NAFCU does not support giving the agency the flexibility to expand CUSO activities without going through the rulemaking process.
The National Credit Union Administration’s proposed Credit Union Service Organization rule would allow CUSOs to become predatory payday lenders that could make loans that far exceed the interest rate in the Federal Credit Union Act, consumer groups are warning.
“This proposal will authorize predatory lending by credit unions, hampering household security at a time when greater security is badly needed,” the Center for Responsible Lending, the Self-Help Federal Credit Union, the Self-Help Credit Union, and the National Consumer Law Center, wrote in a letter commenting on the proposal.
“The rule appears to allow federal credit unions to participate in lending that the Federal Credit Union Act specifically prohibits — posing severe reputation risk to federal credit unions as well as legal and compliance risks,” the groups said, as they released the comment letter.
The NCUA board in January issued a proposed rule that would allow CUSOs to engage in all lending that federal credit unions may engage in. Credit union trade groups have said they support the rule, while banking groups oppose it.
The Federal Credit Union Act sets an interest rate cap of 28% for payday loans and 18% for all other loans.
The CUSO rule would allow credit unions to circumvent that cap, the consumer groups said “We believe it will also increase racial discrimination, as families of color are disproportionately targeted with these harmful loans,” the groups continued.
The groups said that credit unions historically have used CUSOs to engage in predatory lending. Credit unions facilitated payday loans by implementing products that the CUSOs designed, by earning finder’s fees for referring members to CUSO-issued payday loans or by funding and selling payday loans to CUSOs they owned, the consumer advocates said.
The rule also would allow CUSOs and credit unions to evade state laws governing high-cost lending, they added.