During its eighth open meeting of 2023, the NCUA Board unanimously approved a new rule that will improve the ability of federally insured credit unions (FICUs) to partner with financial technology companies. The final rule amends existing regulations regarding indirect lending, loan participations, and “the purchase, sale, and pledge of eligible obligations and notes of liquidating credit unions.”
Chairman Todd Harper explained that the rule will give federally insured credit unions more flexibility, but comes with a caveat: they will also need to ensure they are conducting proper vendor due diligence to ensure appropriate risk levels.
“This new rule codifies several long-standing supervisory guidance letters on third-party due diligence, indirect lending, and loan participations, and it shifts the regulatory framework from a prescriptive structure to a principles-based system,” said Harper. “However, with greater freedom also comes greater responsibility. Managers and boards of directors choosing to use this new rule, therefore, must ensure their third-party due diligence and vendor management policies are updated, followed, and reflect the size and complexity of their activities and risk levels.”
Vice Chairman Kyle Hauptman added his support in the rule and its goal of removing the regulator as a barrier to innovation. “It should go without saying that we do not want fintechs—or any service provider—to choose NOT to work with credit unions because their regulator makes it unnecessarily difficult.”
Per the published rule, the intent was to achieve an “appropriate balance” between mitigating risk to the share insurance fund, mitigating risk to members, and creating an environment for growth and stability within the industry. It will do so by removing prescriptive limitations and other qualifying requirements, giving FICUs more freedom to partner with innovative companies and financial service providers in this space.
“Fintech is no longer a luxury but a strategic imperative for credit unions to remain relevant, attract younger generations of members, and promote financial inclusion,” added NCUA board member Rodney Hood.
The rule will go into effect 30 days after it is published within the Federal Register.