[Federal Register Volume 86, Number 37 (Friday, February 26, 2021)]
[Proposed Rules]
[Pages 11645-11651]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01398]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 86, No. 37 / Friday, February 26, 2021 / 
Proposed Rules

[[Page 11645]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 712

RIN 3133-AE95


Credit Union Service Organizations (CUSOs)

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) is seeking comment on a proposed rule 
that would amend the NCUA's credit union service organization (CUSO) 
regulation. The proposed rule would accomplish two objectives: 
Expanding the list of permissible activities and services for CUSOs to 
include originating any type of loan that a Federal credit union (FCU) 
may originate; and granting the Board additional flexibility to approve 
permissible activities and services. The NCUA is also seeking comment 
on broadening FCU investment authority in CUSOs.

DATES: Comments must be received by March 29, 2021.

ADDRESSES: You may submit written comments, identified by RIN 3133-
AE95, by any of the following methods (Please send comments by one 
method only):
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> Fax: (703) 518-6319. Include ``[Your Name]--Comments on 
Proposed Rule: Credit Union Service Organizations (CUSOs)'' in the 
transmittal.
    <bullet> Mail: Address to Melane Conyers-Ausbrooks, Secretary of 
the Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.
    <bullet> Hand Delivery/Courier: Same as mail address.
    Public Inspection: You may view all public comments on the Federal 
eRulemaking Portal (http://www.regulations.gov) as submitted, except 
for those we cannot post for technical reasons. The NCUA will not edit 
or remove any identifying or contact information from the public 
comments submitted. Due to social distancing measures in effect, the 
usual opportunity to inspect paper copies of comments in the NCUA's law 
library is not currently available. After social distancing measures 
are relaxed, visitors may make an appointment to review paper copies by 
calling (703) 518-6540 or emailing <a href="/cdn-cgi/l/email-protection#a9e6eeeae4c8c0c5e9c7cadcc887cec6df"><span class="__cf_email__" data-cfemail="59161e1a1438303519373a2c38773e362f">[email protected]</span></a>.

FOR FURTHER INFORMATION CONTACT: Policy and Analysis: Jacob McCall, 
(703) 518-6624; Legal: Rachel Ackmann, Senior Staff Attorney, (703) 
548-2601; or by mail at National Credit Union Administration, 1775 Duke 
Street, Alexandria, VA 22314.

SUPPLEMENTARY INFORMATION:

I. Introduction

Legal Authority and Background

    The Board is issuing this rule pursuant to its authority under the 
Federal Credit Union Act (FCU Act).\1\ Under the FCU Act, the NCUA is 
the chartering and supervisory authority for FCUs and the Federal 
supervisory authority for federally insured credit unions (FICUs). The 
FCU Act grants the NCUA a broad mandate to issue regulations governing 
both FCUs and FICUs. Section 120 of the FCU Act is a general grant of 
regulatory authority and authorizes the Board to prescribe regulations 
for the administration of the FCU Act.\2\ Section 209 of the FCU Act is 
a plenary grant of regulatory authority to the NCUA to issue 
regulations necessary or appropriate to carry out its role as share 
insurer for all FICUs.\3\ Accordingly, the FCU Act grants the Board 
broad rulemaking authority to ensure that the credit union industry and 
the NCUSIF remain safe and sound.
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    \1\ 12 U.S.C. 1751 et seq.
    \2\ 12 U.S.C. 1766(a).
    \3\ 12 U.S.C. 1789.
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    Under the FCU Act, FCUs have the authority to lend up to one 
percent of their paid-in and unimpaired capital and surplus, and to 
invest an equivalent amount, in CUSOs.\4\ The NCUA regulates FCUs' 
lending to and investment in CUSOs in part 712 of its regulations (CUSO 
rule).\5\ In general, a CUSO is an organization: (1) In which a FICU 
has an ownership interest or to which a FICU has extended a loan; (2) 
is engaged primarily in providing products and services to credit 
unions, their membership, or the membership of credit unions 
contracting with the CUSO; and (3) whose business relates to the 
routine daily operations of the credit unions it serves.\6\ The CUSO 
rule provides a list of preapproved activities and services related to 
the routine daily operations of credit unions.\7\
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    \4\ 12 U.S.C. 1757.
    \5\ 12 CFR part 712. All sections of part 712 apply to FCUs. 
Sections 712.2(d)(2)(ii), 712.3(d), 712.4, and 712.11(b) and (c) 
apply to federally insured, state-chartered credit unions (FISCUs), 
as provided in Sec.  741.222 of the chapter. FISCUs must follow the 
law in the state in which they are chartered with respect to the 
sections in part 712 that only apply to FCUs. Corporate credit union 
CUSOs are subject to part 704. Any amendments to part 704 would 
occur through a separate rulemaking and are not included in this 
proposed rule.
    \6\ See 12 CFR 712.1(d), 712.3(b), and 712.5.
    \7\ 12 CFR 712.5.
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    The list of preapproved activities and services in the CUSO rule 
has not been substantively revised since 2008.\8\ The 2008 final rule 
added two new categories of permissible CUSO activities: (1) Credit 
card loan origination and (2) payroll processing services. The 2008 
final rule also added new examples of permissible CUSO activities and 
clarified that FCUs may invest in and loan to CUSOs that buy and sell 
participations in loans they are authorized to originate. In the 2008 
final rule, commenters requested additional CUSO lending authority. 
Specifically, commenters requested the authority to make car loans, 
including direct lending and the purchase of retail installment sales 
contracts from vehicle dealerships, and to engage in payday lending. 
The NCUA, however, declined further expansions of CUSO lending 
authority at that time.\9\
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    \8\ 73 FR 79307 (Dec. 29, 2008).
    \9\ The NCUA's rationale for not extending CUSO lending 
authority more broadly is discussed in detail in Section II, 
Proposed Rule.
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II. Proposed Rule

    The Board proposes to amend the CUSO rule to permit CUSOs to 
originate any type of loan that an FCU may originate and grant the 
Board additional flexibility to approve permissible CUSO activities and 
services outside of notice

[[Page 11646]]

and comment rulemaking.\10\ Each proposed change is discussed in detail 
below.
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    \10\ Originate means to fund or make loans. This is separate 
from the already recognized authority of CUSOs to engage in loan 
support services that include loan processing and servicing under 
Sec.  712.5(j).
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Expansion of Permissible CUSO Lending Activity

    The Board has reconsidered its 2008 position on permitting CUSOs to 
engage in all types of lending. The Board now believes that permitting 
CUSOs to originate any type of loan that an FCU may originate may 
better enable FCUs to compete effectively in today's marketplace and 
better serve their members.
    As discussed above, the FCU Act permits an FCU to lend to or invest 
in a CUSO that provides services associated with the routine and daily 
operations of credit unions. The NCUA has interpreted this statutory 
authority broadly to permit an FCU to lend to and invest in a CUSO that 
does most of the same activities and services permissible for an 
FCU.\11\ However, to date CUSOs have not been permitted to originate 
certain kinds of loans.\12\
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    \11\ 12 CFR 712.5.
    \12\ See, 62 FR 11779 (Mar. 13, 1997).
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    The NCUA historically has been reluctant to grant CUSOs general 
lending authority for all loans for several reasons. First, the NCUA 
has been hesitant in granting CUSOs authority to provide consumer loans 
as it may be perceived as a dilution of the FCU common bond 
requirement.\13\ Specifically, because CUSOs may serve people that are 
not members of an FCU, the NCUA has been concerned about FCUs 
benefiting from CUSO profits generated from non-members. Second, the 
NCUA has also expressed concern that if member loans were being made by 
CUSOs, the NCUA would have a duty to examine such loans and that would 
lead to stricter NCUA examination authority over CUSOs.\14\ Finally, 
the NCUA has also limited CUSO lending authority due to concerns that 
permitting CUSOs to engage in a core credit union function could 
negatively affect affiliated credit union services.\15\
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    \13\ Id.
    \14\ Id.
    \15\ 68 FR 16450 (Apr. 4, 2003).
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    Due to these concerns, the NCUA has previously found compelling 
justification for expanding CUSO lending authority for only four types 
of loans: (1) Business; (2) consumer mortgage; (3) student; and (4) 
credit cards.\16\ In granting CUSOs these lending authorities, the NCUA 
has considered factors specific to each type of lending, such as 
whether these activities require specialized staff or economies of 
scale, and, as discussed below, whether loan aggregation was prevalent 
in the marketplace for the particular type of lending.
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    \16\ Id. See also, 73 FR 79307 (Dec. 29, 2008).
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    For example, when the NCUA permitted CUSOs to engage in credit card 
origination, the agency expressed concern that the scale, expertise, 
and back office operational support required to be successful in the 
credit card business was causing many FCUs without such resources to 
sell their credit card portfolio to other financial institutions.\17\ 
The NCUA has also permitted expanded CUSO lending when economies of 
scale, which an individual FCU may not have, made lending more 
economically viable.\18\ When the NCUA granted CUSOs the ability to 
originate consumer mortgage loans, it stated that economies of scale 
are essential to provide mortgage loans in a cost effective and 
professional manner.\19\ The Board has stated that enabling FCUs to 
realize the benefits of economies of scale offered by CUSOs may allow 
FCUs to offer services to their members that otherwise could not be 
offered. For example, in permitting CUSOs to engage in business loan 
origination, the NCUA noted that FCUs could afford their small business 
members access to loans that the FCU may otherwise not be able to 
offer.\20\ In addition, the NCUA has also permitted CUSOs to engage in 
lending where loan aggregation for resale on a secondary market is 
customary such as consumer mortgage and student loan origination.\21\ 
The Board has previously cited the strict rules in the secondary market 
as justification for expanding CUSO lending authority.\22\
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    \17\ 73 FR 79307 (Dec. 29, 2008). See also, 73 FR 23982 (May 1, 
2008).
    \18\ 51 FR 10353 (Mar. 26, 1986).
    \19\ Id.
    \20\ 68 FR 56537 (Oct. 1, 2003).
    \21\ 63 FR 10743 (Mar. 5, 1998).
    \22\ Id.
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    In past rulemakings, the NCUA has also discussed why the agency 
declined to expand CUSO lending authority more broadly. The NCUA stated 
that a primary rationale for allowing CUSOs to engage in a particular 
kind of loan origination is that an FCU may not possess the level of 
expertise or resources required for a successful loan program, whereas 
the CUSO may. With respect to vehicle loan origination, the NCUA stated 
that most FCUs are able to successfully originate vehicle loans and do 
not need the expertise of a CUSO.\23\ Similarly, in declining to expand 
CUSO lending authority to general consumer loans, the NCUA described 
such loans as ``relatively easy to offer and process'' and did not 
believe such loans shared similar characteristics with other more 
sophisticated lending categories permissible for CUSOs.\24\
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    \23\ 73 FR 79307 (Dec. 29, 2008).
    \24\ 63 FR 10743 (Mar. 5, 1998).
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    After reexamining CUSO authority, the Board is now considering 
whether it is appropriate to expand CUSO lending authority. It is 
currently permissible for CUSOs to engage in several types of lending, 
including consumer mortgage, business, student, and credit card. These 
categories of permissible CUSO lending represent several core areas of 
FCU business. The proposed rule would permit a reasonable expansion of 
CUSO lending authorities, and the Board expects the proposed rule would 
principally result in CUSOs originating automobile loans and small 
dollar consumer loans.
    One reason the NCUA has historically been hesitant to expand CUSO 
lending is the concern that if CUSOs engaged in a core credit union 
function, it could negatively affect affiliated credit union services. 
As discussed above, CUSOs, however, have been originating loans that 
are also core FCU lending products for over 30 years without negatively 
impacting FCUs. Given this extensive history, the Board does not 
believe the expansion of CUSO lending authority in the proposed rule 
would be disruptive to FCUs.
    The Board also believes that recent technological developments have 
further increased the benefits of allowing CUSOs to engage in expanded 
loan originations. As noted by the U.S. Treasury Department, consumer 
expectations for financial services are expanding with unprecedented 
speed. The market to originate loans has grown increasingly complex as 
technological changes, including digitization, help drive changes to 
the established lending landscape.\25\ Digital lending is increasingly 
common throughout the household and small business lending market as 
consumers derive credit from a highly diverse mix of financial 
institutions and nonbank firms. For example, nonbank firms constitute a 
significant share of the consumer lending market and are increasingly

[[Page 11647]]

targeting lending products traditionally provided by credit unions, 
including auto finance, small-dollar consumer lending, and unsecured 
consumer credit.\26\ Nonbank companies now account for a significant 
percent of the outstanding non-mortgage consumer loan market.\27\
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    \25\ See U.S. Treasury, ``A Financial System That Creates 
Economic Opportunity: Nonbank Financials, Fintech, and Innovation,'' 
July 2018. Available at https://home.treasury.gov/sites/default/files/2018-07/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financi....pdf.
    \26\ Id. at 87.
    \27\ Id. at 84.
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    The U.S. Treasury Department noted that ``[n]onbank digital lenders 
have gained outsized attention in recent years, driven in part by their 
rapid rate of growth and employment of new technology-intensive 
approaches to lending.'' \28\ These firms, particularly lenders active 
in consumer and small business lending, have digitized the customer 
acquisition, origination, underwriting, and servicing processes. 
Moreover, these lenders are creating customer experiences that may be 
more timely and seamless than the techniques employed by some credit 
unions, and these changes also appear to reduce expenses, which lowers 
the cost of credit as well as providing greater access to credit. In 
contrast, many credit unions have yet to digitize their lending at a 
similar level. The U.S. Treasury Department stated that, ``[k]ey 
elements of digitization employed by new digital lenders are rapidly 
expanding across the wider banking and financial institution landscape 
and are expected to permeate all major lending segments over time.'' 
\29\
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    \28\ Id. at 85.
    \29\ Id.
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    To compete effectively in a market with a rising prevalence of 
these technology-based lenders, FCUs may need to rely increasingly on 
pooling their resources to fund CUSOs and to build the necessary 
infrastructure. The costs for research and development, acquisition, 
implementation, and specialized staff capable of managing these new 
technologies may be prohibitive for all but a very few of the largest 
FCUs. CUSOs may provide the means for FCUs to address these challenges 
and may enable FCUs to collaboratively develop technologies that better 
serve their members.
    The Board recognizes that CUSOs provide significant value to the 
credit union industry by facilitating cooperation among credit unions. 
With CUSOs' collaborative business model, CUSOs are able to foster 
shared innovation among credit unions to achieve economies of scale, 
develop expertise, and better serve their members. These attributes 
allow CUSOs to offer financial services to credit union members more 
efficiently than an individual credit union may otherwise be able to 
offer, particularly for small credit unions.\30\ The cooperation and 
transfer of knowledge among credit unions through CUSOs can have long-
term positive implications for the safety and soundness of the credit 
union system.
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    \30\ 47 FR 30462 (July 14, 1982). One of the original purposes 
of CUSOs was to permit small credit unions to join together to 
perform functions and engage in activities at a lesser cost than 
could be accomplished by an individual credit union.
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    Accordingly, under the proposed rule, CUSOs would be permitted to 
originate, purchase, sell, and hold any type of loan permissible for 
FCUs to originate, purchase, sell, and hold. Therefore, CUSOs could 
originate types of loans previously prohibited by the CUSO rule, 
including general consumer loans, direct auto loans, and unsecured 
loans and lines of credit. CUSOs could also purchase vehicle-secured 
retail installment sales contracts (RICs) from vehicle dealers. In 
proposing this change, the Board acknowledges and recognizes the 
importance of existing relationships that FICUs have with local vehicle 
dealers in connection with originating vehicle loans. The Board intends 
for this proposed rule to protect and maintain those relationships.
    Under the proposed rule, CUSO originated loans would not be subject 
to the same restrictions as loans originated by FCUs. For example, part 
701 of the NCUA's regulations imposes conditions on FCU lending 
relating to loan terms such as interest rate, maturity, and 
prepayment.\31\ These restrictions would not apply to CUSO-originated 
loans because CUSOs, even wholly owned CUSOs, are separate entities 
from FCUs and are not subject to direct NCUA supervision. However, an 
FCU may not purchase a loan from a CUSO unless the loan meets the 
requirements of the NCUA's eligible obligations rule.\32\ Similarly, an 
FCU may not purchase a loan participation from a CUSO unless it 
complies with the NCUA's loan participations rule.\33\
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    \31\ 12 CFR part 701.
    \32\ See, 12 CFR 701.23(b).
    \33\ 12 CFR 701.22.
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Loan Participations
    In addition to specifically permitting CUSOs to engage in consumer 
mortgage, business, and student loan origination, the current CUSO rule 
also permits CUSOs to buy and sell participation interests in such 
loans. The inclusion of this authority to buy and sell participation 
interests in such loans stems from the FCU Act and the NCUA's loan 
participation rule, which classifies a CUSO as a ``credit union 
organization'' authorized to engage in the purchase and sale of loan 
participations.\34\ The NCUA's loan participation rule, however, does 
not permit the sale to FCUs of participation interests in open-end, 
revolving credit.\35\ Therefore, the current CUSO rule only permits 
CUSOs to originate credit card loans, but not the authority to buy and 
sell participation interests in credit card loans. To remain consistent 
with the NCUA's loan participation rule, this proposed rule would grant 
CUSOs the authority to only purchase and sell participation interests 
that are permissible for FCUs to purchase and sell.
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    \34\ 12 U.S.C. 1757(5)(E); 12 CFR 701.22(a).
    \35\ 73 FR 79307 (Dec. 29, 2008).
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CUSO Registry
    Under the current CUSO rule, a FICU must obtain a written agreement 
from a CUSO the FCU loans to or invests in that the CUSO will annually 
submit to the NCUA a report containing basic registration information 
for inclusion in the NCUA's CUSO registry (CUSO Registry).\36\ CUSOs 
that are engaged in complex or high-risk activities have additional 
obligations with respect to the CUSO Registry.\37\ Under the current 
CUSO rule, complex or high-risk activities are defined to include 
credit and lending, including business loan origination, consumer 
mortgage loan origination, loan support services, student loan 
origination, and credit card loan origination.\38\ For consistency, the 
proposed rule would remove the specific subcategories of lending and 
instead refer to all loan originations as complex or high risk. Lending 
activities are considered complex or high risk because they involve 
credit unions' core business function, tend to affect a large number of 
credit unions, and present a high degree of operational and financial 
risk.\39\ Specifically, FICUs making loans to and investments in CUSOs 
engaged in credit and lending activities may be exposed to significant 
levels of credit, strategic, or reputation risks.\40\
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    \36\ 12 CFR 712.3(d).
    \37\ Id. Complex or high-risk CUSOs must agree to include in 
their report: (1) A list of services provided to certain credit 
unions, and (2) the investment amount, loan amount, or level of 
activity of certain credit unions. Complex or high-risk CUSOs must 
also agree to provide the CUSO's most recent year-end audited 
financial statements to the NCUA. CUSOs engaged in credit and 
lending services are also required to report 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.
    \38\ 12 CFR 712.3(d)(5)(i).
    \39\ 78 FR 72537 (Dec. 3, 2013).
    \40\ Id.

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[[Page 11648]]

Expansion of Permissible CUSO Activities to Other Activities as 
Approved by the Board in Writing

    Currently, the list of permissible CUSO activities in Sec.  712.5 
includes many of the core services and activities associated with the 
daily and routine operations of credit unions. The list, however, does 
not provide the Board flexibility to consider additional activities and 
services without engaging in notice and comment rulemaking. In 
contrast, part 704 permits corporate CUSOs to engage in any category of 
activity as approved in writing by the NCUA and published on the NCUA's 
website.\41\ Amending part 712 to be similar to part 704 has the 
potential to reduce regulatory burden by allowing the rule to expand as 
technology shapes the routine and daily operations of credit unions. 
Accordingly, under the proposed rule, the list of permissible 
activities in Sec.  712.5 would include a catchall category for other 
activities as approved in writing by the NCUA and published on the 
NCUA's website. The proposed rule would also provide that once the NCUA 
has approved an activity and published that activity on its website, 
the NCUA would not remove that particular activity from the approved 
list, or make substantial changes to the content or description of that 
approved activity, except through formal rulemaking procedures.
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    \41\ 12 CFR 704.11(d)(3)(ii). Approved activities are listed on 
the NCUA's website at: https://www.ncua.gov/regulation-supervision/corporate-credit-unions/corporate-cuso-activities/approved-corporate-cuso-activities.
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III. Request for Comment on the Proposed Rule

    The above proposed changes are consistent with the Board's ongoing 
efforts to reduce regulatory burden while assuring that FCUs operate in 
a safe and sound manner. The Board welcomes comment on all aspects of 
the proposal,\42\ including, but not limited to, the following 
questions:
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    \42\ Many FCUs have considerable experience with CUSO lending 
relationships, therefore the Board is not providing the usual 60-day 
comment period for this proposal which would relieve a regulatory 
prohibition on certain forms of CUSO lending. See NCUA Interpretive 
Ruling and Policy Statement (IRPS) 87-2, as amended by IRPS 03-2 and 
IRPS 15-1. 80 FR 57512 (Sept. 24, 2015), available at https://www.ncua.gov/files/publications/irps/IRPS1987-2.pdf.
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    (1) Is the term ``any type of'' loan sufficiently clear such that 
FCUs would be able to comply with the proposed rule? Are there any 
types of loans that FCUs cannot originate that CUSOs currently do 
originate?
    (2) Please discuss, and provide supporting information, on the 
costs of the development or acquisition, implementation, and 
maintenance of technology-based lending services.
    (3) Would the proposed rule enable FCUs to offer additional 
technology-based lending services that FCUs may be otherwise unable to 
offer their members?
    (4) The Board is also considering whether permitting CUSOs to 
originate additional types of loans would facilitate FCUs' access to 
securitization markets. It may be cost prohibitive for FCUs to 
securitize loans because securitizations are most cost effective with a 
large volume of loans. FCUs may also have difficulty aggregating loans 
to complete a securitization due to restrictions on purchasing loans 
and market concerns relating to varying underwriting standards. 
Therefore, the Board solicits comment on whether a CUSO could serve as 
an aggregator of loans to allow FCUs better access to securitization 
markets.
    (5) Does the proposed rule expose FCUs to unnecessary safety and 
soundness risks? If so, are there steps the Board should consider to 
mitigate such risks?
    a. For example, should the NCUA gather additional data about CUSO 
lending activities? If so, what data?
    b. Should the NCUA consider additional constraints on an FCU's 
ability to purchase and hold loans originated by a CUSO?
    c. Should the NCUA consider risk retention requirements for CUSO 
lending activities? The Board notes that FCUs that sell loan 
participations must maintain 10 percent of the loan.
    (6) Would permitting CUSOs to engage in any type of lending as FCUs 
lead to additional reputational risk for FCUs? Loans from affiliated 
CUSOs may not comply with the same consumer protection limits as FCU 
loans, for example FCUs are subject to usury restrictions and a 
regulatory structure for issuing payday alternative loans (referred to 
as PALs).
    (7) Does expanding CUSO lending authority to include additional 
core FCU lending categories create unnecessary competition for FCUs, 
particularly small FCUs?
    (8) Instead of adopting a provision similar to the corporate CUSO 
provision that allows the NCUA to add additional categories of 
permissible activities for all CUSOs on its website, should the Board 
require individual FCUs to petition the Board for permission to lend to 
or invest in CUSOs that do additional activities or services not 
already listed in Sec.  712.5?
    (9) Should the Board publish on its website any conditions imposed 
on activities permissible through the approval process?
    (10) Should the Board consider additional changes to the 
permissible activities list for CUSOs?

IV. Request for Comment on the Authority To Invest

    An FCU's authority to lend to and invest in a credit union 
organization is provided for in two separate provisions of the FCU Act. 
The FCU Act authorizes an FCU to lend to credit union organizations 
provided the extensions of credit do not exceed one percent of the 
FCU's paid-in and unimpaired capital and surplus.\43\ A credit union 
organization is defined as any organization, as determined by the 
Board, which is established primarily to serve the needs of its member 
credit unions and whose business relates to the daily operations of the 
credit unions they serve. In contrast, the FCU Act authorizes FCUs to 
invest up to one percent of its total paid in and unimpaired capital 
and surplus, with the approval of the Board, in the shares, stocks, or 
obligations of any other organization providing services which are 
associated with the routine operations of credit unions.\44\
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    \43\ 12 U.S.C. 1757(5)(D).
    \44\ 12 U.S.C. 1757(7)(I). Provided, however, that such 
authority does not include the power to acquire control directly or 
indirectly, of another financial institution, nor invest in shares, 
stocks or obligations of an insurance company, trade association, 
liquidity facility or any other similar organization, corporation, 
or association, except as otherwise expressly provided by the FCU 
Act.
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    There are significant differences between these lending and 
investment authorities in the FCU Act. The lending authority refers to 
``credit union organizations'' and limits such entities to those that 
primarily serve the needs of their member credit unions. In contrast, 
the investment authority does not use the term ``credit union 
organization'', but instead generally refers to an ``organization''. In 
addition, the investment authority is not limited to organizations that 
primarily serve the needs of their member credit unions.
    The NCUA has historically interpreted the lending and investment 
authority under the FCU Act as referring to the same types of 
organizations.\45\ The NCUA's first CUSO rule explicitly stated that 
``an organization described at Section 107(7)(I) of the [FCU Act], and 
a `credit union organization,' as described at Section 107(5)(D) of the 
[FCU Act], are identical entities.'' \46\ The NCUA explained its 
interpretation in the preamble to its 1977 final rule after several 
commenters questioned the

[[Page 11649]]

definitional section of the proposed rule that defined ``credit union 
service corporation'' to be both the entity described at Section 
107(7)(1) and Section 107(5)(D). In the preamble, the NCUA discussed 
that the thrust of the comments was that the definition was unduly 
restrictive and was not legally mandated. In response, the NCUA stated 
that ``in light of the mandate in the legislative history by 
Congressman St Germain that [investment] authority is to be `exercised 
on a carefully controlled basis by NCUA,' the Administration feels 
justified in tying the two definitions together.'' \47\ The NCUA also 
stated that it found no substantive difference in an organization 
``which is established primarily to serve the needs of its member 
credit unions, and whose business relates to the daily operations of 
the credit unions they serve'' and an organization ``providing services 
which are associated with the routine operations of credit unions.'' 
\48\ The NCUA also stated that the legislative history indicated that 
the House committee stands ready to review investment interpretation 
matters upon request from NCUA ``[s]hould a case be made for a more 
liberal interpretation of the provisions.'' \49\
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    \45\ 44 FR 12401 (Mar. 7, 1979).
    \46\ Id.
    \47\ Id.
    \48\ Id.
    \49\ Id.
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    The NCUA also noted that the FCU Act specifically ``intertwines the 
lending and investment powers. For instance, section 107(7)(A) allows a 
Federal credit union to ``invest'' its funds in ``loans exclusively to 
members.'' \50\ Due to the preceding analysis, the NCUA believed that 
its interpretation of sections 107(5)(D) and 107(7)(I) were justified. 
The NCUA stated that ``[w]hile it may restrict the permissible 
activities for Federal credit unions in this field, legislative history 
mandates a rather conservative approach.'' \51\
---------------------------------------------------------------------------

    \50\ Id.
    \51\ Id.
---------------------------------------------------------------------------

    The NCUA is now considering whether to reconsider this longstanding 
interpretation. Specifically, the NCUA is considering adopting separate 
definitions for the types of organizations that an FCU may invest in or 
lend to, which potentially would expand the types of organizations 
eligible for FCU investment. For example, the NCUA could permit FCUs to 
invest in organizations that do not primarily serve credit unions or 
credit union members, but still provide services that relate to the 
routine operations of FCUs. Under such an interpretation of the FCU 
Act, FCUs could potentially invest in companies that broadly serve the 
financial service community, but do not primarily serve credit unions 
and their members. For instance, an FCU could form an organization with 
community banks to create a lending platform that could be used by both 
the FCU's members and the community banks' customers.
    The Board notes that the statutory limitations on the amount of 
investments would remain unchanged. An FCU is only authorized by the 
FCU Act to invest up to one percent of its total paid in and unimpaired 
capital and surplus in organizations. An FCU that has already invested 
one percent of its total paid in and unimpaired capital and surplus in 
CUSOs would not be authorized to invest any additional money. Instead, 
such an FCU would have to reallocate its investments if it sought to 
make any investments that were previously prohibited.
    The Board invites comments on whether it should reconsider its 
longstanding interpretation of the lending and investment authorities 
under the FCU Act. In addition, the Board invites comments on the 
following specific questions:
    1. Do specific provisions and the legislative history of the FCU 
Act suggest that the NCUA could take a less conservative approach to 
interpreting the lending and investment authorities?
    2. The investment authority under the FCU Act states that Board 
approval is required before an FCU can make an investment in an 
organization. Currently, the regulation provides for this approval 
through the pre-approved permissible activities list in Sec.  712.5. If 
the Board were to consider permitting investments that are not included 
in Sec.  712.5, should approval be required for each investment to 
determine if the activities of the organization relate to the routine 
operations of FCUs? If the Board requires separate notice requirements, 
should current investments be grandfathered?
    3. Please discuss appropriate safety and soundness limitations that 
the Board should consider if it reinterprets its interpretation. Should 
the Board impose a requirement that the FCU's ownership interest in the 
organization not be speculative? For example, should an FCU be 
permitted to have an investment in an organization that is still 
developing a product? If the Board reinterprets its interpretation, 
should the Board impose a separate capital treatment for new 
investments that are currently prohibited?

V. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a notice of proposed rulemaking, an agency prepare and 
make available for public comment an initial regulatory flexibility 
analysis that describes the impact of a proposed rule on small entities 
(defined for purposes of the RFA to include credit unions with assets 
less than $100 million).\52\ A regulatory flexibility analysis is not 
required, however, if the agency certifies that the rule will not have 
a significant economic impact on a substantial number of small entities 
and publishes its certification and a short, explanatory statement in 
the Federal Register together with the rule.
---------------------------------------------------------------------------

    \52\ See 80 FR 57512 (Sept. 24, 2015).
---------------------------------------------------------------------------

    This proposed rule would not have a significant economic impact on 
a substantial number of small entities. The proposed rule imposes no 
requirement or costs on small entities and only expands the list of 
permissible activities for CUSOs. The proposed rule would expand the 
list of activities that are considered complex or high risk for 
purposes of the CUSO Registry, however, the Board does not expect the 
additional reporting requirements to entail substantial regulatory 
burden. Accordingly, the NCUA certifies that the proposed rule would 
not have a significant economic impact on a substantial number of small 
FICUs.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden (44 U.S.C. 3507(d)). For 
purposes of the PRA, a paperwork burden may take the form of a 
reporting, recordkeeping, or a third-party disclosure requirement, 
referred to as an information collection.
    The NCUA is seeking comments on proposed revisions to the 
information collection requirements contained 12 CFR part 712, which 
has been submitted to the Office of Management and Budget (OMB) for 
review and approval under OMB control number 3133-0149. Under the 
proposed rule, CUSOs would be permitted to originate, purchase, sell, 
and hold any type of loan permissible for FCU's to originate, purchase, 
sell, and hold. Accordingly, CUSOs could originate categories of loans 
previously prohibited under the CUSO rule. The NCUA estimated 60 new 
CUSOs would enter into an agreement with a FICU (Sec.  712.3(d)); which 
would also require

[[Page 11650]]

the FICU to obtain a written legal opinion prior to investing in a 
CUSO, as prescribed by Sec.  712.4(b), and that these CUSO would be 
categorized a complex and be required to complete the expanded 
information via the CUSO Registry (Sec.  712.3(d)(5)). It is estimated 
that the increase in the number of respondents would increase total 
burden hours by 690.
    OMB Control Number: 3133-0149.
    Title of information collection: Credit Union Service Organizations 
(CUSOs), 12 CFR part 712.
    Estimated number of respondents: 1,843.
    Estimated number of responses per respondent: 1.
    Estimated total annual responses: 1,843.
    Estimated burden per response: 1.82.
    Estimated total annual burden: 3,356.
    The NCUA invites comments on: (a) Whether the proposed collection 
of information is necessary for the proper performance of the functions 
of the agency, including whether the information will have practical 
utility; (b) the accuracy of the agency's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions used; (c) ways to enhance the quality, 
utility and clarity of the information to be collected; and (d) ways to 
minimize the burden of the collection of information on those who are 
to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology; and (e) estimates of capital or 
start-up costs and cost of operation, maintenance, and purchase of 
services to provide information.
    All comments are a matter of public records. Due to the limited in-
house staff, email comments are preferred. Comments regarding the 
information collection requirements of this rule should be (1) mailed 
to: <a href="/cdn-cgi/l/email-protection#29797b684a4644444c475d5a69474a5c48074e465f"><span class="__cf_email__" data-cfemail="a9f9fbe8cac6c4c4ccc7dddae9c7cadcc887cec6df">[email protected]</span></a> with ``OMB No. 3133-0149'' in the subject 
line; faxed to (703) 837-2406, or mailed to Dawn Wolfgang, NCUA PRA 
Clearance Officer, National Credit Union Administration, 1775 Duke 
Street, Suite 6032, Alexandria, VA 22314, and to the (2) Office of 
Information and Regulatory Affairs, Office of Management and Budget, at 
www.reginfo.gov/public/do/PRAMain. Select ``Currently under 30-day 
Review--Open for Public Comments'' or by using the search function.

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, the NCUA, an 
independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the principles of the Executive order. This 
rulemaking will not have a substantial direct effect on the states, on 
the connection between the National Government and the states, or on 
the distribution of power and responsibilities among the various levels 
of government. The NCUA has determined that this proposal does not 
constitute a policy that has federalism implications for purposes of 
the Executive order.

Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this proposed rule will not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).\53\
---------------------------------------------------------------------------

    \53\ Public Law 105-277, 112 Stat. 2681 (1998).
---------------------------------------------------------------------------

List of Subjects in 12 CFR Part 712

    Administrative practices and procedure, Credit, Credit unions, 
Insurance, Investments, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on January 14, 
2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.

    For the reasons discussed above, the Board proposes to amend 12 CFR 
part 712 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, 1782, 
1784, 1785, and 1786.

0
2. Amend Sec.  712.3 by revising paragraphs (d)(5)(i), (d)(5)(ii) 
introductory text, and (d)(5)(iii) to read as follows:


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

* * * * *
    (d) * * *
    (5) * * *
    (i) Credit and lending:
    (A) Loan support services, including servicing; and
    (B) Loan origination, including originating, purchasing, selling, 
and holding any loan as described in Sec.  712.5(q).
    (ii) Information technology:
* * * * *
    (iii) Custody, safekeeping, and investment management services for 
credit unions.
* * * * *
0
3. Amend Sec.  712.5 as follows:
0
a. Revise paragraph (a) introductory text;
0
b. In paragraph (a)(4), add a semicolon at the end of the paragraph;
0
c. Revise paragraph (b) introductory text;
0
d. In paragraph (b)(11), remove the period and add a semicolon in its 
place;
0
e. Remove paragraphs (c), (d), (n), and (s);
0
f. Redesignate paragraphs (e) through (t) as paragraphs (c) through 
(p);
0
g. Revise newly redesignated paragraphs (c) introductory text, (d) 
introductory text, (e) introductory text, (f) introductory text, (g) 
introductory text, and (h) introductory text;
0
h. In newly redesignated paragraph (h)(3), remove the word ``and'';
0
i. Revise newly redesignated paragraphs (i) introductory text, (j), 
(k), (l), and (m) introductory text;
0
j. In newly redesignated paragraph (m)(3), remove the period and add a 
semicolon in its place;
0
k. Revise newly redesignated paragraph (n);
0
l. In newly redesignated paragraph (o), remove ``CUSO investments in 
non-CUSO service providers:'' and remove the last period and add a 
semicolon in its place;
0
m. In newly redesignated paragraph (p), remove the period and add a 
semicolon in its place; and
0
n. Add new paragraphs (q) and (r).
    The additions read as follows:


Sec.  712.5  What activities and services are preapproved for CUSOs?

* * * * *
    (a) Checking and currency services:
* * * * *
    (b) Clerical, professional and management services:
* * * * *
    (c) Electronic transaction services:
* * * * *
    (d) Financial counseling services:
* * * * *
    (e) Fixed asset services:
* * * * *
    (f) Insurance brokerage or agency:
* * * * *
    (g) Leasing:
* * * * *
    (h) Loan support services:
* * * * *
    (i) Record retention, security and disaster recovery services:
* * * * *
    (j) Securities brokerage services;

[[Page 11651]]

    (k) Shared credit union branch (service center) operations;
    (l) Travel agency services;
    (m) Trust and trust-related services:
* * * * *
    (n) Real estate brokerage services;
* * * * *
    (q) Loan origination, originating, purchasing, selling, and holding 
any type of loan permissible for Federal credit unions to originate, 
purchase, sell, and hold, including the authority to purchase and sell 
participation interests that are permissible for Federal credit unions 
to purchase and sell; and
    (r) Once the NCUA has approved an activity and published that 
activity on its website, the NCUA will not remove that particular 
activity from the approved list, or make substantial changes to the 
content or description of that approved activity, except through formal 
rulemaking procedures.

[FR Doc. 2021-01398 Filed 2-25-21; 8:45 am]
BILLING CODE 7535-01-P


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