The CUSO Made Me Do It Is No Defense

May 20, 2013 at 9:46 am Leave a comment

imagesOn Thursday, the National Consumer Law Center sent a letter to NCUA criticizing 9 federally chartered credit unions for engaging in pay-day lending practices.  This was not the first time the Center had criticized these credit unions.  Lest our enemies outside the industry get too excited about this, the NCLC stressed that the vast majority of credit unions do not offer these loans.

Some of the criticized credit unions responded by pointing out that it was a CUSO they were affiliated with that was actually making the pay-day loans.  As for the other credit unions, they are exceeding the 18% interest rate cap on federal credit union loans only if the application fee charged is included in these calculations.

I find myself disagreeing a lot with the NCLC, but this is not one of those times.

Although the credit union activity was perfectly legal, it is a prime example of how credit unions can get in trouble if we abide by the letter rather than the spirit of the law.  NCUA permits credit unions to make short term loans that exceed the interest rate cap.  This regulation also permits credit unions to charge an application fee in the amount of up to $20.  In other words, there is a way of offering pay-day loan alternatives without offering pay-day loans.  To be sure, this alternative has been less than enthusiastically embraced by the industry as a whole, in part because its strictures mean that its cost outweigh its benefits for most credit unions.  But the answer is not to evade the spirit of NCUA’s regulations, but rather to work within the existing regulatory structure for a change that reflects a broad-based consensus.

Some of the 9 credit unions point out that they simply referred members to CUSOs that made the offending loans.  Chairwoman Matz pointed out that NCUA lacks the authority to directly regulate CUSOs.  Again, this is the type of response that lawyers love but that make the public so distrustful of lawyers.  If anyone could name me one person outside the credit union industry who knows what a CUSO is, I’d be more surprised than finding out that Stephen Hawkins is going to be on Dancing with the Stars.  Part of your third-party due diligence obligation should be to assess the reputational risk that a CUSO’s activities cause your credit union.  Explaining to a member who can’t repay a pay-day loan that the credit union told them about in the first place that the credit union isn’t the bad guy isn’t exactly the type of answer that is going to engender good will within your community.

Let’s keep in mind that there is still a proposed regulation out to give NCUA expanded authority to directly regulate CUSOs.  From everything we have been told, this proposal is all but dead.  However, if credit unions start hiding behind CUSOs to justify activities in which they themselves would not engage, NCUA might take another look at this whole issue.  I hope not.

FCU’s authorized to do PAC payroll deductions

Last week, I scared the bejeebies out of a few people in the office when I blogged about proposed regulations by New York State’s Department of Labor that would ban employers from making payroll deductions to facilitate voluntary political contributions.  I also said that we would have to get clarification on whether or not this regulation would be preempted by federal law.  With a little help from our good friends at CUNA, we were sent a Federal Election Commission opinion letter clearly indicating that regulations such as New York’s would be preempted as applied to contributions made for federal political activities (FEC Advisory Opinion 1982-29).  On that happy note, let’s all have a great week, shall we?

Entry filed under: Advocacy, Compliance, New York State, Regulatory. Tags: , , , , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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