getting a QSO 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. Hey everyone, this is Mark with a special Archive episode of With Flying Colors. I hope you enjoy. Do you wanna maximize your success with NCUA? Join Mark Trico as he shares with you the insider's view on passing your exam with flying colors.
The With Flying Colors Podcast is sponsored by Credit Union Exam Solutions by Mark Trico. If you would like to work directly with the Credit Union Exam Solutions team and receive support to optimize your results with NCUA, so you save time and money, visit us@marktrico.com to find out more. Hey everyone, this is Mark Treichel with another episode of With Flying Colors. Today's podcast is about credit union service organizations or QSOs and QSO exams, if you will.
I had the pleasure of being interviewed on another podcast, a new podcast in the Q and In preparation for that, I was reminded that being interviewed is harder than doing the interview and thoroughly enjoyed it. I'm actually going to have the host of the show on my show coming up and his name is Michael Heller of QSOLAW. com. And with this fresh in my mind, I thought I would talk about QSO examinations. So a lot of people are familiar with the NSUA examination process at credit unions.
And in the podcast that I was on, I was asked about what differences there are with a CUSO examination. And before talking about what's different about CUSO exams, you know, credit unions over 1 billion in asset size get exams annually, and that's if they're a code one or a code two, if you're a code. Three or worse, you're going to see NCOA anywhere from every six months to every four months. And by the way, code threes and code fours are increasing.
If you're less than a billion dollars, you will see NCOA if you're a code one or a code two, every 12 to 24 months. Now the QSO exams. Are less frequent than that. And there are three types of QSO exams.
There's an exam, integrated exam, meaning it's done as part of an NCOA exam, which is essentially a light touch and there's the standalone exam, which focuses specifically on one QSO and are typically conducted in response to NCOA or state staff recommendations, these reviews are performed by the same team of examiners that are. Utilized for an examination. So that's one of the similarities is that the staff who does QSO exams are the same staff that do credit union exams.
So for example, if you have a QSO that makes commercial loans or makes indirect loans or make student loans, you can expect to see either problem case officers with experience in loans or regional lending specialists that would likely do those independent. QSO reviews when other differences, they're substantially more rare. Now, back when I was a regional director, uh, for the 10 years, I was a regional director. There were years that I did zero. The region did zero standalone QSO reviews.
And there were years that perhaps we did three or four. Of course, it's a resource issue. And if you're going to go in, you need to have a good reason to go in. You just don't willy nilly decide. To go into a credit union for a stand alone CUSO review. I was also asked about CUSOs that while CUSOs are not directly subject to NCUA supervision. How is it that NCUA is able to do the reviews? And that goes to NCUA's regulation on CUSOs.
And that requires any federally insured credit union with a loan to or investment in a CUSO to, among other things, enter into a written agreement with that CUSO that will provide the NCUA with complete access to any books and records of the CUSO and the ability to review the CUSO's internal controls. So any records, complete access to any books and records, that's pretty broad.
So 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, Uh, or make loans to a CUSO that the CUSO agrees that they will make the books and records available. And that means any books and records. And we'll get into that a little bit as well. Now it's often asked what type of CUSOs get looked at. It really depends on what's going on in the industry.
And for example, back when credit unions started to get into commercial loans more, which is a very labor intensive. Product credit unions and credit union exams were taking exceptions to the ability of the staff that credit unions had. And so QSOs were an excellent method for getting the economies of scale, where you have the skill sets and abilities to make those loans housed in a QSO. And that would create synergy for the credit union.
So when that started to take off and, and into a side growth in those, then there would be reviews, independent, standalone reviews at. Commercial loan CUSOs. When student lending took off like a racehorse some 10 12 years ago, same thing happened. But before all that was indirect auto loans. And so back when I was a regional director in 2003 2004 2005, there were some indirect loan CUSO reviews that happened.
So really, As new services grow in QSOs, you can expect that those services are the ones that NCUA may pay attention to. So what does that mean? FinTech. NCUA Board is very supportive of FinTech, but I would bet that you are going to see or credit union service organizations that are in FinTech get looked at, whether that's this year, next year, or the year after.
That's something, if it grows, that you can expect NCUA will Add to their list of those few independent QSO reviews that they do each year. By the way, getting a QSO 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. There are, you know, I have some clients who are owners of QSOs that receive copies of QSO exams.
Um, And they were excited when they got it because it showed that they had a good partner and that things were going well. So a review can actually go well, just like while they don't do camel codes, getting a code one or a code two can show your board, you're doing a good job. Not that if you don't get a code one or a code two, it means you're not doing a good job. But getting a good report in a QSO review can play positive dividends. So NCOA coming in to do one can be a good thing.
So what type of risk is NCOA looking for? It really comes down to when NCOA does a risk assessment at a QSO, is there systemic risk that they need to worry about? For example, like I said, a QSO is growing and it's It's impacting more and more assets and it's impacting more and more credit unions. That would be systemic risks that because there's growth, they want to take a look at it. Or it could be individual credit union risk.
Let's say there's a type of loan product that has anywhere from three to 10 owners and those three to 10 owners are booking a substantial amount of loans of a certain type or a new type. That's the type of thing that could end up getting looked at. So NCOA, just like a credit union, when a credit union has a new service. N two A is gonna take a look at that. If that service is growing, they're gonna take a look at it. So if you're a qso, same thing is gonna happen.
You see growth in a particular area, that's where they may want to look and see if it's a new risk that they need to be concerned about. So one of the issues that QSOs face, since they're not examined so frequently, they don't know what NCUA is going to look at. And as I mentioned, the regulation says that you will provide complete access to any books and records of the QSO and. Any is very broad that means any so, you know, oftentimes it's asked, do you want to push back on that?
And you may want to ask why they need it. But in the end, if NC way says they need to see something to assess the safety and soundness of the queue. So you are going to. Have to give it to them because it does say that they have access to any documents. So what type of documents might they ask for? You can break them into just general types of documents. You can talk about certain plans like strategic plans or a disaster recovery plan or profitability plan.
They could ask for documents as it relates to staffing, an organizational chart, who's on the board of directors.
Uh, what that staff does, what type of training the CUSO does for staff, copies of monthly board minutes is something that they ask for credit unions, that's something you could expect to see them ask from the CUSO, a list of customers, credit union customers, a list of owners, a list of lenders, policies, procedures, other documents in that arena, or underwriting or making recommendations to the client, for example.
If there are legal opinions that show that what you're doing is consistent with your contracts with your clients or the credit unions that you serve, you could see that they might ask for that. Of course, there's the issue of the corporate veil. I mean, going back, they want to make sure that the QSO cannot pierce the corporate veil of the, of the credit union. And that's because credit unions are limited, federal credit unions are limited to 1 percent investment or 1 percent of loans.
So max 2 percent of assets. Could be at risk and if you can pierce the corporate veil, of course, that number can go up and they want to make sure that there are independent structures. So, for example, that the board of the CUSO is different than the board of the credit unions that the staff of the CUSO is different than the staff of the credit unions. They need to be independent groups and that's something that they would look at, but organizational structure. Is it LLC? Are there bylaws?
Is there a certificate of good standing? Uh, compliance with the laws in the state in which it operates. Now NCUA is not going to delve into the state laws or laws that aren't specifically related to the regulation, but if they become aware of something along those lines, they may point it out. What type of insurance policies do you have? What type of insurance policies might you have? Uh, if you've got loan participations, they may want to see the loan participation agreements.
So there's an exhaustive List that NCUA has in their examiner's guides of what they might look at, but those are some examples of what they potentially could look at. You could see them also get into IS& T and data processing type documents and review of strategic plans, board and management oversight, vendor management, information security program, intrusion detection and responses, software development and acquisitions.
Uh, NCUA's guidance does have very broad amount of questions and documents that they may look into. Doesn't mean they will in every instance, but again, any document be made available means any document. So push come to shove. If NCUA asks for something, my recommendation would be to give it to them. But, you know, one of the discussions came, that came up earlier in my. My podcast interview with In The Queue was the importance of controlling the narrative.
Having the same person, or having one person in control of the documents that are going to NCUA, and then also making sure that The team members at the QSO are communicating so that if NCUA is asking a question on one side of the QSO review and asking a question on the other side, that things don't get taken out of context. That's why it's very important to have a contact person for a QSO review or for any exam.
And, you know, I counsel my clients on that and participate in some of those meetings that go on that are led by the contact person during an NCUA examination. A common question, it relates to the concept of primarily serving a credit union, and the question becomes, how do you determine primarily serves? So one way I always like to figure out what a word means is to go to dictionary. com. Or something similar and look up the word.
So what does primarily mean it means first and foremost, first in essence, fundamentally. So that doesn't give a percentage. It doesn't say 51. It doesn't say 91. It doesn't say 12, but a substantial portion of the services should be. For credit union members now, and sua does have in their regulation says may only invest in or lend to a Q. So that primarily serves credit unions and their members as opposed to the general population. While the insulate is not defined primarily serves.
It has been the agency's longstanding position that the determination as to whether a CUSO complies with the customer based requirement be made on a case by case basis using the totality of the circumstances test. So what does that mean? It means the body of work. It means the legal term, totality of circumstances. So that basically means all the facts that they're going to take it into consideration. Said another way, what's the definition of beauty? They'll know it when they see it.
The reality though, is they're not going to take exception of something. Ty is going to go to the runner, if you will, using a baseball terminology. If you can come close to looking that you're safe at first base, they will land on the side of primarily serves. It also goes on to give some examples that when determining if a QSO meets the customer base requirement, a federal credit union should review several variables, including the number of affiliated members served.
Gross or net revenues derived from members, members assets under management, the number of policies sold to members, and of course, some of these might not apply to particular QSOs, but these are examples of how you could show that you're in compliance with the Primarily SERVS requirement. The number of services sold to members and the availability or accessibility of services to members. So, again, they must primarily serve, but it's not a one and done black and white statistic.
If you're at this percentage, it counts, and if you're at this percentage, it doesn't. But if you're questioning whether or not you do primarily serve, you might want to make sure that you can, again, control the narrative. That you can document or show or explain why you are in compliance with that regulatory requirement. So NCUA has expanded the ability for CUSOs to do more and more over time. They've pre approved many other regulations.
Services and there's ways to get onto the list of services that are pre approved. And I'm not going to go in that here today. That's a story for another day. There is a past podcast that I did with Brian Lauer of NICUSO and also of CUSO Law, where we talked through some of those changes and it would be best if you're interested in that, go back in the archives and take a look. For that podcast, I'll put a reference in the show note to what podcast number that was. All right. That's it for today.
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 steps in the industry that NCOA has taken to expand things in this arena. I also will say that the NCOA board has a proposed rule on eligible obligations and loan participations. And I know that per the last board meeting, they're looking at that possibly coming out as soon as July, perhaps no later than September.
The interesting thing about that is board member Rodney Hood, who is very passionate about. that topic. His term is up in August. I know he would rather like to see it in July. Uh, and I know staff is working on it based on what Chairman Todd Harper said at the last board meeting. All right, that's it. That's a wrap. This is Mark Treichel signing off with Flying Colors. Thank you for joining us on this episode of With Flying Colors.
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