A CUSO relationship can have a positive or negative impact on a credit union’s earnings and net worth depending on:
- The types of products or services provided
- Whether or not the CUSO is wholly or partially owned by the credit union
- The financial health of the CUSO and its operating/strategic goals
Examiners should be aware of whether or not the credit union is heavily reliant on a CUSO for its financial well-being. For example, can the credit union sustain its business model without relying on CUSO-generated earnings?
An affiliated credit union’s risk of loss is normally limited to its investments in or loans to a CUSO. However, credit unions can experience losses that exceed this amount due to changes in the value of the investment, accounting treatments, or exposure to the products and services offered by the CUSO.
As noted in the following example, weaknesses in a CUSO’s operations can materially affect a credit union’s financial condition beyond the amount of the investment in or loan to the CUSO.
Example: Credit Union Losses that Exceed the Amount of CUSO Loans or Investments
Abraham Lincoln FCU loans one percent of its unimpaired capital and surplus (the maximum amount allowed) to the John Adams CUSO, a lending CUSO. John Adams CUSO provides loan underwriting services to Abraham Lincoln FCU.
The CUSO experiences operating losses that result in the write-down of the credit union’s loan to zero. At the same time, underwriting weaknesses at the CUSO cause the credit union to experience significant losses when borrowers are unable to repay their loans. Abraham Lincoln FCU must now charge off the non-performing loans.
The expense of the charged-off loans, in addition to the initial amount of the credit union’s loan to the CUSO, results in total losses to the credit union that exceed the initial loan amount. In extreme cases, these losses could lead to the credit union’s insolvency.
Last updated August 9, 2018
