A CUSO (Credit Union Service Organization) is an organizational entity owned by credit unions.. In October 2021, changes were made that expanded what CUSOs can do for credit unions. In this episode, Brian Lauer of Messick Lauer & Smith P.C. dives deep into the new CUSO regulation, CUSO trends, and why every credit union should consider investing in a CUSO. He also talks about it in relation to FinTech and cryptocurrency. Interested to learn more? Tune into this conversation!
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Credit Union Service Organization Hot Topics With Expert Brian Lauer
CUSO Trends - FINTECH, Crypto & More
I'm excited to have Brian Lauer with me. Brian, how are you doing?
I'm good. How are you?
I'm fantastic. I'm excited to chat with you. I want to give a little bit of your background. I pulled Brian's biography off of his LinkedIn. Brian is a Partner with the law firm of Messick Lauer & Smith. He lives in Media, Pennsylvania, where he concentrates his practice on assisting credit unions, primarily through CUSOs, in finding effective ways to work collaboratively with other credit unions and third-party service providers to serve their members with non-traditional products and services.
Brian also assists credit unions, and CUSOs navigate the sea of regulations affecting nearly every aspect of their day-to-day operations. Brian became NACUSO’s General Counsel in 2021 and served as NACUSO’s liaison with NCUA and other regulatory agencies for NACUSO. Brian, we first met back in 2013. That was when I first became the Executive Director at NCUA.
NACUSO does a real good job of lobbying the NCUA board and making sure the issues are out there for the people that you represent. It was at that meeting I sat in with one of the board members that was where I first learned how good a job NACUSO did in communicating the needs of its members. At that time, there was a discussion about expanding the CUSO rule to allow for all forms of letting, etc. It's ironic.
Now as we chat its July 19th, 2022. If my dad were still around, it would be his 89th birthday. I got a love of quotes from him. One of them he gave me on a card was from Calvin Coolidge, “Nothing in this world can take the place of persistence.” As I was getting ready to chat with you, it dawned on me that it was my dad's birthday, and I connected the dots, the persistence that NACUSO had on that particular topic. Bravo for a job well done on that.
Thank you. You are right. Back in 2013, when we met, we started to discuss the issue of CUSOs getting the power to be able to make all types of loans. At that time, CUSOs could only make four types of loans, residential mortgage loans, business loans, student loans, and credit card loans. To us, it seemed archaic that the CUSO wouldn't be able to have the lending powers to be able to assist credit unions and all types of loans. If I recall correctly, back in 2013, we started to discuss that with Chairman Matz. She loved to bring a big group of people to those meetings. It was always fun. There would be 8 or 10 of you guys back there but that's when we met and first brought the issue up.
You are persistent at it. There were dialogues but I remember walking out of there. It must have been after the meeting when it came up that the general counsel and I started chatting a little bit about that. Slowly but surely, you got NCUA staff around to the idea, and then you kept whittling away at it with the board, and here we are. That became a final rule on October 2021. NCUA expanded permissible activities and services for CUSOs. That has been in place for a little bit now. One of the things that went into the rule was allowing it to make every type of loan.
There were other things that were approved in that rule—for example, giving the NCUA board the additional flexibility to approve permissible activities without having to go back to the table with the rule, making the rule in and of itself a little bit nimbler so that it couldn't get bogged down within the walls of NCUA. Here we are. Let's see. That was a little bit ago. Have you seen any movement from where you sit at NACUSO relative to this rule? Do any credit unions have any luck on that on the side of making different loans? What's your take on the implementation of this rule?
One of the things that we discussed with some of the board members when we were being persistent is that there was a question around, “What are the advantages of expanding to all loan types? Why would this matter? What will a CUSO make auto loans, unsecured loans or whatever the case may be? How is that going to be advantageous?” We often talked about how the lending marketplace is changing. It's always changing and has been since I have been in the industry. Things are changing exponentially faster as we go along.
One of the things that credit unions can use CUSOs for in the lending space, as the marketplace changes, is to get access to additional loan types that they wouldn't necessarily get access to. I use the analogy to indirect lending and dealer loans. Back when CUDL attacked that marketplace decades ago, what the CUSO was trying to do was give credit unions access to loans that they were starting to lose. Members were no longer walking into the branches. They weren't coming. They weren't going to the dealership and saying, “I like the car. I'm going to go get my loan from the credit union.”
Credit unions are constantly changing and have been since, but things are changing exponentially faster.
The dealer didn't want them to leave the dealership. They had them at the table and said, “Here's your loan. We will do that for you.” The CUSOs were the ones that helped attack that problem for credit unions. They said, “Why don't we build a network of dealership relationships? We will tell the dealers we will be the loans on the backend.” It's like the birth of indirect lending.
I see this expansion of CUSO powers in this realm to be another additional way in which credit unions can get access to loans that they are starting to lose. Auto loans are a good example. A credit union member may go to Costco, Carvana or Tesla to buy a car. Tesla is not a dealership, not part of the network. As an example, Tesla or Costco don't want to deal with 1,000 different credit unions. They want to deal with one lender. They don't want their folks saying, “I have to figure out what credit union you are a member of.” What the CUSO does is helps to grease the wheels of that deal flow.
It makes the friction go away. The CUSO can be the lender. The CUSO can worry about getting the loan onto the credit unions’ books, and worry about membership and all those things, that CUDL, for instance, is doing now. A lot of other CUSOs are doing the same thing. It's enabling credit unions to build more relationships with third-party lenders so that they can get more of those loans on their books. I always throw the example out there like Peloton. Peloton is not going to want to deal with 1,000 credit unions but they might deal with a good CUSO that has access to those 1,000 credit unions. You can maybe get some of those loans.
Peloton, for example, is looking for economies of scale. They want to sell it but they want it to be quick. You use one of my favorite words, friction. There's a book, Atomic Habits. I don't know if you've read it. I'm on my second reading of it. It helps me work out. It helps me do different things but it's creating friction for bad habits. For example, I don't have any chocolate in the house. It’s about eliminating friction on good things, which is what the CUSO can do to arrange for those loans. That's an excellent example.
There has been indirect lending growth. NCUA statistics show that it's growing. It's quite possible that it’s this rule that played a role. They did add participation loans and indirect lending as an area of concentration for their exams. Other than them raising third-party due diligence, which comes into play with every CUSO and CUSOs are familiar with, I don't think it's caused any undue challenges out there for credit unions but the growth is good. There are credit unions that don't have the ability to make those loans. Their members might not be interested in it. They can do some participations that comes from the CUSO as well.
You had mentioned the nimbleness of the new rule to the idea that the board can act without rulemaking to add additional CUSO activities. We haven't seen any of those yet. They are going to be listed on the NCUA website in a certain section under the regulations. We haven't seen any activity there. Going back to your comment about the length of time and the persistence of NACUSO, to be able to get this change to the lending powers, I never look at the calendar. Maybe that's what decreased the friction on my persistence in getting the rule. I never thought how early we asked for that. Based on your timeline, it took almost or somewhere around eight years.
These changes we're talking about with the advantages of using CUSOs to decrease friction and getting more loans on the credit unions’ books, we need that nimbleness. We need to be able to access as things change different markets and types of services in a much faster fashion. I'm happy that the board approved that addition to the rules.
It's going to be interesting too because if you go to American Banker, CU Times, CU Today or FinTech, you can't look at a website dealing with banking that doesn't talk to FinTech, and the NCUA board members individually speak to FinTech quite a bit. It's quite possible that you will see when they do come out with some of these things, there might be an appetite for FinTech-type investments or incidental powers, if you will. What are your thoughts relative to that arena?
I could not agree more. Going back to persistence, I like the theme. As soon as we were able to successfully get the change to the CUSO rule on the lending powers that we were speaking of, the CUSO started right away on what we think is vitally important to the industry and a regulatory change that we need. The industry desperately needs the ability to build longer-lasting partnerships with FinTech.
This exponential evolution has everything to do with technology and financial technology. For a long time, folks said, “FinTech is going to disintermediate credit unions from their members.” Varying success over the last several years since you started hearing that but it's become more and more relevant because the credit union members or the average member is aging. We need to get those younger members, and the younger members are using their phones for everything.
A credit union needs to focus on, “What are my routine operations? Where are my credit unions going to get the services they need?” They are going to financial technology companies. FinTech lending, by the way, going back to the lending powers, there's some opportunity for credit unions to use CUSOs to compete with some of the FinTech lendings going on. You see companies like Upgrade, Upstart, and Affirm on the buy now, pay later side.
There are lots and lots of innovations and creations in the lending space. Credit unions need to be able to invest in and cultivate those technologies to be able to be relevant to their members in the future. That starts with being able to invest in those things. Something as simple as an incubater. I'm sure you've heard about these.
The industry desperately needs the ability to build longer-lasting partnerships with FinTech.
Financial Technology, incubators, digital credit union or Digital Federal Credit Union, DCU, in the Boston area, started one on their own but weren't able to invest in and truly cultivate those services as much as would have been advantageous. The only investment power they have is CUSOs, and those FinTechs have to agree to primarily serve credit unions. That's a big hindrance to a credit union. Being able to invest in a FinTech or financial technology is limiting their market right off the bat.
I'm trying to remember a GAO report or something that talked about a regulatory sandbox and having the ability to play in the sandbox to figure out what's next. The way the Federal Credit Union Act and/or the regulations are structured can be a little bit of a hindrance to that. The way the NCUA board is always talking about FinTech, you know that they are aware of it. It's probably because of the persistence of people like you and individual CUSOs that are saying, “We need to have the ability to do this.”
The reality is if they are to allow it, even if it leads to an occasional insurance fund loss, that's better than being left in the wake of FinTech and where banking is going. That's the other alternative. You lock it down and don't let credit unions do it. It’s because of that their relevance can ultimately be challenged. It's at the heart of everything.
To your point, people like to say that credit unions are conservative and we should be conservative in our approach but the truth is we're in the risk business. The NCUA needs to understand that as well. There could be insurance losses. I'm not going to say there never will be but if we don't get in line with the technology and the future of the financial services industry, credit unions are going to die, not all of them. It will probably be like the old adage, the frog in the pot and don't know the water is boiling.
NCUA’s board is currently structured in a way that they are open to those ideas. I've heard the possibility of this FinTech issue getting a few legs under this regulation. When I was an examiner a long time ago, I first printed off the regulation and the NCUA checklist. It was all about piercing the corporate veil and making sure that the CUSO’s board was different than the credit union’s board so that you could truly have independence.
The first time that I saw CUSO s doing good things was on the commercial lending side. There were credit unions that couldn't afford to have the staff to do it but had members that might want the loans. That was a great thing that I saw early on in my career relative to CUSOs. Later on, there was the back office sharing of skills and different things like that. Over the last few years, are there any things that you see starting to get momentum relative to certain things that CUSOs are doing now better than they did maybe several years ago, or other newer type things that CUSOs are trying to do?
Many years ago, commercial lending was a hot thing, and it was good for credit unions. It showed the value of what collaboration can do to give credit its access to a lending type they would not have necessarily been able to put on their books. By the way, to our earlier comments, there was a risk there, too. We saw some of that risk later when the financial crisis happened. We weathered that, and credit unions are better off for it. They are seen as a resource for their members in the commercial and small business lending space that they weren't necessarily before.
You are certainly right then the back office came into play. The trend I see now is more of a strategy. Credit unions are focused on what their CUSO investment strategy is. These are some of the larger creditors. They are saying, “Instead of investing in a CUSO or forming a CUSO as it comes along, onesie-twosie, here and there, that looks like a good idea. Let's invest in it and see what happens.”
Instead, credit unions are starting to look at this from a strategic vision perspective. How do their CUSO investments fit within the overall vision and mission of the credit union? It takes a board-to-C-Suite management top down, look, and approach, and says, “We are only going to make investments in CUSOs that fit within the mission. Instead of just looking at, ‘That's a cool idea. Let's see what happens,’ but let's look at what we think.”
In a way, it’s tackling it strategically, saying, “These are the swim lanes that we see where investment would be beneficial for our credit union and our mission, and then looking and hiring people to look into those things and further take on the tactics of doing that. That's the focus. The only other thing I would mention is after back office. We've talked about FinTech quite a bit. Credit unions are only permitted to invest in a financial technology company if it's a CUSO. Over the last few years, financial technology has been incredibly popular, wanting to make good investments in technologies that will help them their credit union. I see the strategy as being focused.
There's an opportunity for credit unions to use CUSOs to compete in some FinTech lending right now.
The other thing that is pertinent to the industry as a whole is that credit unions are starting to refocus on the underserved as it relates to financial technology. The FinTechs were coming in, mobile, digital, different products and services, data analytics, all of these things. I do see credit unions refocusing on trying to serve some of these financial deserts and communities that don't have financial services within their confines that allow them to succeed. I see credit unions starting to refocus on that as banks start to move out of that space even more and more.
I saw an interesting plot map of the country, and it was a plot map of poverty. The darker colors were more poverty versus the lighter colors. It was a plot map of pop of poverty throughout the country, and it almost matched exactly up with a plot map of communities where an individual would have to travel more than a mile to the nearest bank branch or financial institution branch. That's a real problem. By the way, it's not just rural. Although credit unions are fantastic at remaining in some of these rural communities that banks leave. It's also in the big cities. There are communities where the banks are leaving. A lot of smaller credit unions are still there saying, “We are here.”
Small, medium, and large credit unions with that underserved element. That's what I have been involved in, some situations where credit unions were getting secondary capital or sub-debt so that they could acquire banks. There's a compelling argument that a credit union purchases a bank, as opposed to another bank. The bank is more likely to shut those branches down than the credit union because the credit union is doing it because either they want to add that field of membership so that they can serve them or it's already part of their field of membership.
The credit unions are focused on member service as just the cliché that everybody always says but it's true. They generally do not close branches because their members are still there and need to be served.
Hopefully, there's that proposed change to the Federal Credit Union Act that will allow any type of credit union to pick up on an underserved area which will be great for the underserved. It will be good for credit unions because there will be able to serve more and better. Some states allow a bigger investment and amount of lending.
If my memory serves right, NCUA allows 1% investment and 1% in lending. It's capped at 2%. The states that allow more, is that abundant, used a lot or something on occasion? There's somebody who goes out and does it. Have the results of that been positive in a way that maybe this is something that NCUA should be looking at, whether it's a change to the Act or regulations to allow a little bit more?
For the most part, the industry is not using that 1%. The amount at risk is still lower or under 1%. However, I will say there are progressive credit unions, for a lack of a better word, that is certainly using that 1% a whole lot more and would see an advantage to increasing it. When you look at some of the states, I don't know that any of them are hitting their cap.
I've not seen any studies that show that those credit unions are necessarily more successful because of that versus the others. I'm glad I'm here having this talk with you because I still think in the industry, CUSOs are an afterthought for credit unions. They should be a more prevalent tool for credit unions to use. As we continue to persist in that way, maybe we will see those caps being increased.
It's a tool. It's in the toolbox. If a credit union isn't utilizing it, it's something that they should take a look at. If it creates an opportunity for you to better serve your members, which inevitably and undoubtedly, most often it does, as you are looking at those strategies on how you can best serve your members, it's something that credit unions should consider. Brian, as we wrap up here, is there a question I should have asked you that I didn't? Also, if someone who tunes in to the show here wants to get in touch with you, how would they go about doing that?
I don't think we missed anything in our target market. It was a good talk, though. The only thing that's hot right that maybe we could touch on briefly is cryptocurrency. It's a huge area. It’s enveloped by this overall FinTech market. It's an interesting space that we need to keep an eye on. I don't know that I necessarily have answers to it.
Cryptocurrency is an interesting space that we need to keep an eye on.
Some of the NCUA board are interested in it. It's a fascinating space that we should keep our eyes on and continue to look at. CUSOs are a way for credit unions to get involved in the crypto space and maybe not take on too much risk on their own. It might be a good stepping stone to getting into that space, the DeFi space, stablecoin, and the like.
There's the crypto and the blockchain side for the clearing aspect of it. I've heard the noise on both sides of that. There are credit unions out there that, on the crypto side, create an opportunity for their members to participate in it.
It's going to be a big area for sure in the next few years.
Brian, if a credit union was wanting to connect with you about anything we talked about here or anything CUSO-related, how would they go about doing that?
Probably the best way would just be to go to our website, which is www.CusoLaw.com. You can get all of our contact information there, learn more about myself and my colleagues, and maybe even read some of the news items and information that we have on the site as well.
Brian, it was great chatting with you. Good to connect. Your persistence is admirable, well done. Again, thank you for your time.
It was great to be here. Thanks so much for inviting me.
For the reader, I appreciate your time. I appreciate your reading and hope you will join me again soon for the next episode of With Flying Colors.
About Brian Lauer
Brian Lauer is a partner with the law firm of Messick Lauer & Smith P.C. in Media, Pennsylvania where he concentrates his practice on assisting credit unions, primarily through CUSOs, in finding effective ways to work collaboratively with other credit unions and third party service providers to serve their members with non-traditional products and services.
Brian also assists credit unions and CUSOs navigate the sea of regulations affecting nearly every aspect of their day to day operations.
Brian became NACUSO’s General Counsel in 2021.
Brian serves as a liaison with the NCUA and other regulatory agencies for NACUSO.