Compliance Blog

Written by Pamela Yu, Special Counsel for Compliance and Research

NCUA recently announced that CUSOs may begin their required annual reaffirmation with NCUA’s online CUSO Registry beginning on February 1.  CUSOs have until March 1 to complete this mandatory process.  This will be the first round of reaffirmations—NCUA’s CUSO Registry was first launched a year ago to implement changes made to the agency’s CUSO rule in 2013.

To assist CUSOs in complying with this annual requirement, NCUA will host a free 90-minute training webinar on the annual reaffirmation process this Wednesday, January 25 at 2:30 p.m. ET.  Those who wish to learn how to update their CUSO Registry information for the upcoming annual registration period can register for the webinar here. The webinar will offer registrants the opportunity to ask NCUA staff questions about the annual registration process.  Questions can also be sent beforehand to NCUA at WebinarQuestions@ncua.gov. 

Don’t forget that the annual registration requirement is a contractual obligation of the CUSO; credit unions are not obligated to complete this process for their CUSOs.  NCUA’s CUSO rule provides, among other things, that a credit union may invest in or loan to a CUSO only if certain conditions are met.  One of those conditions is that the credit union must obtain a written agreement from a CUSO, before making an investment or loan to that CUSO, that the CUSO will directly submit annual reports to NCUA on an annual basis (a newly formed CUSO must file a report within 60 days of its formation).  See, 12 C.F.R. §712.3(d)(4).  Nevertheless, NCUA has made it clear that it will examine credit unions for their CUSO’s adherence to its contract and “credit unions may not make additional investments or loans to the CUSO until the CUSO satisfies the annual registration requirement.”  See, NCUA 16-CU-02 (January 2016).  As such, credit unions are expected to monitor for its CUSO’s compliance with the registration requirement as part of its ongoing due diligence.  This can be accomplished with relative ease, since NCUA added a search feature to its registry in June 2016. 

One thing that may have tripped up some CUSOs during the initial registration process last year was the initial screening questions that present to a user when attempting to log in to the registry. For example, one screening question asks: “Does your organization primarily serve credit unions or credit union members?”

Since this is an issue that continues to pop up from time to time, and is raised by CUSOs and credit unions alike, let’s take this opportunity to revisit what it means to “primarily serve” credit unions or their members.

Under the CUSO rule, a “CUSO” is defined as “any entity in which a FICU has an ownership interest or to which a FICU has extended a loan, and that entity is engaged primarily in providing products or services to credit unions or credit union members.”  It also includes a CUSO subsidiary, or “any entity in which a CUSO has an ownership interest of any amount, if that entity is engaged primarily in providing products or services to credit unions or credit union members.”  12 C.F.R. §712.1(d) (Emphasis added). 

In addition, the rule imposes a customer base requirement for CUSOs: “An FCU can invest in or loan to a CUSO only if the CUSO primarily serves credit unions, its membership, or the membership of credit unions contracting with the CUSO. . .” 12 C.F.R. §712.3(b) (Emphasis added).

But how do we determine if an entity “primarily serves” credit unions or their members?

The “primarily serves” test was first addressed in the preamble to a 1986 final rule.  In that rulemaking, the NCUA Board stated:

“In light of the comments, the Board again considered providing a definition of the term "primarily." As it had concluded in the proposed rule, the Board believes that defining the term as a percentage of business or percentage of customers served would be arbitrary. The lack of a definition is not deemed critical since the wording in §701.27(d)(4) reiterates the statutory requirement and will provide the Board with a sufficient basis to deal with any clear abuses.”   

50 Fed. Reg. 10353, 10355 (March 26, 1986) (Emphasis added). 

While NCUA purposefully did not define the term “primarily” in the regulation, in the past, the agency has determined that a majority, or 50 percent or greater, may be sufficient to meet the “primarily serves” requirement. See NCUA OGC Ops. 96-0741 (September 20, 1996); 01-0746 (August 7, 2001); 11-0642 (August 3, 2011).

But as every good Compliance Officer knows: The rule is the rule, except when it isn’t. 

A 1996 legal opinion explains:

"[While NCUA has indicated that] "50% or greater" is often used as a rough indicator of "primarily," [it has] also stated that "50% or greater" is not the only definition of "primarily." In the past the definition of the term "primarily" has depended upon several variables, such as: type of business(es) provided; number of affiliated members served; gross or net revenues derived from affiliated members; amount of affiliated members assets under management; number of policies sold to affiliated members; number of services provided to affiliated members; and availability/access of services to affiliated members.”

NCUA OGC Op. 96-1214 (January 22, 1997).

Thus, while in some cases a “50% or greater” standard may meet the “primarily serves” test for CUSOs, this is not always true.  A number of variables must be considered, as noted in 96-1214, to determine if an entity meets the customer base requirement to qualify as a CUSO for the purposes of NCUA’s rule.

Clear as mud?  For more information on the CUSO annual reporting requirements, be sure to register for Wednesday’s training webinar, or visit NCUA’s CUSO Registry webpage.

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