7 TAC §91.801
The Credit Union Commission proposes amendments to §91.801,
concerning investments in CUSOs. The amendments clarify the investment limits
for a credit union in CUSOs, require that separate corporate existence between
the credit union and the CUSO be clearly maintained, and require that the
CUSO be bonded or insured for its operations and obtain an annual opinion
audit.
The amendments to the rule are proposed as a result of the Department’s
observations that some credit unions were trying to operate CUSOs with less
than adequate capital and without observing the formalities of separate corporate
existence.
Kerri T. Galvin, General Counsel, has determined that for the first five
year period the rule is in effect there will be no fiscal implications for
state or local government as a result of enforcing or administering the proposed
rule.
Ms. Galvin has also determined that for each year of the first five years
the proposed amended rule is in effect, the public benefits anticipated as
a result of enforcing the rule will be to mitigate potential risk and liability
to credit unions and their members. There is no anticipated effect on small
businesses as a result of adopting the amended rule. There will be an economic
cost anticipated to credit unions for complying with the audit requirement
of the amendment if adopted. The audit is justified for safety and soundness
reasons based on the potential significant concentration of capital in a CUSO,
which makes this a highly at-risk investment in relation to the credit union's
net worth. To mitigate the impact of this economic cost, the Commission has
established a threshold for the size of investment that triggers the audit
requirement.
Written comments on the proposal must be submitted within 30 days after
its publication in the
Texas Register
to Kerri
T. Galvin, General Counsel, Credit Union Department, 914 East Anderson Lane,
Austin, Texas 78752-1699. Oral comments on the proposal can be made at Commission’s
Legislative Advisory Committee meeting on Friday, May 20, 2005 at 9:00 am
at 914 East Anderson Lane, Austin, Texas 78752.
The amendment is proposed under the provision of the Texas Finance
Code, §124.352 which provides the Credit Union Commission with the authority
to adopt rules limiting investments; and under the Texas Finance Code, §15.402,
which authorizes the Commission to adopt reasonable rules for administering
Title 2, Chapter 15 and Title 3, Subchapter D of the Texas Finance Code.
The specific section affected by the proposed amendment is Texas Finance
Code, §124.352.
§91.801.Investments in Credit Union Service Organizations.
(a)
Definition. When used in this section, a credit union service
organization (CUSO) is an organization whose primary purpose is to strengthen
or advance the credit union movement, serve or otherwise assist credit unions
or their operations,
and
[
or
] provide
products
or
services authorized by subsection (f) of this section to [
members
of credit unions
]
credit unions and their members
.
(b)
A credit union by itself, or with other parties, may only
organize, invest in or make loans to a CUSO which is structured and operated
in a manner that demonstrates to the public that it maintains a legal existence
separate from the credit union. A credit union and a CUSO must operate so
that:
(1)
their respective business transactions, accounts, and records
are not intermingled;
(2)
each observes the formalities of their separate corporate
or other organizational procedures;
(3)
each is adequately
capitalized
[
financed
] as a separate unit in light of normal obligations reasonably foreseeable
in a business of its size and character;
(4)
each is held out to the public as a separate
and distinct
enterprise; [
and
]
(5)
all transactions between them
are at arms length and consistent with sound business practices as to each
of them; and
(6)
[
(5)
] unless the credit union has
guaranteed a loan to the CUSO, all borrowings by the CUSO indicate that the
credit union is not liable.
(c)
Notice. A credit union shall provide written notice to
the commissioner of its intent to make an initial investment in, make an initial
loan to a CUSO,
make a material change to a CUSO’s organizational
structure,
or perform new activities in an existing CUSO at least 15
days prior to commencing efforts to effect such activity. The written notice
must include a complete description of the credit union’s investment
in or loan to the CUSO, the activity to be conducted, and a representation
and undertaking that the activity will be conducted in accordance with applicable
law
and in a manner that will limit potential exposure of the credit
union to no more than the loss of funds invested in, or loaned to, the CUSO
. The credit union shall provide any additional information reasonably
requested by the commissioner [
.
]
, which may include a written
legal opinion that the CUSO has either been established in a manner that will
limit the credit union’s potential exposure, or that the new activity
or change to its organizational structure will not result in the credit union’s
potential exposure being more than the loss of funds invested in or loaned
to the CUSO.
(d)
Limitations. The board of directors of a credit union that
organizes, invests in, or lends to any CUSO shall establish, in writing, the
maximum amount relative to the credit union’s net worth, that will be
invested in or loaned to any one CUSO.
This maximum amount may not exceed
the statutory limit established by Texas Finance Code §124.352(b).
Investments
and loans described in this section shall not, in the aggregate, exceed
the greater of
10% of the total assets
or 100% of net capital
of
the credit union, unless the credit union receives the prior written approval
of the commissioner. The amount of loans to CUSOs, cosigned, endorsed, or
otherwise guaranteed by the credit union, shall be included in the aggregate
for the purpose of determining compliance with the limitations set forth in
this section.
(e)
Prohibitions. No credit union may invest in or make loans
to a CUSO:
(1)
if any officer, director, committee member, or employee
of such credit union or any member of the immediate family of such persons
owns or makes an investment in or has made or makes a loan to the CUSO;
(2)
unless the organization is structured as a corporation,
limited liability company, registered limited liability partnership, or limited
partnership and the credit union has obtained a written legal opinion that
the CUSO is established in a manner that will limit the credit union’s
potential exposure to not more than the loss of funds invested in or loaned
to such CUSO;
(3)
if the CUSO engages in any revenue producing activity other
than the performance of services for credit unions or members of credit unions,
and such activity equals or exceeds one half (1/2) of the CUSO’s total
revenue;
(4)
unless prior to investing in or making a loan to a CUSO
the credit union obtains a written agreement which requires the CUSO to follow
GAAP, render financial statements to the credit union at least quarterly,
and provide the department, or its representatives, complete access to the
CUSO's books and records at reasonable times without undue interference with
the business affairs of the CUSO; [
or
]
(5)
if the CUSO is not sufficiently
bonded or insured for its operations;
(6)
if the CUSO does not obtain
an annual opinion audit, by a licensed Certified Public Accountant, on its
financial statements in accordance with generally accepted auditing standards,
unless the investment in the CUSO by any one or more credit unions does not
exceed $100,000; or
(7)
[
(5)
] if any director is an employee
of the CUSO, or anticipates becoming an employee of the CUSO upon its formation.
(f)
Permissible
[
Permissive
] activities
and services. A
credit union may invest in or loan to a
CUSO
that is
[
shall be
] engaged in providing products and services
that include, but are not limited to:
(1)
operational services including credit and debit card services,
cash services, wire transfers, audits, ATM and other EFT services, share draft
and check processing and related services, shared service center operations,
electronic data processing, development, sale, lease, or servicing of computer
hardware and software, alternative methods of financing and related services,
other lending related services, and [
any
] other services or activity,
including consulting, related to the
routine daily
operations of
credit unions;
(2)
financial services including financial planning and counseling,
securities brokerage and dealer activities, estate planning, tax services,
insurance services, administering retirement,
or
deferred compensation
and other employee or business benefit plans
;
[
, or any other
service deemed economically beneficial or attractive to the members of the
participating credit union or credit unions;
]
(3)
internet based or related services including sale and delivery
of products to credit unions or members of credit unions; or
(4)
any other
product,
service or activity
deemed economically beneficial or attractive to credit unions or credit union
members if
approved, in writing, by the commissioner.
(g)
Compensation. A credit union director, senior management
employee, or committee member or immediate family member of any such person
may not receive any salary, commission, or other income or compensation, either
directly or indirectly, from a CUSO affiliated with their credit union, unless
received in accordance with a written agreement between the CUSO and the credit
union. The agreement shall describe the services to be performed, the rate
of compensation (or a description of the method of determining the amount
of compensation) and any other provisions deemed desirable by the CUSO and
the credit union. The agreement, and any amendments, must be approved by the
board of directors of the credit union and the board of directors (or equivalent
governing body) of the CUSO prior to any performance of service or payment
and annually thereafter. For purposes of this section, senior management employee
shall include the chief executive officer, any assistant chief executive officers
(e.g. vice presidents and above), and the chief financial officer; and immediate
family shall include a person’s spouse or any other person living in
the same household.
(h)
Examination fee. If a CUSO is requested by the commissioner
to make its books and records available for inspection and examination, the
CUSO shall pay a supplemental examination fee as prescribed in §97.113(d)
of this title (relating to Supplemental Examinations). The commissioner may
waive the supplemental examination fee or reduce the fee as he deems appropriate.
(i)
Exclusion. A credit union which has a net worth ratio greater
than six percent (6%) and is deemed adequately capitalized by its insuring
organization may invest in or make loans to a CUSO that is not limited by
the restriction set forth in subsection (e)(3)
of this section
;
provided the activities of the CUSO are exclusively limited to activities
which could be conducted directly by a credit union or are incidental to the
conduct of the business of a credit union. Notwithstanding this exclusion,
all other provisions of the act and this chapter applicable to a CUSO apply.
In the event a credit union’s net worth or capital declines below the
required thresholds, the credit union may not renew, extend the maturity of,
or restructure an existing loan, advance additional funds or increase the
investment in the CUSO without the prior written approval of the commissioner.
This agency hereby certifies that the proposal has been reviewed
by legal counsel and found to be within the agency's legal authority to adopt.
Filed with the Office of
the Secretary of State on February 16, 2005.
TRD-200500745
Harold E. Feeney
Commissioner
Credit Union Department
Earliest possible date of adoption: April 3, 2005
For further information, please call: (512) 837-9236