Credit Union Exam Solutions Presents With Flying Colors

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.

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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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