We applaud the National Credit Union Administration (“NCUA”) Board (the “Board”) for its sensible and well thought out approach to regulation. The amendments to Part 701.21, 701.22 and 701.23 of the NCUA Rules and Regulations, finalized today, are exactly what the credit union industry needs to thrive in the evolving lending environment. Over the last decade or so, financial innovators have sought to disrupt the lending landscape. Their actions are not with the
intention to put credit unions out of business. Instead, like all innovators throughout the course of history, these financial technology companies are working to make the financial lives of Americans easier.
Credit union members are rarely in the market for a loan. They are in the market to buy a good or service. Financial innovators are using technology and ingenuity to be readily available to a member when they find they need money to buy something. Rare are the days that members come into the branch for a loan. In addition, financial innovators are using technology to make the lending process easier and faster. Members no longer want to sit and wait days or weeks for the credit union to make a lending decision.
Where does this leave credit unions in this ecosystem? Credit unions have been here before. Auto lending is a perfect example. There was a time when credit unions could expect that their loyal members would come to them first when looking to buy a car. A member would start at the credit union branch to obtain financing and then head off to the car dealership to look for their new or used car. This is now a rare event. Over the last twenty years or so, members started just going to the dealer to buy a car and financing was an afterthought. This meant that often the dealership was facilitating the loan for the car purchase and not a credit union. Credit unions were losing member loans to captive lenders at the dealership.
Credit unions adapted. Credit unions began to develop relationships with dealerships wherein the credit union would be an option for financing a car purchase at that dealership. Credit unions began to win back and maintain a portion of the member auto lending market. However, in many cases, it became difficult for a credit union to maintain or develop these relationships with the number of dealerships. This was particularly true for smaller credit unions, but it affected credit unions of all sizes. It just made sense for a third party to aggregate the dealerships and facilitate the connections to credit unions.
This was a perfect place for CUSOs to step in. There are third parties that assist with connecting dealers with lenders, but CUSOs are the only parties that are owned by credit unions and focus on helping credit unions win these relationships. Therefore, credit unions gravitated to CUSOs to help them manage these relationships.
However, the market is shifting again, and merely connecting credit unions with dealers is not enough. Members are no longer exclusively going to the dealership to buy a car. There are a multitude of car buying services and applications springing into the market. From the consumer perspective, this is good. Most people do not like the process of buying a car. They would rather enlist someone else to do it for them. In a way, these new players are looking to disintermediate the dealerships.
What happens when a member doesn’t go to the dealership or the credit union first to purchase that dream new car? How do credit unions continue to be the trusted financing partner with their member on this life achievement? Credit unions must adapt again and develop relationships with these new car buying services. The challenge is that a large nationally focused car buying model is not going to want to secure relationships with thousands of credit unions
throughout the country. Furthermore, the process of linking a member with a credit union lender at the time of purchase is seen as unnecessary friction in the car buying process. Once again, this is an opportunity for CUSOs. CUSOs are now permitted to be the lender in a relationship with these national services and can work to keep these auto loans in the credit union industry. The CUSO can be the lender up front and then, just as they do today, get those loans to their credit union partners. It is a solution that will make the car buying process for members simpler and
make sure credit unions of all sizes are not cut out of this portion of the auto lending market. The auto lending example is not an isolated one. One consumer need that financial technology companies are filling is unsecured lending. These originators are capturing an enormous amount of smaller dollar loans. These types of loans are exactly the types of loans credit unions have made for years. These are your holiday loans or your small loans to pay a car
repair, a home repair/improvement, or a medical bill. These members are so important to the credit union movement. In the same way that CUSOs can help credit unions gain access to more member auto loans, CUSOs can and will help credit unions gain access to more unsecured member loans. The types of loans that can often be lifesaving.
In 2021, NCUA finalized amendments to the CUSO rules and regulations. This was an important first step to allowing CUSOs to be a key tool in gaining access to more loans from financial technology companies. CUSOs have been a driving force to enable credit unions to gain access to loan types. CUSOs act as an important intermediary for credit unions. However, the question then becomes: what tools do CUSOs and credit unions need to make sure these
loans can make their way to credit union balance sheets where these members can be properly served?
The new and final amendments to Parts 701.21, 701.22 and 701.23 will be instrumental in answering this question. Ultimately, these changes will make credit unions more successful in the changing lending environment giving them the proper tools to obtain member loans from non-credit union originators. Allowing credit unions to adapt to the new lending environment just like indirect lending adaptations in the past.
First and foremost, the amendment to the 5% limitation on purchasing eligible obligations under Part 701.23 is instrumental in allowing credit unions, possibly through CUSOs and other collaborations, to build strong relationships with financial technology companies. This is important because as outlined above credit unions need more tools to allow them to be a part of the lending system as it has evolved with the use of technology. The changes to the 5%
limitation will garner more robust relationships with non-credit union originators because just like historical indirect loans, which are not subject to the 5% cap, credit unions can purchase more member loans from these third-party originators.
In addition, the amendments to the purchasing exception for inter-credit union loan sales/purchases under Part 701.23(b)(2) will be an efficient and valuable way to make sure small to midsized credit unions can also gain access to these loans. This change will create a healthy credit union system and not just create advantages for the largest credit unions. One of the best ways to manage safety and soundness risk is giving credit unions the ability to adequately
manage their balance sheets. This amendment will give credit unions the ability to diversify their risk and provide much needed interest income to those that need it. It is likely that without CUSOs larger credit unions will be in a better position to develop lasting relationships with non-credit union originators; however, this amendment to Part 701.23(b)(2) will allow smaller credit unions to purchase loans from the larger credit unions and obtain some of the much needed return on assets that they need. Meanwhile, this amendment will also allow larger credit unions
the ability to manage balance sheet risk by selling some of these loans to other credit unions without jeopardizing their relationship with a non-credit union originator.
The National Association of Credit Union Service Organizations (NACUSO) was formed in 1985 to help credit unions explore the use of CUSOs and the delivery of non-traditional products and services. Over the years, NACUSO’s focus has evolved to helping credit unions form multi-owned CUSOs and participate in collaboration and the cooperative business model. Today, NACUSO serves over 300 member organizations as an education organization comprised of a network for collaborators and innovators that embrace a positive industry message and amplifies the voice of credit unions and CUSOs by providing resources to help people collaborate, identify opportunities, build businesses, find solutions, and get things done. For more information: www.nacuso.org
President & CEO, NACUSO