Dear Mr. Lozoff:
You have asked about what restrictions apply to a CUSO engaging in the purchase and servicing of
delinquent loans. The primary restriction for CUSOs servicing nonperforming loans is that they
cannot advance new principal, because CUSOs cannot originate consumer loans except for student
loans and residential mortgage loans. We conclude, however, CUSOs can restructure loans in aid of
their collection activity.
According to your letter, a group of state and federal credit unions would like to create a CUSO to
consolidate a number of back office functions. The CUSO would also engage in the purchase and
collection of delinquent loans. You have asked if there are any restrictions to a CUSO’s authority
to purchase, sell, or collect delinquent loans.
NCUA’s CUSO rule was recently amended to provide several new examples of permissible CUSO
activities related to the routine operation of credit unions, including the “purchase and servicing
of non-performing loans.” 12 C.F.R. §712.5(j)(5). This amendment was intended to incorporate a prior legal opinion into the CUSO rule. See 73 FR 79307 (Dec. 29, 2008). The purchase of non-performing loans was recognized in a 2005 legal opinion letter as a permissible part of a CUSO’s debt collection activity. OGC Op. 05-0919 (October 11, 2005). The 2005 opinion noted that, with limited exceptions, CUSOs are not permitted to engage in consumer lending; however, in that particular case “the CUSO [would] not be involved in any debt restructuring.” Id. Thus, the 2005 opinion did not fully address the authority of a CUSO to engage in debt restructuring when it purchases non-performing loans.
In light of the recent changes to the CUSO rule, it may be necessary to clarify NCUA’s position with
regard to a CUSO’s authority to engage in debt restructuring. Our view is a CUSO that purchases
non-performing loans may restructure delinquent debt it owns, so long as the credit union made the
original underwriting decision and no new credit is being extended to the borrower. CUSOs are able
to restructure loans by changing terms of the loans, such as the term, payment schedules, or
interest rates, but cannot advance new principal. Nevertheless, CUSOs should not restructure a loan
under their authority to purchase and service non-performing loans so as to circumvent lending
restrictions applicable to federal credit unions, for example, restructuring a loan with maturity
terms longer or interest rates higher than permitted for a federal credit union. CUSOs continue to
be prohibited from engaging in the origination of new consumer loans, other than credit card lines
of credit, residential mortgage loans and student loans.
If you have further questions, please feel free to contact Staff Attorney Pamela Yu or me.