Credit Union Service Organizations, 72537-72550 [2013-28479]

Agencies

• National Credit Union Administration

[Federal Register Volume 78, Number 232 (Tuesday, December 3, 2013)]
[Rules and Regulations]
[Pages 72537-72550]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28479]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 712 and 741

RIN 3133-AD93


Credit Union Service Organizations

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is issuing a final rule to amend its credit union service 
organization (CUSO) regulation to increase transparency and address 
certain safety and soundness concerns. The final rule expands the 
requirements of the CUSO regulation that apply to federally insured, 
state-chartered credit unions (FISCUs) to address accounting, financial 
statements, and audits. The final rule also includes limits on the 
ability of ``less than adequately capitalized'' FISCUs to recapitalize 
their CUSOs. In addition, it adds several new requirements that apply 
to both federal credit unions (FCUs) and FISCUs. Specifically, all 
CUSOs are required to annually provide basic profile

[[Page 72538]]

information to NCUA and the appropriate state supervisory authority 
(SSA). CUSOs engaging in certain complex or high-risk activities are 
required to additionally report more detailed information, including 
audited financial statements and general customer information. The 
final rule also requires all subsidiary CUSOs to follow applicable laws 
and regulations.

DATES: This rule is effective June 30, 2014. CUSOs will begin 
submitting reports to NCUA under new Sec.  712.3(d)(4) when the 
agency's reporting system is fully operational, which will be by 
December 31, 2015.

FOR FURTHER INFORMATION CONTACT: Pamela Yu, Staff Attorney, Office of 
General Counsel, at 1775 Duke Street, Alexandria, Virginia 22314-3428, 
telephone (703) 518-6540, or Lisa Dolin, Program Officer, Office of 
Examination and Insurance, at 1775 Duke Street, Alexandria, Virginia 
22314-3428, telephone (703) 518-6630.

SUPPLEMENTARY INFORMATION: 

I. Background
    A. Why is NCUA adopting this final rule?
    B. What changes were released for comment in the 2011 proposed 
rule?
II. Summary of Public Comments
    A. What were the general comments supporting the proposed rule?
    B. What were the general comments opposing the proposed rule?
III. Final Rule
    A. What changes does this rule make?
    B. How does this rule impact credit unions?
    C. What are the key provisions in the final rule?
IV. Draft Reporting Form
V. Regulatory Procedures

I. Background

A. Why is NCUA adopting this final rule?

    CUSOs provide significant value to the credit union industry by 
acting as a collaborative means to share risk, manage costs, and 
deliver services to credit union members. With their unique 
collaborative business model, CUSOs foster cooperation and shared 
innovation for credit unions to achieve economies of scale, retain 
expertise, and better serve their members. Thus, the NCUA Board (the 
Board) recognizes that CUSOs benefit both credit unions and credit 
union members. Nevertheless, the Board believes the ability to 
accurately inventory CUSOs and evaluate their financial and operational 
condition is imperative to mitigating risks to the National Credit 
Union Share Insurance Fund (NCUSIF). The Board is adopting this rule to 
improve the quality of information about CUSOs and the nature of their 
activities, in order to identify risks to the credit union industry and 
protect the NCUSIF.
    In 2008, the Board issued a final rule, which, among other things, 
made certain provisions of the CUSO regulation applicable to FISCUs.\1\ 
Specifically, the final rule requires FISCUs to maintain separate 
corporate identities from their CUSOs. It also requires FISCUs to enter 
into agreements with CUSOs stating that the CUSOs would provide open 
access to their books and records to NCUA and the applicable SSA.\2\ 
Those provisions had previously only applied to FCUs, but the Board 
believed that, to protect the NCUSIF, it was necessary to apply those 
requirements to FISCUs as well.
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    \1\ 73 FR 79312 (Dec. 29, 2008).
    \2\ Id.
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    Since the promulgation of the 2008 rule, the Board has determined 
that additional protections in the CUSO rule addressing investments, 
accounting, financial statements, and audits should similarly be 
extended to FISCUs in order to protect credit unions and the NCUSIF. 
Additionally, since 2008, the agency has continued to investigate ways 
to improve the quality of information about credit unions' use of CUSOs 
and the services provided by CUSOs. The Board does not believe that the 
information NCUA currently maintains on CUSOs is sufficient to evaluate 
CUSOs and their potential impact to the NCUSIF. For example, at this 
time, NCUA cannot fully determine which CUSOs maintain relationships 
with which credit unions, the financial condition of CUSOs, the full 
range of services offered by CUSOs, or even the total number of CUSOs 
that presently exist. The current information is incomplete, primarily 
because the agency is collecting information on a CUSO from the CUSO's 
credit union clients rather than directly from the CUSO itself. 
Further, directly capturing CUSO information reduces the regulatory 
burden to FICUs in reporting this information. The Board believes that, 
in order to identify emergent risks posed by CUSOs and to protect the 
NCUSIF, it is imperative to have complete and accurate financial and 
operational information about CUSOs and the nature of their services.
    As a result, the Board is issuing this final rule, which makes 
additional parts of the CUSO rule applicable to all federally insured 
credit unions (FICUs). The final rule also requires CUSOs to register 
basic information (and, in some cases, to file more detailed reports) 
directly with NCUA and the appropriate SSA, if applicable. 
Additionally, it also codifies existing agency policy regarding 
subsidiary CUSOs. Finally, the rule makes technical changes to 
reference federally insured credit unions and define ``CUSO,'' and 
conforming amendments to Sec.  741.222 to reflect the changes affecting 
FISCUs in this final rule.

B. What changes were released for comment in the 2011 proposed rule?

    On July 21, 2011, the Board issued a proposed rule to amend part 
712 of NCUA's regulations to increase transparency and address certain 
safety and soundness concerns regarding CUSOs.\3\ The proposed rule 
applied several existing provisions in the CUSO rule to FISCUs. First, 
the proposal limited a ``less than adequately capitalized'' FISCU's 
aggregate cash outlay to a CUSO, measured on a cumulative basis, to the 
permissible investment limit in the state in which the FISCU is 
chartered. These proposed changes are similar to the requirements in 
Sec.  712.2(d)(2) for FCUs. They were intended to address the Board's 
concern that less than adequately capitalized FISCUs are continuing to 
invest money in failing CUSOs, thereby posing serious risks to their 
members and the NCUSIF. Second, the proposed rule applied existing 
provisions related to accounting, financial statements, and audits to 
FISCUs. These particular provisions already apply to FCUs under Sec.  
712.3(d).
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    \3\ 76 FR 44866 (July 27, 2011).
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    The proposed rule also added two new requirements to apply to all 
FICUs. Specifically, the proposed rule required FICUs to include, in 
their agreements with CUSOs, a requirement that a CUSO submit a 
financial report directly to NCUA or, in the case of a CUSO invested in 
by a FISCU, NCUA and the appropriate SSA. Under the proposal, these 
reports would be required to be submitted at least annually. (Proposed 
Sec.  712.3(d)(4)). The proposed reporting requirement was intended to 
protect the NCUSIF by improving the quality of available information 
about CUSOs so that NCUA could better evaluate and identify emergent 
risks posed by CUSOs. Additionally, the proposed rule prohibited FICUs 
from investing in a CUSO unless that CUSO's subsidiaries also comply 
with all of the requirements of the CUSO rule and/or laws and rules of 
the state in which the credit union is chartered, as applicable. 
(Proposed Sec.  712.11).

II. Summary of Public Comments

    The public comment period for the proposed rule ended on September 
26, 2011. NCUA received 290 comments on

[[Page 72539]]

the proposed rule: 64 from CUSOs, 54 from FCUs, 85 from state-chartered 
credit unions, 1 from a corporate credit union, 7 from trade 
associations (1 representing banks, 2 representing credit unions, 1 
representing CUSOs, 1 representing state credit union regulators, 1 
representing cooperatives, and 1 assisting credit unions in investments 
and insurance), 21 from state credit union leagues, 2 from non-profit 
policy or research organizations, 2 from law firms or attorneys, and 54 
from individuals.
    Of the 290 comments received, 85 were duplicative in some manner, 
for example, identical ``form'' letters from different individual 
commenters, identical letters from the same person representing 
different organizations, identical letters from different people 
representing the same organization, or different letters from the same 
person representing the same organization. Additionally, the majority 
of the comments exhibited notable similarities. For example, a 
significant number of comments contained at least some duplicative or 
``form'' language, presented similar arguments or talking points, cited 
similar data or statistics, or posed similar questions for 
clarification.
    Most of the commenters expressed opposition to, or raised concerns 
about, one or more aspects of the proposed rule. A few commenters were 
supportive of the proposal overall.

A. What were the general comments supporting the proposed rule?

    The commenters who supported the proposal were generally in favor 
of subjecting CUSO activities to greater regulatory scrutiny. Several 
supporters of the rule, however, argued that the proposal did not go 
far enough and that additional oversight is necessary in order to 
protect consumers and to mitigate the potential risk to the NCUSIF.
    Additionally, a number of commenters opposed the proposal in 
general, but expressed support for certain aspects of it. In 
particular, several commenters supported the proposed recapitalization 
limits for less than adequately capitalized FISCUs, noting that this 
particular provision is consistent with safety and soundness. Several 
commenters also supported applying the same CUSO rules to FISCUs and 
FCUs. Several opponents of the rule in general also expressed support 
for greater transparency between CUSOs and credit unions. These 
commenters suggested, however, that instead of being required to report 
financial information directly to NCUA, CUSOs should improve and 
enhance the information shared with participating credit unions.

B. What were the general comments opposing the proposed rule?

    Commenters expressing opposition to the rule focused primarily on 
the proposed financial reporting requirement. Most commenters raised 
concerns about NCUA's authority to impose the proposed reporting 
requirement. They noted that NCUA does not have statutory authority to 
directly regulate CUSOs, and questioned whether NCUA's general safety 
and soundness and examination authority under the Federal Credit Union 
Act (FCU Act) is sufficient to justify the increased regulatory 
oversight of CUSOs. Nearly all commenters indicated they do not believe 
CUSOs pose a true systemic risk to the NCUSIF and argued that 
additional regulation by NCUA is unnecessary. Commenters contended that 
NCUA's current authority over CUSOs is sufficient, noting that problems 
with CUSOs are few, and that these problem cases can be addressed by 
improving NCUA's supervisory oversight of credit unions and 
strengthening due diligence requirements. Most commenters suggested 
that, if the Board adopts a final rule, the Board should take a more 
targeted regulatory approach by tailoring the rule to identified 
problem areas. They argued that the proposal is misguided in treating 
all CUSOs the same, regardless of the CUSO's line of business.
    In addition, a substantial number of commenters argued that the 
proposed rule would unnecessarily and unfairly increase regulatory 
burden and compliance costs to both credit unions and their affiliated 
CUSOs, stifling innovation and placing them at a competitive 
disadvantage to their non-CUSO competitors. Commenters also expressed 
concern that certain requirements under the proposal would be a 
condition of NCUSIF coverage.
    NCUA has carefully reviewed and considered all the comment letters 
it received in response to the proposal. Recognizing the significant 
concerns raised by commenters, the Board has made substantial 
adjustments to the final rule. The key provisions of the final rule, 
along with an analysis of the pertinent public comments, are discussed 
in greater detail below.

III. Final Rule

A. What changes does this rule make?

    Under this final rule, several provisions of the current CUSO 
regulation which previously applied only to FCUs will now apply to 
FISCUs as well. The rule also adds a new requirement for all FICUs to 
require their CUSOs to register basic information (and, in some cases, 
to file more detailed reports) directly with NCUA and, if applicable, 
the appropriate SSA. Finally, the final rule clarifies the regulation's 
applicability to subsidiary CUSOs by codifying existing policy in the 
regulatory text.

B. How does this rule impact credit unions?

    FCUs and FISCUs making loans to and investments in CUSOs are 
impacted by this final rule. The Board emphasizes, however, that the 
final rule is significantly more limited in application than the 
proposed rule, targeted mainly to CUSOs engaged in more complex or 
high-risk activities, such as credit and lending, information 
technology (IT), and custody, safekeeping, and investment management 
services for credit unions.

C. What are the key provisions in the final rule?

    A detailed discussion of the final rule's key provisions follows.
Applicability of Certain CUSO Rule Provisions to FISCUs
    Section 120 of the FCU Act authorizes the Board to prescribe rules 
and regulations for the administration of the FCU Act.\4\ Further, 
Title II of the FCU Act provides that the Board may insure members' 
accounts and administer the NCUSIF, and may prescribe regulations for 
FICUs that are necessary to carry out that purpose.\5\ Subpart B of 
Part 741 addresses NCUA regulations that FISCUs must follow to obtain 
and maintain federal share insurance from NCUA. Currently, only two 
provisions of the CUSO rule apply to FISCUs: (1) Sec.  712.4, which 
addresses corporate separateness, and (2) Sec.  712.3(d)(3), which 
provides NCUA and the applicable SSA with access to CUSO books and 
records. The Board believes certain requirements should be consistent 
among all FICUs to minimize risk to the NCUSIF. The risk to the NCUSIF 
from CUSO operations is the same, regardless of the charter type of the 
credit union. However, individual state regulatory requirements for 
CUSO activities may vary from NCUA's regulations. The FCU Act limits 
FCU loans to CUSOs to a maximum of 1% of paid-in and unimpaired capital 
and

[[Page 72540]]

surplus.\6\ The FCU Act also restricts FCU investments in CUSOs to the 
same amount.\7\ Under certain state laws, however, FISCUs are permitted 
to invest or loan to CUSOs in significantly higher amounts. For 
example, some state limits are as high as 25% or they are 
unspecified.\8\ Accordingly, for uniformity among all FICUs and to 
minimize risk to the NCUSIF, this final rule amends Sec.  741.222 to 
specify that current Sec.  712.2(d)(2), which imposes certain 
recapitalization restrictions, and Sec.  712.3(d), which addresses CUSO 
accounting, audits, and financial statements, also apply to FISCUs.
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    \4\ 12 U.S.C. 1766.
    \5\ 12 U.S.C. 1781(b)(9), 1789(11).
    \6\ 12 U.S.C. 1757(5)(D).
    \7\ 12 U.S.C. 1757(7)(I).
    \8\ See, e.g., N.D. Admin. Code 13-03-23-06 (10% of equity); 
Ind. Code Sec.  28-7-1-9 (10% of capital, surplus, and unimpaired 
shares, or higher with prior written approval); Me. Rev. Stat. Ann. 
tit. 9-B, Sec.  864 (10% of share capital and surplus); Idaho Code 
Ann. Sec.  26-2146 (10% of paid-in shares and deposits); Mich. Comp. 
Laws Ann. Sec.  490.401 (12% of assets with prior approval); N.C. 
Gen. Stat. Sec.  54-109.82 (25% of allocations to the reserve fund); 
Mont. Code Ann. Sec.  32-3-701 (no limit specified).
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Limits on Recapitalization of Insolvent CUSOs--Applicability of Sec.  
712.2(d)(2) to FISCUs
    In 2008, the Board amended the CUSO regulation to require less than 
adequately capitalized FCUs to obtain written approval from the 
appropriate regional director before making an investment in a CUSO 
that would result in an aggregate cash outlay, measured on a cumulative 
basis, in an amount in excess of 1% of the credit union's paid-in and 
unimpaired capital and surplus.\9\ The Board promulgated the amendment 
because, as it noted in the 2008 proposed rule, it was aware of credit 
unions that had experienced losses because they chose to recapitalize 
insolvent CUSOs.\10\ The 2008 amendment was intended to prevent an FCU 
from investing, on an aggregate basis, more than 1% of its capital in a 
CUSO that has essentially become unsustainable.
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    \9\ 73 FR 79312 (Dec. 29, 2008).
    \10\ 73 FR 23982, 23984 (May 1, 2008).
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    This final rule adds a similar requirement for FISCUs except where 
state law specifies a higher investment limit in CUSOs. The provision 
will apply in circumstances where a FISCU is already less than 
adequately capitalized or where the recapitalization of a CUSO will 
render the FISCU less than adequately capitalized for Prompt Corrective 
Action (PCA) purposes.\11\ Under the rule, if a FISCU is less than 
adequately capitalized or the investment will result in the FISCU being 
less than adequately capitalized, the FISCU must obtain written 
approval from the appropriate SSA before making an investment in a CUSO 
that will result in an aggregate cash outlay, measured on a cumulative 
basis, that exceeds the investment limit in the state in which the 
FISCU is chartered. If the applicable state does not regulate the 
investment limit for FISCUs, however, the FISCU must obtain regulatory 
approval from the appropriate SSA before making an investment in a CUSO 
that will result in an aggregate cash outlay, measured on a cumulative 
basis, in excess of 1% of the FISCU's paid-in and unimpaired capital 
and surplus.
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    \11\ 12 CFR part 702.
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    In addition to submitting a request to the appropriate SSA, a less 
than adequately capitalized FISCU, or a FISCU that would be rendered 
less than adequately capitalized by the recapitalization of a CUSO, 
must also submit its request to the appropriate NCUA regional office. 
While the SSA will decide such requests, the Board believes it is 
important that NCUA's regional offices also be made aware of these 
requests so NCUA can provide appropriate input to the SSAs. The Board 
notes that this amendment does not require a less than adequately 
capitalized FISCU, or a FISCU that would be rendered less than 
adequately capitalized by the recapitalization of a CUSO, to divest of 
a CUSO. Rather, it may maintain its existing investment, but it cannot 
make additional investments in any CUSO without prior written approval 
from the appropriate SSA.
    Several commenters generally supported applying the same CUSO rules 
to FISCUs and FCUs. A number of commenters also expressed specific 
support for this provision, noting that imposing investment limits for 
less than adequately capitalized FISCUs is consistent with safety and 
soundness. Some commenters, however, disagreed with the cumulative 
calculation for the aggregate cash outlay or expressed confusion 
regarding its application. In particular, several commenters asked for 
clarification regarding how far back in time the cumulative calculation 
must go. The Board adopts this provision substantially as proposed, 
but, for clarity, the final rule limits the cumulative calculation to 
the last 7 years. This time period corresponds with various other 
accounting time limits, such as the length of time bankruptcies are 
reported, and record retention timeframes for audit and tax purposes. 
Parallel amendments are made in the final rule to limit the cumulative 
calculation to 7 years for both FCUs and FISCUs.
CUSO Accounting, Audits, and Financial Statements--Sec.  712.3(d)
    Under the final rule, provisions in the current CUSO rule 
addressing CUSO accounting, audits, and financial statements which 
currently only apply to FCUs also now apply to all FICUs. As discussed 
above, in 2008, the Board amended Sec.  712.3(d) to require FISCUs to 
comply with the subsections addressing access to a CUSO's books and 
records.\12\ This final rule applies all of the subsections of Sec.  
712.3(d) to FISCUs. Under these additional subsections, a credit 
union's agreement with a CUSO must require the CUSO to account for all 
of its transactions according to Generally Accepted Accounting 
Principles (GAAP), prepare quarterly financial statements, and obtain 
an annual audit of its financial statements by a licensed certified 
public accountant.
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    \12\ 73 FR 79312 (Dec. 29, 2008).
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    As noted above, a number of commenters supported applying the same 
rules to FISCUs and FCUs. A few commenters, however, expressed concern 
that the proposal to apply the financial statement and audit provision, 
Sec.  712.3(d)(2), to FISCUs would result in higher compliance costs to 
the credit union and CUSO where a CUSO is wholly owned and the CUSO's 
financials are consolidated into the investing credit union's financial 
statements. The Board notes that under this final rule, as well as 
under the existing rule for FCUs, a wholly owned CUSO would not be 
required to obtain a separate annual financial statement audit if the 
CUSO is included in the annual consolidated financial statement audit 
of its investing credit union. As such, the Board does not anticipate 
that the extension of Sec.  712.3(d)(2) to FISCUs will impose an 
unreasonable compliance cost where a CUSO is wholly owned. The Board 
continues to believe it is necessary to extend these requirements to 
FISCUs to ensure NCUA will be able to fully review the financial 
condition of CUSOs and evaluate the risks posed to FISCUs and 
ultimately to the NCUSIF. Accordingly, the section is adopted as 
proposed.
Reporting Requirement--Sec.  712.3(d)(4)
    The proposed rule added a new provision to require a FICU's 
agreement with a CUSO to require it to file financial reports with NCUA 
and, as applicable, the appropriate SSA (proposed Sec.  712.3(d)(4)). 
The proposal was intended to allow NCUA to collect uniform information 
directly from all CUSOs, in order for the agency to

[[Page 72541]]

adequately evaluate the relationships between CUSOs and credit unions, 
as well as the risk posed by those relationships. As discussed in the 
preamble to the proposed rule, the Board believes that the information 
NCUA currently compiles on CUSOs is incomplete because the agency is 
indirectly gathering pertinent information from customer credit unions 
rather than directly from the CUSOs. Without additional reporting 
directly from CUSOs, it is impossible for NCUA to determine which CUSOs 
maintain relationships with which credit unions, the financial 
condition of CUSOs, and the full range of services offered by CUSOs. 
This lack of information restricts NCUA's ability to conduct offsite 
monitoring and evaluate the risks posed by CUSOs. As proposed, the 
information required in the reports would have to be submitted at least 
annually and would address five broad categories: (1) General 
information; (2) board and management; (3) services; (4) credit union 
customer listing; and (5) balance sheet and income statement. In 
addition, the Board proposed to require a newly formed CUSO to file the 
report within 30 days after its formation.
    As discussed above, this requirement was troubling to most 
commenters. Commenters expressed opposition to the reporting provision 
and asked the agency to substantially revise or withdraw the proposal. 
Commenters also expressed concerns about NCUA's authority to impose the 
proposed requirements. They noted that NCUA does not have statutory 
authority to directly regulate CUSOs and, as such, the reporting 
requirement is overreaching. Further, commenters argued that the 
provision is unjustified, contending there is insufficient data to 
demonstrate that CUSO investments present a material risk. Moreover, 
they argued NCUA's current authority over CUSOs is sufficient to stem 
any potentially serious risk issues.
    The Board disagrees. While the Board acknowledges that NCUA does 
not have direct statutory and regulatory authority over the operations 
of CUSOs, NCUA does have the authority to regulate FCUs' lending and 
investment in CUSOs.\13\ NCUA has regulated this lending and investment 
authority in the CUSO rule since 1979, when this statutory provision 
was implemented through the promulgation of the first CUSO 
regulation.\14\ The Board believes the proposed reporting requirement 
is both historically and legally consistent with NCUA's statutory 
authority to regulate this lending and investment authority.
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    \13\ 12 U.S.C. 1757(7)(I), 1757(5)(D).
    \14\ 44 FR 12401 (Mar. 7, 1979).
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    Moreover, Title II of the FCU Act provides the Board with the broad 
authority to insure members' accounts and administer the NCUSIF, and to 
prescribe regulations for FICUs that are necessary to carry out that 
purpose.\15\ All FICUs, through their application for insurance, have 
agreed to comply with those regulations. The current lack of 
information on CUSOs limits NCUA's ability to conduct offsite 
monitoring and assess any emergent risks to the NCUSIF posed by CUSO 
operations. The Board continues to believe that, to protect the NCUSIF 
from any such risk, it is necessary and within its authority to 
implement regulations that require credit unions to enter into 
agreements with CUSOs requiring CUSOs to submit reports directly to 
NCUA and the appropriate SSAs, if applicable.
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    \15\ 12 U.S.C. 1781(b)(9), 1789(11).
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    Furthermore, the Board continues to believe that CUSOs present 
material risks to the credit union industry. Past experience has 
demonstrated that a single CUSO has caused losses and operational 
problems at multiple credit unions. Such losses have contributed to a 
number of credit unions' insolvency, conservatorship, or liquidation. 
The following are specific examples in which CUSO activity caused 
significant financial and/or operational problems for credit 
unions.\16\
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    \16\ The agency does not have a formal mechanism to track 
information about losses attributable to CUSOs. Further, there are 
different types of losses that can be realized by credit unions, 
including losses in terms of the investment in or loan to the CUSO 
and losses incurred from the product or service offered by the CUSO 
(for example, loan losses). Credit union failures can rarely be 
attributed to one factor alone. Failures typically arise out of a 
compounding of poor decisions on the part of credit union 
management. There are examples, however, of losses in credit unions 
as a direct result of CUSO activity. In some cases, these losses led 
to the failure of the institutions involved.
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    Case 1--Activities involving multiple CUSOs contributed to 
a $1.5 billion FICU's failure. Since 2008, the FICU sustained losses 
totaling approximately $224 million as a direct result of its CUSO 
activity.
    Case 2--A CUSO managed four loan pools primarily comprised 
of commercial loans. In addition to having loan participation 
agreements with 25 FICUs, the CUSO obtained warehouse lines of credit 
from several banks and one corporate credit union. In 2008, the CUSO's 
access to third party investors declined with the economic turndown. To 
stay in compliance with its written agreements with FICUs, the CUSO 
shifted mortgages from one mortgage pool to another. Investor FICUs 
were provided monthly reports on the loan pools, but the information 
was poorly presented. As a result, it was difficult for investor FICUs 
to determine the individual mortgages transferred among the pools. The 
CUSO eventually defaulted on its warehouse lines of credit. It was put 
into bankruptcy in 2009. In total, aggregate losses to the FICUs 
involved with this CUSO exceeded $47 million. Of the 25 FICUs affected, 
10 were assumed by other FICUs. The aggregate cost to the NCUSIF for 
these actions was over $5 million.
    Case 3--Nineteen FICUs incurred losses totaling over $5 
million in the last 5 years from a CUSO involved in member business 
loan participations. An additional $6 million in losses are projected 
from one commercial borrower. FICUs have already reserved between 25% 
and 100% of their participated balances for these additional 
anticipated losses.
    Case 4--A student lending CUSO sold participations of 
purchased student loans to six FICUs. Related loan losses at these 
FICUs are much higher than anticipated. One FICU has booked over $4 
million in loan losses and projects an additional $4.5 million in 
losses on the portfolio.
    Case 5--A CUSO underwrites and services member business 
loans for several FICUs. The CUSO's past performance was substandard 
and a large portion of the serviced loan portfolio was owned by one 
FCU. The FCU could not recover from the impact of the CUSO's poor 
lending practices, and the associated loan losses played a role in the 
FCU's need to merge with a healthier credit union.
Ensign FCU
    Involvement in a business loan CUSO was a contributing factor to 
the failure of Ensign FCU, which has cost the NCUSIF approximately $38 
million to date. The CUSO failed to service a member business loan 
portfolio according to its agreement with the credit union. In November 
2010, NCUA filed a suit against the CUSO claiming the CUSO continued to 
collect payments on 18 commercial loans allegedly owned by Ensign FCU 
after the credit union was shut down in November 2009. In addition to 
Ensign FCU, the CUSO worked with three other credit unions. The CUSO 
has since dissolved.
Eastern New York FCU
    Relationships with a complex network of CUSOs, a lack of board of 
directors' oversight of related business ventures, and improper 
accounting

[[Page 72542]]

contributed to the failure of Eastern New York FCU. Several CUSOs were 
created to generate income, but most of the CUSOs had very few 
customers. NCUA's Office of the Inspector General determined that the 
FCU's board of directors did not perform the necessary due diligence to 
ensure each CUSO was complying with all regulations. NCUA estimates the 
purchase and assumption of this $50 million credit union will cost the 
NCUSIF approximately $3.3 million.
Community One FCU
    The failure of Community One FCU was due in part to losses stemming 
from a CUSO involved in indirect auto lending. The credit union's 
management engaged in an extremely large indirect lending program 
without adequate policies and collection procedures in place. NCUA 
estimates the purchase and assumption of this $159 million credit union 
will cost the NCUSIF approximately $6.8 million.
Kern Central Credit Union
    Kern Central CU's failure was due in part to an indirect auto loan 
program CUSO. The credit union's losses from a concentration of 
indirect auto loans with high loan-to-value ratios, as well as poor 
management of the program, contributed to its demise. NCUA estimates 
the purchase and assumption of this $34 million credit union will cost 
the NCUSIF approximately $5.6 million.
    The above examples clearly demonstrate the material risks that CUSO 
operations pose to the credit union industry. Moreover, the Board feels 
a proactive--rather than reactive--approach is necessary to prevent 
higher potential losses to the NCUSIF in the future. NCUA's methods of 
managing risk to the NCUSIF must keep pace as credit union and CUSO 
operations expand and present more risk to the NCUSIF.
    As noted above, in 2008, the Board amended the CUSO rule to, among 
other things, require all FICUs to enter into agreements with CUSOs 
stating that the CUSOs would provide NCUA and the applicable SSA with 
``complete access to any books and records of the CUSO and the ability 
to review CUSO internal controls.'' \17\ In general, this access may 
involve an onsite CUSO review to determine the degree of risk the CUSO 
poses to credit unions and the NCUSIF. During such review, an examiner 
assesses the financial condition of the CUSO and the adequacy of 
controls; verifies the accuracy of the financial statements; determines 
the viability of operations and service to member credit unions; and 
confirms compliance with applicable laws and regulations. NCUA may 
request a CUSO review if there are safety and soundness concerns to 
credit unions or if the CUSO poses an undue risk to the NCUSIF. For 
example, the agency may request a review if a credit union examination 
raises concerns that the CUSO's operation is adversely affecting the 
financial condition and operation of the credit union, or if the CUSO 
has a significant effect on the operations of a credit union or group 
of credit unions that depend on its services.
---------------------------------------------------------------------------

    \17\ 74 FR 79312 (Dec. 29, 2008); 12 CFR 712.3(d)(3)(i).
---------------------------------------------------------------------------

    While NCUA currently has the authority to access CUSO books and 
records and to review CUSO internal controls, the agency does not 
routinely engage in onsite monitoring of CUSOs. The Board believes it 
is more efficient and more cost-effective for the agency and the credit 
union system to require CUSOs to submit information about their 
financial condition directly to NCUA, than for the agency to collect 
this information indirectly through credit unions or through more 
widespread onsite CUSO reviews. As noted above, NCUA's current practice 
is to conduct an onsite CUSO review only if safety and soundness 
concerns to credit unions exist or if the CUSO poses an undue risk to 
the NCUSIF. The Board believes the final rule will improve the agency's 
ability to conduct offsite monitoring of CUSOs and identify emerging 
areas of concern.
    Nevertheless, the Board recognizes that the rule could be more 
narrowly focused and still achieve the agency's objective of obtaining 
more complete and accurate information about CUSOs, the services they 
offer, and their financial condition. Accordingly, the Board is 
significantly revising the reporting requirement in the final rule.
    The majority of commenters suggested NCUA should take a more 
targeted regulatory approach by tailoring the final rule to identified 
problem areas. Further, they argued that the proposal's one-size-fits-
all approach was misguided. Numerous commenters contended that the rule 
should be exclusively targeted at CUSOs engaging in riskier activities, 
such as business lending. CUSOs involved in activities with less risk, 
such as marketing or licensing CUSOs, should not be subject to 
increased oversight. Commenters recommended that, at a minimum, certain 
types of lower-risk CUSOs should be exempted from the rule.
    In light of the comments received on the proposed rule, the Board 
has determined to significantly reduce the scope and application of the 
reporting requirement in the final rule. Accordingly, the final rule 
narrowly focuses on CUSOs engaging in certain complex or high-risk 
activities. The Board notes that the types of activities qualifying as 
``complex or high-risk,'' as well as the reporting requirements for 
CUSOs engaging in such activities, may evolve as new risks emerge. At 
this time, however, the Board believes that, for purposes of the 
reporting requirement, complex or high-risk activities include credit 
and lending, information technology, and custody, safekeeping, and 
investment management services for credit unions because these 
particular activities tend to affect a large number of credit unions 
and present a high degree of operational and/or financial risk. 
Activities related to these categories currently include:

     Credit and lending--

    [cir] Business loan origination;
    [cir] Consumer mortgage loan origination;
    [cir] Loan support services, including servicing;
    [cir] Student loan origination; and
    [cir] Credit card loan origination.

     Information technology--

    [cir] Electronic transaction services;
    [cir] Record retention, security, and disaster recovery services; 
and
    [cir] Payroll processing services.

     Custody, safekeeping, and investment management services 
for credit unions.\18\
---------------------------------------------------------------------------

    \18\ CUSOs only engaging in trust services for individual credit 
union members will be required to submit only basic profile 
information. These CUSOs will not be required to submit the 
additional, enhanced report.
---------------------------------------------------------------------------

    Credit and lending-related activities involve credit unions' core 
business function and represent a high degree of potential risk. CUSOs 
engaging in credit and lending services have the potential to pose 
multiple types of risks to FICUs and the NCUSIF. Without proper 
monitoring and controls, FICUs making loans to, and investments in, 
CUSOs engaged in credit and lending activities may quickly be exposed 
to significant levels of credit, strategic, or reputation risks. For 
example, credit risk increases with poor underwriting, which may lead 
to decreased net worth and increased strategic and reputation risks, 
all of which can ultimately impact member services. Due to the higher-
risk nature of credit and lending activities, the Board believes it is 
necessary to receive additional information about CUSOs involved in 
credit and lending activities in order to monitor for material levels 
of risk to the NCUSIF.
    Information technology-related CUSOs usually engage in activities 
that

[[Page 72543]]

involve emerging complex electronic services. These services have been 
subject to malicious attacks, which pose transactional, reputational, 
and strategic risks to credit unions, and ultimately, the NCUSIF, if 
proper safeguards are not in place. Moreover, credit union members have 
been adversely impacted by breaches in network security. The additional 
data collected for CUSOs engaging in IT services will enable NCUA to 
better monitor and respond to these increased risks.
    In addition, the Board believes CUSOs engaging in custody, 
safekeeping, and investment management services for credit unions 
require robust monitoring due to the complex nature of these services. 
Credit unions place a high degree of reliance on these CUSOs because 
credit unions are entrusting their assets and their members' assets to 
CUSOs. As a result, there are increased reputational, strategic, and 
compliance risks that warrant additional monitoring by NCUA.
    Under the final rule, only CUSOs engaging in these complex or high-
risk activities are required to report substantive information. All 
other CUSOs will register only basic profile information. Specifically, 
the final rule requires a FICU to obtain a written agreement from a 
CUSO before investing in or lending to the CUSO. This written agreement 
must provide that the CUSO will annually submit, pursuant to NCUA 
guidance, a report containing general registration information directly 
to NCUA and the appropriate SSA, if applicable. This basic registration 
information will consist of general profile information, including the 
CUSO's legal name; tax identification number (e.g., EIN); address; 
telephone number; Web site; primary point of contact; services offered; 
name(s) and charter(s) of credit union(s) investing in, lending to, or 
receiving services from the CUSO; and investor(s) and/or subsidiary 
CUSO(s). The Board believes this is the minimal amount of information 
necessary to meet the agency's objective of obtaining a clearer and 
more transparent representation of the CUSO industry.
    Only CUSOs involved in complex or high-risk activities will be 
subject to an additional, enhanced reporting requirement. Specifically, 
in addition to the basic profile information described above, CUSOs 
engaged in certain complex or high-risk activities will be required to 
report more detailed information, including audited financial 
statements and more specific customer information. The Board believes 
this additional information is crucial in order for the agency to 
effectively analyze and monitor the risks CUSOs present to FICUs and 
the NCUSIF. Specifically, CUSOs engaging in complex or high-risk 
activities will be required to report:
     For each credit union investing in, lending to, or 
receiving services from the CUSO:
    [cir] Services provided to each credit union;
    [cir] The investment amount, loan amount, or level of activity of 
each credit union; and
     The CUSO's most recent year-end audited financial 
statements.
    In addition, CUSOs engaging in credit and lending services will be 
required to report the following activity by loan type:
     The total dollar amount of loans outstanding;
     The total number of loans outstanding;
     The total dollar amount of loans granted year-to-date; and
     The total number of loans granted year-to-date.
    CUSOs that previously were not involved in complex or high-risk 
activities that become involved in such activities by virtue of: (1) A 
merger with or acquisition of a CUSO that engages in such activities; 
or (2) adding new products or services that are complex or high-risk 
activities will be subject to the enhanced reporting requirement. For 
example, if a CUSO providing real estate brokerage services merges into 
a CUSO involved in consumer mortgage loan origination, then the 
continuing CUSO will be required to submit the additional, enhanced 
report in the next reporting cycle. Moreover, if a CUSO engaging in 
checking and currency services begins to offer payroll processing 
services, then it too will become subject to the enhanced reporting 
requirement.
    Some commenters objected that the actual reporting form required 
under the proposal would be issued as guidance, without the opportunity 
for public comment. The Board believes it would be advantageous for 
FICUs and CUSOs to have the opportunity to review the format and 
content of the draft reporting form, so all affected parties are 
adequately prepared to comply with the new requirements once the 
reporting system is fully established. Accordingly, the draft reporting 
form is being published in conjunction with this rulemaking. The draft 
form illustrates the intended reporting format for the basic 
registration for all CUSOs, as well as the expanded reporting 
requirement for CUSOs involved in complex or high-risk services. The 
Board emphasizes that the draft reporting form is subject to change as 
the agency works to develop and implement the new reporting system for 
CUSOs. Furthermore, future modifications may be made to the reporting 
form based on NCUA's assessment of current needs. NCUA intends to 
submit a copy of the reporting form to the Office of Management and 
Budget (OMB), as required by the Paperwork Reduction Act (PRA). 
Accordingly, the public will be provided an opportunity to comment on 
the form's paperwork requirements. The draft reporting form is found in 
Section IV of this SUPPLEMENTARY INFORMATION.
    Many commenters raised concerns that the proposed reporting 
requirement could potentially expose CUSOs' confidential business 
information and trade secrets to public dissemination through Freedom 
of Information Act (FOIA) requests, putting them at a competitive 
disadvantage to their non-CUSO counterparts. The Board is sensitive to 
these concerns. It notes that the FOIA, as well as the applicable 
exemptions set forth in NCUA's implementing FOIA regulations, applies 
to any data or information submitted by CUSOs to NCUA under Sec.  
712.3(d)(4). The Board anticipates that CUSO submissions will contain 
or consist of ``trade secrets and commercial or financial information 
obtained from a person and privileged or confidential.'' This type of 
information is subject to withholding under exemption 4 of the 
FOIA.\19\ In addition, information that is ``contained in or related to 
examination, operating, or condition reports prepared by, on behalf of, 
or for the use of an agency responsible for the regulation or 
supervision of financial institutions'' is subject to withholding under 
exemption 8 of the FOIA.\20\ To the extent, however, that CUSO 
submissions may contain or consist of data or information not subject 
to an applicable FOIA exemption, for example, a CUSO's name, address, 
or other publicly available information, that data or information would 
be releasable under the FOIA.
---------------------------------------------------------------------------

    \19\ 5 U.S.C. 552(b)(4); 12 CFR 792.11(a)(4).
    \20\ 5 U.S.C. 552(b)(8); 12 CFR 792.11(a)(8) (emphasis added).
---------------------------------------------------------------------------

    Several commenters noted that the proposal required the financial 
report to be submitted ``at least'' annually. These commenters urged 
NCUA to clearly define the reporting frequency as ``annual.'' The Board 
agrees that reporting under the new rule should occur on an annual 
basis. As such, the final rule modifies the requirement by establishing 
the reporting frequency as ``annually.'' Additionally, the final rule

[[Page 72544]]

modifies the proposed requirement that a newly formed CUSO file a 
report within 30 days after its formation. Under the final rule, all 
newly formed CUSOs will be required to file a report within 60 days of 
formation. For newly formed CUSOs involved in complex or high-risk 
activities, such report must include the enhanced information; all 
other newly formed CUSOs will report only basic registration 
information. For purposes of this requirement, the definition of 
``newly formed CUSO'' includes a newly established business or an 
established business that becomes subject to this regulation by virtue 
of a credit union's investment or loan to the business. Again, NCUA 
will publish guidance on the report, providing more specific 
information on the correct format, timing, and required information.
    Commenters also raised concerns that the proposal is unclear about 
how the information reported directly by CUSOs will be used by the 
agency. Numerous commenters noted that, by design, CUSOs generally do 
not have a sizable capital structure or generate significant income. 
These commenters urged NCUA not to evaluate CUSOs based solely on their 
balance sheets and income statements.
    The Board is mindful of commenters' concerns and emphasizes that 
the agency appreciates the value that CUSOs bring to the credit union 
industry as collaborative tools for credit unions to achieve economies 
of scale, retain expertise, and better serve their members. The Board 
recognizes that CUSOs, in their supportive function, are intentionally 
designed to operate on thin margins in order to realize greater 
benefits to credit unions. Accordingly, the Board understands that 
balance sheets and income statements alone do not reflect the true 
value of CUSOs. The Board continues to believe, however, that the 
ability to accurately inventory CUSOs and evaluate their financial and 
operational condition is paramount to mitigating risk to the credit 
union system as a whole. It emphasizes that NCUA intends to use the 
information reported by CUSOs to inform the agency's supervisory 
oversight of FICUs. For example, NCUA may use the information to help 
credit unions improve their due diligence, to raise examiner awareness 
of identified risks, and to foster collaborative problem-solving among 
CUSOs, credit unions, SSAs, and NCUA. The Board feels that the final 
rule achieves the balance of exercising regulatory restraint while 
ensuring the ultimate safety and soundness of the NCUSIF.
Subsidiary CUSOs--Sec.  712.11
    The proposed rule added a new section to the CUSO regulation, 
applicable to both FCUs and FISCUs, prohibiting a FICU from investing 
in a CUSO unless all subsidiaries of the CUSO also agree to follow all 
applicable laws and regulations. (Proposed Sec.  712.11).
    A significant number of commenters expressed concern that the 
proposal would treat any entity in which a CUSO invests as a subsidiary 
subject to the CUSO regulation. They argued that non-controlling 
investments should not trigger the regulation. Several commenters 
suggested that the informal rule has been that a CUSO subsidiary is 
impermissible if the subsidiary was formed with the intent and purpose 
of evading the CUSO rule, and they recommended that the Board adopt 
this standard in the final rule.
    The Board disagrees and adopts the subsidiary provision 
substantially as proposed. NCUA's policy with regard to CUSO 
subsidiaries has been publicly stated since at least 1997, although it 
has never been included in regulatory text. Specifically, under 
existing policy, the CUSO rule applies to all levels or tiers of a 
CUSO's structure. Any subsidiary entity in which a CUSO invests will 
also be treated as a CUSO and, thus, subject to the regulation.\21\ The 
Board continues to believe there is an inherent risk that a subsidiary 
CUSO could adversely affect the investing credit union and, ultimately, 
the NCUSIF. Accordingly, the final rule clarifies the regulation's 
applicability to subsidiary CUSOs by codifying NCUA's existing policy 
in the regulatory text. The Board believes it is appropriate to codify 
this requirement in the regulation to ensure that credit unions and 
CUSOs are aware that the requirements of the CUSO rule and applicable 
state rules apply to all subsidiary entities in which a CUSO invests, 
including those entities with the appearance of being formed with the 
intent and purpose of evading the CUSO rule. This requirement will 
apply to 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. The provision, 
however, will not apply to third parties with whom a CUSO contracts or 
otherwise does business. Because this provision (Sec.  712.11) applies 
to all FICUs, the definition of a CUSO in Sec.  741.222 is also amended 
to include subsidiary entities in which a CUSO invests any amount, if 
that entity is engaged primarily in providing products or services to 
credit unions or members.
---------------------------------------------------------------------------

    \21\ 62 FR 11781 (Mar. 13, 1997).
---------------------------------------------------------------------------

Definitions and Conforming Amendments
    The Board is making several technical and conforming amendments. 
The final rule updates Sec.  712.1 to make certain technical changes, 
to reflect the amendments in this rulemaking, and to add a definition 
to provide that the term ``federally insured credit union'' or ``FICU'' 
means all FCUs and FISCUs. In addition, the final rule brings the 
language contained in Sec.  741.222 that defines the term ``CUSO'' into 
Sec.  712.1 as well. The Board believes that parallel references to 
``CUSO'' in both Sec.  712.1 and Sec.  742.222 will add clarity and 
consistency to the regulations addressing CUSOs. Additionally, Sec.  
712.1 and Sec.  741.222 are being revised to conform with Sec.  701.30, 
which was amended to include remittance transfers.\22\ Finally, 
technical changes are made in Sec.  712.4(b) to clarify that written 
legal advice is required prior to a FICU investing in a CUSO.
---------------------------------------------------------------------------

    \22\ 76 FR 44761 (July 27, 2011); 76 FR 73993 (Nov. 30, 2011).
---------------------------------------------------------------------------

State Exemptions
    Section 712.10 of the current rule allows SSAs to apply for an 
exemption, on behalf of FISCUs, from Sec.  712.3(d)(3), the provision 
addressing access to books and records with which FISCUs must comply. 
Because the proposed rule added additional requirements for FISCUs 
(proposed Sec.  712.3(d)(1) and (2)), the proposal expanded Sec.  
712.10 to allow SSAs to obtain an exemption, on behalf of FISCUs, from 
compliance with these additional provisions. The proposed changes did 
not alter the manner in which an SSA can obtain an exemption, but 
merely made changes that take into account that some states may already 
have equivalent or more stringent rules or requirements that govern 
financial reporting, audits, and accounting practices of FISCUs and 
their CUSOs. The proposed rule, however, did not allow for an SSA to 
apply for an exemption, on behalf of FISCUs, from the new reporting 
requirement in proposed Sec.  712.3(d)(4) because allowing an exemption 
from this requirement would result in inconsistent reporting based on 
the varying laws in the different states. Commenters were either 
generally supportive of, or did not provide comment on, these 
particular changes. Accordingly, the Board adopts the amendments to 
Sec.  712.10 substantially as proposed. The final rule clarifies, 
however, that NCUA may grant

[[Page 72545]]

state exemptions from any or all of Sec.  712.3(d)(1), (2), and (3) 
only if state law is equal to, or more stringent than, NCUA's 
requirements.
Transition Period for Compliance
    The Board recognizes that FICUs with loans to or investments in 
CUSOs will be required under this final rule to make changes in the 
agreements they currently have with their CUSOs. Accordingly, the 
effective date of the final rule is June 30, 2014. Additionally, CUSOs 
will begin submitting reports to NCUA under new Sec.  712.3(d)(4) when 
the agency's reporting system is fully operational, which will be by 
December 31, 2015.

IV. Draft Reporting Form

    The Board is publishing a draft reporting form to illustrate the 
intended format for CUSO reports submitted under Sec.  712.3(d)(4) of 
this final rule. The draft shows the planned reporting format for the 
basic registration for all CUSOs, as well as the expanded reporting 
requirement for CUSOs engaging in complex or high-risk activities. The 
Board notes, however, that the draft reporting form is subject to 
change as the agency develops and implements the new reporting system 
for CUSOs. Further, once finalized, the agency may later modify the 
reporting form based on NCUA's assessment of changing industry needs. 
In accordance with the requirements of the PRA, NCUA will submit a copy 
of the reporting form to the OMB, along with an application for an OMB 
Control Number. At that time, the public will be provided an 
opportunity to comment on the form's paperwork requirements, including 
NCUA's estimate of the burden of the paperwork requirements.
[GRAPHIC] [TIFF OMITTED] TR03DE13.008


[[Page 72546]]


[GRAPHIC] [TIFF OMITTED] TR03DE13.009

V. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires NCUA to prepare an 
analysis to describe any significant economic impact a regulation may 
have on a substantial number of small entities. NCUA considers credit 
unions having less than fifty million dollars in assets to be small for 
purposes of RFA.\23\ The changes to the CUSO rule impose minimal 
compliance obligations by requiring FISCUs to comply with certain 
regulatory requirements concerning agreements with CUSOs and certain 
recapitalization limits. NCUA has determined and certifies that the 
final rule will not have a significant economic impact on a substantial 
number of small credit unions.
---------------------------------------------------------------------------

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

Paperwork Reduction Act

    The PRA applies to rulemakings in which an agency by rule creates a 
new paperwork burden on regulated entities or modifies an existing 
burden.\24\ For purposes of the PRA, a paperwork burden may take the 
form of either a reporting or a recordkeeping requirement, both 
referred to as information collections. NCUA recognizes that this final 
rule requires FISCUs and FCUs to comply with certain requirements that 
constitute an information collection within the meaning of the PRA. 
Under this rule, FISCUs with an investment in or loan to a CUSO will 
need to revise the current agreement they have with their CUSO to 
provide that the CUSO will account for all its transactions in 
accordance with GAAP, prepare quarterly financial statements and obtain 
an annual financial statement audit of its financial statements by a 
licensed certified public accountant. The rule also requires FISCUs, in 
certain circumstances, to submit an application for regulatory approval 
to recapitalize an insolvent CUSO. Additionally, the final rule 
requires FICUs to enter into agreements with CUSOs requiring CUSOs to 
submit reports directly to NCUA and the appropriate SSA.
---------------------------------------------------------------------------

    \24\ 44 U.S.C. 3507(d); 5 CFR Part 1320.
---------------------------------------------------------------------------

    Currently, NCUA cannot fully determine the total number of CUSOs 
that presently exist, which CUSOs maintain relationships with which 
credit unions, the financial condition of CUSOs, or the full range of 
services offered by CUSOs. The current information is incomplete, 
primarily because the agency is collecting information from the CUSOs' 
credit union clients rather than directly from each CUSO itself. 
Nevertheless, according to NCUA records, of the 2,492 FISCUs that filed 
a Form 5300 Call Report with NCUA as of June 30, 2013, 1,161 reported 
an interest in at least one CUSO, and a total of 2,836 CUSO interests 
was reported. For purposes of this analysis, NCUA estimates that this 
requirement will affect all FISCUs reporting an interest in a CUSO. 
Using these estimates, information collection obligations imposed by 
this aspect of the rule, on an annual basis, are analyzed below:
    Changing the written agreement relating to certain accounting and 
reporting requirements.
    FISCUs with a reported interest in a CUSO as of 6/30/2013: 1,161.
    Frequency of response: one-time \25\
---------------------------------------------------------------------------

    \25\ One-time estimates account for, on average, approximately 
two CUSOs per credit union. The actual frequency will vary based on 
the credit union's actual number of reported interests in a CUSO.
---------------------------------------------------------------------------

    Initial hour burden: 4.

4 hour x 1,161 = 4,644

    In addition to the requirement for FISCUs to revise their 
agreements with CUSOs, this rule also requires FCUs with an investment 
in or loan to a CUSO to revise the current agreement they have with 
their CUSO to provide that the CUSO submit a financial report directly 
to NCUA. According to NCUA records, of the 4,189 FCUs that filed a form 
5300 call report with NCUA as of June 30, 2013, 1,413 reported at least 
one interest in a CUSO; a total of 3,275 CUSO interests was reported. 
For purposes of this analysis, NCUA estimates that this requirement 
will affect all FCUs with a reported interest

[[Page 72547]]

in a CUSO. Using these estimates, information collection obligations 
imposed by this aspect of the rule, on an annual basis, are analyzed 
below:
    Changing the written agreement relating to reports to NCUA.
    FCUs with a reported interest in a CUSO as of 6/30/2013: 1,413.
    Frequency of response: one-time.
    Initial hour burden: 4.

4 hour x 1,413 = 5,652

    Initial CUSO reporting to NCUA--basic information.
    Reported CUSOs as of 6/30/2013 \26\: 1,197.
---------------------------------------------------------------------------

    \26\ Numbers reported may be over or understated based on the 
problems with gathering CUSO data from credit unions rather than 
from CUSOs directly.
---------------------------------------------------------------------------

    Frequency of response: one-time.
    Initial hour burden: 0.5.

0.5 x 1,197 = 598.5

    Initial CUSO reporting to NCUA--expanded information.
    Reported CUSOs providing credit and lending, IT, or custody, 
safekeeping, and investment management services for credit unions as of 
6/30/2013: \27\ 600.
---------------------------------------------------------------------------

    \27\ Estimates are likely overstated as credit unions currently 
report only broad categories of services as defined in the 
regulation. The expanded reporting requirements under this rule are 
more narrowly defined and will result in fewer CUSOs affected.
---------------------------------------------------------------------------

    Frequency of response: one-time.
    Initial hour burden: 3.

3 hours x 600 = 1,800

    Annual CUSO reporting to NCUA--expanded information.
    Reported CUSOs providing credit and lending, IT, or custody, 
safekeeping, and investment management services for credit unions 
services as of 6/30/2013: 600.
    Frequency of response: Annual.
    Initial hour burden: 3.

3 hour x 600 = 1,800

    Direct reporting by CUSOs, however, will lessen the existing burden 
to FICUs for reporting their CUSO interests to NCUA. According to NCUA 
records, of the 6,681 FICUs that filed a form 5300 call report with 
NCUA as of June 30, 2013, 2,574 reported at least one interest in a 
CUSO.
    For purposes of this analysis, NCUA estimates that this requirement 
will affect all FICUs with a reported interest in a CUSO. Using these 
estimates, the reduced burden to FICUs by this aspect of the rule, on 
an annual basis, is analyzed below:
    Completing the CUSO section of 5300 call report.
    FICUs with a reported interest in a CUSO as of 6/30/2013: 2,574.
    Frequency of response: Quarterly.
    Reduced hour burden: 0.4.

0.4 hours x 2,574 x 4 = 4,118.4

    Completing the CUSO section of CU Online profile.
    FICUs with a reported interest in a CUSO as of 6/30/2013: 2,574.
    Frequency of response: Semi-annually.
    Reduced hour burden: 0.2.

0.2 hours x 2,574 x 2 = 1,029.6

    Another aspect of this final rule that involves PRA consideration 
is the requirement pertaining to recapitalizing CUSOs that have become 
insolvent. The final rule will require certain FISCUs to seek and 
obtain prior approval from their SSA before making an investment to 
recapitalize an insolvent CUSO. According to NCUA's records, as of June 
30, 2013, there were only 17 FISCUs that were less than adequately 
capitalized (i.e., net worth of under 6%). Of these FISCUs, 9 currently 
have an interest in a CUSO. NCUA estimates it would take a FISCU 
approximately two hours to complete a request for the SSA's prior 
approval for an investment to recapitalize an insolvent CUSO.
    Obtaining regulatory approval:
    Total less than adequately capitalized FISCUs with an interest in a 
CUSO as of 6/30/2013: 9.
    Frequency of response: one-time.
    Initial hour burden: 2.

2 hours x 9 = 18

    In accordance with the requirements of the PRA, NCUA intends to 
obtain a modification of its OMB Control Number, 3133-0149, to support 
these changes. Simultaneously with its publication of this final rule, 
NCUA is submitting a copy of the final rule to OMB, along with an 
application for a modification of the OMB Control Number.
    The PRA and OMB regulations require that the public be provided an 
opportunity to comment on the paperwork requirements, including an 
agency's estimate of the burden of the paperwork requirements. The 
Board invites comment on: (1) Whether the paperwork requirements are 
necessary; (2) the accuracy of NCUA's estimates on the burden of the 
paperwork requirements; (3) ways to enhance the quality, utility, and 
clarity of the paperwork requirements; and (4) ways to minimize the 
burden of the paperwork requirements.
    Comments should be sent to the NCUA Contact and the OMB Reviewer 
listed below:

NCUA Contact: Tracy Crews, National Credit Union Administration, 1775 
Duke Street, Alexandria, Virginia 22314-3428, Fax No. 703-837-2861, 
Email: OCIOPRA@ncua.gov
OMB Contact: Office of Management and Budget, ATTN: Desk Officer for 
the National Credit Union Administration, Office of Information and 
Regulatory Affairs, Washington, DC 20503

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency,\28\ voluntarily complies with the Executive Order.
---------------------------------------------------------------------------

    \28\ 44 U.S.C. 3502(5).
---------------------------------------------------------------------------

    The major aspects of the rule make certain aspects applicable to 
FISCUs. By law, these institutions are already subject to numerous 
provisions of NCUA's rules, based on the agency's role as the insurer 
of member share accounts and the significant interest NCUA has in the 
safety and soundness of their operations. In developing the rule, NCUA 
worked with representatives of the state credit union regulatory 
community. This rule incorporates a mechanism by which states may 
request an exemption from coverage of part of the rule for institutions 
in that state, provided certain criteria are met. In any event, the 
final rule will not have substantial direct effects on the states, on 
the relationship between the national government and the states, or on 
the distribution of power and responsibilities among the various levels 
of government. NCUA has determined that this final rule does not 
constitute a policy that has federalism implications for purposes of 
the executive order.

Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this final rule will not affect family 
well-being within the meaning of Section 654 of the Treasury and 
General Government Appropriations Act, 1999.\29\
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    \29\ Public Law 105-277, 112 Stat. 2681 (1998).
---------------------------------------------------------------------------

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 \30\ 
(SBREFA) provides generally for congressional review of agency rules. A 
reporting requirement is triggered in instances where NCUA issues a 
final rule as defined by Section 551 of the Administrative Procedure 
Act.\31\ NCUA does not believe this final rule is a ``major rule'' 
within the meaning of the relevant sections of SBREFA. NCUA has

[[Page 72548]]

submitted the rule to OMB for its determination in that regard.
---------------------------------------------------------------------------

    \30\ Public Law 104-121, 110 Stat. 857 (1996).
    \31\ 5 U.S.C. 551.
---------------------------------------------------------------------------

List of Subjects

12 CFR Part 712

    Administrative practices and procedure, credit, credit unions, 
insurance, investments, reporting, and record keeping requirements.

12 CFR Part 741

    Credit, Credit unions, Reporting and recordkeeping requirements, 
Share insurance.

    By the National Credit Union Administration Board on November 
21, 2013.
Gerard Poliquin,
Secretary of the Board.

    Accordingly, NCUA amends 12 CFR Parts 712 and 741 as follows:

PART 712--CREDIT UNION SERVICE ORGANIZATIONS (CUSOS)

0
1. The authority citation for part 712 continues to read as follows:

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


0
2. Revise Sec.  712.1 to read as follows:


Sec.  712.1  What does this part cover?

    (a) This part establishes when a federal credit union (FCU) can 
invest in and make loans to credit union service organizations (CUSOs). 
CUSOs are subject to review by NCUA. This part does not apply to 
corporate credit unions that have CUSOs subject to Sec.  704.11 of this 
chapter.
    (b) All sections of this part apply to FCUs. Sections 
712.2(d)(2)(ii), 712.3(d), 712.4 and 712.11(b) and (c) of this part 
apply to federally insured, state-chartered credit unions (FISCUs), as 
provided in Sec.  741.222 of this chapter. FISCUs must follow the law 
in the state in which they are chartered with respect to the sections 
in this part that only apply to FCUs.
    (c) As used in this part, federally insured credit union (FICU) 
means an FCU or FISCU.
    (d) As used in this part, CUSO means 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, or, in the case of checking and 
currency services, including cashing checks and money orders for a fee, 
and selling negotiable checks, including travelers checks, money 
orders, and other similar money transfer instruments (including 
international and domestic electronic fund transfers and remittance 
transfers, as defined in section 919 of the Electronic Fund Transfer 
Act, 15 U.S.C. 1693o-1), to persons eligible for membership in any 
credit union having a loan, investment or contract with the entity. A 
CUSO also includes 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.


0
3. Revise Sec.  712.2(d)(2) to read as follows:


Sec.  712.2  How much can an FCU invest in or loan to CUSOs, and what 
parties may participate?

* * * * *
    (d) * * *
    (2) Special rule in the case of less than adequately capitalized 
FICUs. This rule applies in the case of a FICU that is currently less 
than adequately capitalized, as determined under part 702 of this 
chapter, or where the making of an investment in a CUSO would render 
the FICU less than adequately capitalized under part 702 of this 
chapter. Before making an investment in a CUSO:
    (i) A less than adequately capitalized FCU, or an FCU that would be 
rendered less than adequately capitalized by the recapitalization of a 
CUSO, must obtain prior written approval from the appropriate NCUA 
regional office if the making of the investment would result in an 
aggregate cash outlay, measured on a cumulative basis (regardless of 
how the investment is valued for accounting purposes, but limited to 
the immediately preceding seven (7) years) in an amount that is in 
excess of 1% of its paid-in and unimpaired capital and surplus; or
    (ii) A less than adequately capitalized FISCU, or a FISCU that 
would be rendered less than adequately capitalized by the 
recapitalization of a CUSO, must obtain prior written approval from the 
appropriate state supervisory authority if the making of the investment 
would result in an aggregate cash outlay, measured on a cumulative 
basis (regardless of how the investment is valued for accounting 
purposes, but limited to the immediately preceding seven (7) years) in 
an amount that is in excess of the investment limit in the state in 
which it is chartered. A FISCU must also contemporaneously submit a 
copy of this request to the appropriate NCUA regional office. If there 
is no state limit in the state in which a FISCU is chartered, the 
requirements in paragraph (d)(2)(i) of this section will apply to that 
FISCU.
* * * * *


0
4. Revise Sec.  712.3(d) to read as follows:


712.3  What are the characteristics of and what requirements apply to 
CUSOs?

* * * * *
    (d) CUSO accounting; audits and financial statements; NCUA access 
to information. A FICU must obtain a written agreement from a CUSO 
before investing in or lending to the CUSO that the CUSO will:
    (1) Account for all of its transactions in accordance with GAAP;
    (2) Prepare quarterly financial statements and obtain an annual 
financial statement audit of its financial statements by a licensed 
certified public accountant in accordance with generally accepted 
auditing standards. A wholly owned CUSO is not required to obtain a 
separate annual financial statement audit if that wholly owned CUSO is 
included in the annual consolidated financial statement audit of the 
investing FICU;
    (3) Provide NCUA, its representatives, and the state supervisory 
authority having jurisdiction over any FISCU with an outstanding loan 
to, investment in or contractual agreement for products or services 
with the CUSO with complete access to any books and records of the CUSO 
and the ability to review the CUSO's internal controls, as deemed 
necessary by NCUA or the state supervisory authority in carrying out 
their respective responsibilities under the Act and the relevant state 
credit union statute;
    (4) Annually submit, pursuant to NCUA guidance, a report directly 
to NCUA and the appropriate state supervisory authority, if applicable. 
A newly formed CUSO (including a pre-existing business which becomes 
subject to this regulation by virtue of a credit union investment or 
loan) must file a report within 60 days of its formation. The report 
must contain basic registration information, including the CUSO's legal 
name; tax identification number; address; telephone number; Web site; 
primary point of contact; services offered; the name(s) and charter(s) 
of credit union(s) investing in, lending to, or receiving services from 
the CUSO; and investor and/or subsidiary CUSO(s). In addition, for any 
CUSO engaged in complex or high-risk activities, the report must 
contain:
    (i) For each credit union investing in, lending to, or receiving 
services from the CUSO:
    (A) A list of services provided to each credit union;

[[Page 72549]]

    (B) The investment amount, loan amount, or level of activity of 
each credit union;
    (ii) The CUSO's most recent year-end audited financial statements; 
and
    (iii) (A) For CUSOs engaged in credit and lending services:
    (1) The total dollar amount of loans outstanding;
    (2) The total number of loans outstanding;
    (3) The total dollar amount of loans granted year-to-date; and
    (4) The total number of loans granted year-to-date.
    (B) Such information must be provided by loan type for each type of 
loan originated or serviced by the CUSO.
    (5) For purposes of paragraph (d)(4) of this section, complex or 
high-risk activities include preapproved CUSO activities and services 
related to credit and lending, information technology, and custody, 
safekeeping, and investment management services for credit unions. 
Specific activities related to these categories include:
    (i) Credit and lending:
    (A) Business loan origination;
    (B) Consumer mortgage loan origination;
    (C) Loan support services, including servicing;
    (D) Student loan origination; and
    (E) Credit card loan origination.
    (ii) Information technology:
    (A) Electronic transaction services;
    (B) Record retention, security, and disaster recovery services; and
    (C) Payroll processing services.
    (iii) Custody, safekeeping, and investment management services for 
credit unions.
* * * * *

0
5. Revise Sec.  712.4 to read as follows:


Sec.  712.4  What must a FICU and a CUSO do to maintain separate 
corporate identities?

    (a) Corporate separateness. 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. Good business practices dictate that each 
must operate so that:
    (1) Its respective business transactions, accounts, and records are 
not intermingled;
    (2) Each observes the formalities of its separate corporate 
procedures;
    (3) Each is adequately financed as a separate unit in the light of 
normal obligations reasonably foreseeable in a business of its size and 
character;
    (4) Each is held out to the public as a separate enterprise;
    (5) The FICU does not dominate the CUSO to the extent that the CUSO 
is treated as a department of the FICU; and
    (6) Unless the FICU has guaranteed a loan obtained by the CUSO, all 
borrowings by the CUSO indicate that the FICU is not liable.
    (b) Written legal advice. Prior to a FICU investing in a CUSO, the 
FICU must obtain written legal advice as to whether the CUSO is 
established in a manner that will limit potential exposure of the FICU 
to no more than the loss of funds invested in, or loaned to, the CUSO. 
In addition, if a FICU invests in, or makes a loan to, a CUSO, and that 
CUSO plans to change its structure under Sec.  712.3(a), the FICU must 
also obtain prior written legal advice that the CUSO will remain 
established in a manner that will limit potential exposure of the FICU 
to no more than the loss of funds invested in, or loaned to, the CUSO. 
The written legal advice must address factors that have led courts to 
``pierce the corporate veil,'' such as inadequate capitalization, lack 
of separate corporate identity, common boards of directors and 
employees, control of one entity over another, and lack of separate 
books and records. The written legal advice must be provided by 
independent legal counsel of the investing FICU or the CUSO.


Sec.  712.9  [Removed and Reserved]

0
6. Remove and reserve Sec.  712.9.

0
7. Revise Sec.  712.10 to read as follows:


Sec.  712.10  How can a state supervisory authority obtain an exemption 
for FISCUs from compliance with Sec.  712.3(d)(1), (2), and (3)?

    (a) The NCUA Board may exempt FISCUs in a given state from 
compliance with any or all of Sec.  712.3(d)(1), (2), and (3) if the 
NCUA Board determines the laws in that state are equal to, or more 
stringent than, Sec.  712.3(d)(1), (2), and (3), and the laws and 
procedures available to the supervisory authority in that state are 
sufficient to provide NCUA with the degree of access and information it 
believes is necessary to evaluate the safety and soundness of FICUs 
having business relationships with CUSOs owned by FISCUs in that state.
    (b) To obtain an exemption, the state supervisory authority must 
submit a copy of the legal authority pursuant to which it secures the 
information required in Sec.  712.3(d)(1), (2), and (3) of this part to 
NCUA's regional office having responsibility for that state, along with 
all procedural and operational documentation supporting and describing 
the actual practices by which it implements and exercises the 
authority.
    (c) The state supervisory authority must provide the regional 
director with an assurance that NCUA examiners will be provided with 
co-extensive authority and will be allowed direct access to CUSO books 
and records at such times as NCUA, in its sole discretion, may 
determine necessary or appropriate. For purposes of this section, 
access includes the right to make and retain copies of any CUSO record, 
as to which NCUA will accord the same level of control and 
confidentiality that it uses with respect to all other examination-
related materials it obtains in the course of its duties.
    (d) The state supervisory authority must also provide the regional 
director with an assurance that NCUA, upon request, will have access to 
copies of any financial statements or reports which a CUSO has provided 
to the state supervisory authority.
    (e) The regional director will review the applicable authority, 
procedures and assurances and forward the exemption request, along with 
the regional director's recommendation, to the NCUA Board for a final 
determination.
    (f) For purposes of this section, whether an entity is a CUSO shall 
be determined in accordance with the definition set out in Sec.  
741.222 of this chapter.

0
8. Add new Sec.  712.11 to read as follows:


Sec.  712.11  What requirements apply to subsidiary CUSOs?

    (a) FCUs investing in a CUSO with a subsidiary CUSO. FCUs may only 
invest in or loan to a CUSO, which has a subsidiary CUSO, if the 
subsidiary CUSO satisfies all of the requirements of this part. The 
requirements of this part apply to all tiers or levels of a CUSO's 
structure.
    (b) FISCUs investing in a CUSO with a subsidiary CUSO. FISCUs may 
only invest in or loan to a CUSO which has a subsidiary CUSO, if the 
subsidiary CUSO complies with the following:
    (1) All applicable state laws and rules regarding CUSOs; and
    (2) All of the requirements of this part that apply to FISCUs, 
which are listed in Sec.  712.1. The requirements of this part that 
apply to FISCUs apply to all tiers or levels of a CUSO's structure.
    (c) For purposes of this section, a subsidiary CUSO is 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.

PART 741--REQUIREMENTS FOR INSURANCE

0
9. The authority citation for part 741 continues to read as follows:


[[Page 72550]]


    Authority:  12 U.S.C. 1757, 1766, 1781-1790, and 1790d.
0
10. Revise Sec.  741.222 to read as follows:


Sec.  741.222  Credit union service organizations.

    (a) Any credit union that is insured pursuant to Title II of the 
Act must adhere to the requirements in Sec. Sec.  712.2(d)(2)(ii), 
712.3(d), 712.4 and 712.11(b) and (c) of this chapter concerning 
permissible investment limits for less than adequately capitalized 
credit unions, agreements between credit unions and their credit union 
service organizations (CUSOs), the requirement to maintain separate 
corporate identities, and investments and loans to CUSOs investing in 
other CUSOs. For purposes of this section, a CUSO is any entity in 
which a credit union has an ownership interest or to which a credit 
union has extended a loan, and that entity is engaged primarily in 
providing products or services to credit unions or credit union 
members, or, in the case of checking and currency services, including 
cashing checks and money orders for a fee, and selling negotiable 
checks, including travelers checks, money orders, and other similar 
money transfer instruments (including international and domestic 
electronic fund transfers and remittance transfers, as defined in 
section 919 of the Electronic Fund Transfer Act, 15 U.S.C. 1693o-1), to 
persons eligible for membership in any credit union having a loan, 
investment or contract with the entity. A CUSO also includes 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.
    (b) This section shall have no preemptive effect with respect to 
the laws or rules of any state providing for access to CUSO books and 
records or CUSO examination by credit union regulatory authorities.

[FR Doc. 2013-28479 Filed 12-2-13; 8:45 am]
BILLING CODE 7535-01-P