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CUSO Exams - What Are the Risks and Rewards?



# Understanding CUSO Exams: An Insider's Perspective


Credit Union Service Organizations (CUSOs) play a vital role in the credit union industry, offering specialized services that help credit unions expand their offerings and improve efficiency. However, like credit unions themselves, CUSOs are subject to regulatory oversight. In this article, we'll dive into the world of CUSO examinations, drawing insights from Mark Treichel, a former NCUA Regional Director with extensive experience in the field.


## The Basics of CUSO Exams


CUSO exams are less frequent than credit union examinations, but they serve a crucial purpose in ensuring the safety and soundness of the credit union system. There are three types of CUSO exams:


1. Integrated exams: Conducted as part of a regular NCUA exam of a credit union

2. Standalone exams: Focused specifically on one CUSO

3. Independent reviews: Typically conducted in response to NCUA or state staff recommendations


Interestingly, the frequency of standalone CUSO exams can vary significantly. As Treichel notes, "There were years that I did zero... And there were years that perhaps we did three or four." This variability is often due to resource constraints and the need for a compelling reason to conduct a standalone review.


## NCUA's Authority and Access


One might wonder how NCUA, which doesn't have direct regulatory authority over CUSOs, can conduct these exams. The answer lies in NCUA's regulation on CUSOs. Treichel explains:


"While NCUA doesn't have the regulatory authority over CUSOs, they build that authority in by creatively requiring, if a credit union is going to invest or make loans to a CUSO, that the CUSO agrees that they will make the books and records available."


This agreement gives NCUA complete access to any books and records of the CUSO, as well as the ability to review the CUSO's internal controls.


## What NCUA Looks For


During a CUSO exam, NCUA focuses on several key areas:


1. Systemic risks: Particularly in growing CUSOs that impact multiple credit unions

2. Individual credit union risks: Especially when new or high-risk products are involved

3. New or growing services: Such as commercial loans, student lending, or FinTech solutions


NCUA may request a wide range of documents, including:


- Strategic plans

- Disaster recovery plans

- Organizational charts

- Board minutes

- Customer lists

- Policies and procedures


It's important to note that NCUA's access is broad. As Treichel advises, "If NCUA says they need to see something to assess the safety and soundness of the CUSO, you are going to have to give it to them."


## The "Primarily Serves" Requirement


One crucial aspect of CUSO regulation is the requirement that CUSOs primarily serve credit unions and their members. However, there's no hard-and-fast rule for determining compliance with this requirement. Instead, NCUA uses a "totality of the circumstances" test, considering factors such as:


- Number of affiliated members served

- Revenues derived from members

- Members' assets under management

- Number of policies or services sold to members


## Preparing for a CUSO Exam


While CUSO exams may seem daunting, proper preparation can make the process smoother and potentially beneficial. Treichel suggests:


1. Keep clean books and records

2. Ensure services are well-documented

3. Control the narrative during the exam

4. Designate a single point of contact for the exam

5. Ensure team members are communicating consistently


As Treichel points out, "Getting a CUSO review, if your books and records are clean and your services are well documented and you can do a good job of controlling the narrative when NCUA comes in, when that happens, it's actually can be a plus."


## The Future of CUSOs


Despite the regulatory scrutiny, the outlook for CUSOs remains positive. NCUA has expanded the range of permissible CUSO activities over time, recognizing their value to the credit union industry. As Treichel observes:


"Credit union service organizations. They grow and they grow and they grow and they continue to help credit unions, credit unions' members. And I see this as a very positive step in the industry that NCUA has taken to expand things in this arena."


With ongoing developments in areas like FinTech and proposed rules on eligible obligations and loan participations, the role of CUSOs in the credit union ecosystem is likely to continue evolving and expanding.


In conclusion, while CUSO exams require careful preparation and management, they also represent an opportunity for CUSOs to demonstrate their value and compliance. By understanding the exam process and maintaining robust internal controls and documentation, CUSOs can navigate these reviews successfully and continue to play a vital role in the credit union industry.


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