Finding a credit union service organization (CUSO) to fit your credit union’s lending needs is like finding comfortable footwear. “Finding the Right Shoe: Guidelines for a Successful CUSO Fit,” a whitepaper from the CUNA Lending Council, explores key elements in a good working relationship between a credit union and a third-party CUSO.
“A good CUSO is an extension of your credit union,” says Bob Stowell, chief operations officer at $800 million asset US Federal Credit Union in Burnsville, Minn. CUSOs have been a key driver of credit union innovation in the past two decades, particularly in operational efficiencies. They can also keep a lending area at a credit union looking forward to embrace new challenges.
A credit union/CUSO relationship can leverage expertise, innovation, economies of scale and the aggregative power to make services available to credit unions at reduced cost. “The leveraging is huge,” says Aaron Bresko, vice president of lending at $8.8 billion asset BECU in Tukwila, Wash. “Leveraging the aggregation of credit unions can make a big difference in pricing and functionality.”
Experts interviewed in the white paper offered six guidelines that can help ensure a smooth, sound fit between a credit union and a CUSO:
Guideline 1: Make sure the CUSO’s values and mission sync with your credit union’s values and mission.
It’s important that the credit union understand the mission and motive of a CUSO, including why the CUSO exists and what is the return on investment rationale for the CUSO’s owners.
A CUSO’s objectives and structure can each influence how it works with your credit union. Credit unions need to understand whether the CUSO has a profit motive and how that would relate to their service charge structure. And likewise, a credit union should be careful to align with a CUSO with sufficient capital and support from its owners to have staying power.
To find out what makes the CUSO tick, and if its values and mission will provide a good fit with your lending department and credit union, ask around, suggests the white paper. Trust and verify.
Credit union lenders belonging to the CUNA Lending Council can use its e-mail list to ask questions about the CUSO’s values and find a variety of references.
Guideline #2: Choose a partner, not a vendor.
A good credit union/CUSO fit occurs when the CUSO is willing to dive in with both feet, suggests the whitepaper. Good partners are more than transaction makers. They try hard to understand a credit union’s culture and what it’s about. If the CUSO isn’t motivated to identify and help fulfill the credit union’s cultural and strategic objectives, there’s a misalignment of purpose. If the credit union views the CUSO as simply transactional, “work done for work paid,” the true potential of a partnership opportunity is lost.
“Make sure the CUSO's long-term goals are consistent with what you’re looking for in a CUSO,” says Bresko. “For example, it may be growing faster than what it can support. You can ascertain that from the financials that show you the growth, service issues when you’re researching references, and recent growth. The credit union’s processing volume may be more than the CUSO can support. It may not be the right fit for you.”
A warning sign is if most of the discussion between the CUSO and the credit union is focused on the cost of doing business, suggests the whitepaper. That’s a vendor, not a partner.
The credit union has the obligation and responsibility to be clear about what it’s looking for from a CUSO. The CUSO isn’t in a position to tell the credit union what it takes to fulfill the credit union's cultural mission.
What if a credit union’s culture is somehow unique? The credit culture comes from the credit union and it needs to be supported by the CUSO. Credit unions should be concerned when a CUSO asks them to adopt a "one size fits all" credit policy.
In addition, visiting the CUSO can help you see if there’s going to be good alignment between credit union and CUSO, says the whitepaper. It’s an important part of the due diligence process. It’s another step in ensuring you’re working with a true partner.
Another valuable component in a good credit union/CUSO relationship is to use the CUSO’s expertise to help brainstorm thoughts and ideas. That’s another way to see how the CUSO might help your credit union see a service or product from a different point of view, and if it might be the right fit.
Guideline #3: Keep expectations reasonable.
Make sure your vendor management program is thorough and extends to CUSOs just as it does to non-CUSO partners, urges the whitepaper. And use it with all CUSOs your credit union partners with.
It’s critical that the credit union be as clear as possible about what it’s looking for in a partner. In the lending business, the credit union has the responsibility, no matter what services the CUSO has provided, to see that the loans it’s putting on the books are loans it understands and is comfortable with, from a risk standpoint.
It’s critical that both sides understand what they need and don’t need from the other party. And both parties must know what they can, and can’t, offer.
Proper due diligence should involve a great deal of research, and in the middle of that process, it may be tempting to just call supplied references. But it’s well worth the extra effort to find others.
“Cold call some of their users and get the complete story,” says Bresko. “CUSOs are part of the credit union industry, and it’s a small world. If you mess up, word gets around, whether it’s on their reference sheet or not.”
Bresko says the credit union’s size shouldn’t matter when it comes to receiving quality service from a CUSO. “For smaller credit unions, CUSOs can provide extra support and a lot of the due diligence that the credit union can’t necessarily provide. But don’t make assumptions. Be clear about what the CUSO is providing and not providing.
“Ongoing communication is critical, so changes can be made quickly. If something’s not working, address it directly so you don’t get too far off base.”
The credit union should be in the driver’s seat. While the CUSO can help guide the credit union to make certain it follows the rules and regulations, ultimately, the credit union is responsible. If something goes wrong, the credit union can’t go back to the CUSO and hold it liable. CUSOs can’t always predict every financial detail. The credit union makes the ultimate decision about every transaction on the books.
Guideline #4: If in doubt, ask, ask, then ask again.
If you don’t fully understanding any loan detail, speak up. Again, good, timely, consistent communication is the key, says Bresko. “What you’re thinking is happening and what’s really happening may be two different things.”
Lending departments need to reassess whether they can and should rely on a CUSO to comply with lending regulations, says the whitepaper. But the lending executive must be careful not to lean on the CUSO too much. Auditing and continuous monitoring are critical, in addition to having a solid understanding of the regulations yourself.
Guideline #5: Make sure the underwriter has lots of experience with the types of loans you want to offer.
Part of the due diligence process is to make sure the CUSO has that expertise, as well as the infrastructure and the resources to provide what your credit union needs.
To check for underwriting expertise:
• Review the resumes of people who will be underwriting the loans. Check on their experience and areas of expertise. National Credit Union Administration regulations require that whatever CUSO is underwriting the loan needs two years of experience underwriting the specific type of loan under review.
• Get references from other clients. Underwriting a $200 million residential property is very different than underwriting a $5 million construction project for a doctor’s office.
• Consider what they’ve specifically underwritten. For example, if an individual has experience in residential investment properties, that doesn’t necessarily mean he or she has expertise in underwriting a construction project.
• Check on the compensation method. For example, make sure the compensation plan doesn’t encourage underwriters to recommend loans just to earn more money. That’s a conflict of interest. Although it’s convenient to point to closed loans as a measure of success, it’s not the only measure.
Guideline #6: Loan monitoring is critical.
What separates lenders today isn’t underwriting, but local loan monitoring and management, according to the whitepaper. A credit union needs to choose a CUSO that can help it assess a loan, monitor the quality of the loan once it’s made, and manage it or collect when necessary, on an ongoing basis.
Not all CUSOs do that. Some only do the underwriting.
CUSOs, overall, have a more entrepreneurial bent to them than the credit union culture. If not managed properly, the mix can be detrimental to the credit union, says the whitepaper. But CUSOs, managed properly, can help the credit union see new perspectives and models to help it serve members better.
For more information or to access the white paper, visit cunalendingcouncil.org; select “tools and resources” and “whitepapers.”