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The National Credit Union Administration NCUA announced last year that it would be stepping up its examination of credit union oversight of service provider relationships. Credit union service organization business plan assessment and planning; effective due diligence; and risk measurement, monitoring, and control.
While credit unions may have very close relationships with the CUSOs they invest in and do business with, NCUA has made clear that credit unions must do appropriate due diligence reviews and monitor the performance of the CUSOs with whom they partner.
What is the appropriate level of due diligence involving an organization that is controlled by credit unions and dedicated to serving credit union clients? I recommend dividing the services provided by third parties, including by CUSOs, into: Highly Critical; Critical; and Non-Critical.
Critical services are services that a support a core service of the credit union, and b the impact of failure is mitigated by the fact that the credit union has alternative service options that would prevent a significant and immediate member service issue or safety and soundness issue.
An example of a critical service might be mortgage lending services that are being provided through the assistance of a CUSO, but if the CUSO fails, the credit union has the internal resources to continue to provide the service until the credit union finds a more permanent solution.
Non-critical services are those that a do not support a core service of the credit union, and b the impact of failure would not cause a member service issue or a safety and soundness issue for the credit union, such as the janitorial service for the branches. Effective due diligence The basic purpose of doing due diligence is to determine that the third party arrangement is a fair deal and good value for the credit union.
The credit union will have to do some research on the costs of providing the services internally and the costs charged by a CUSO or other service providers for a similar level of service.
If the CUSO has been providing a service to the credit union for a number of years, that should typically reduce the level of due diligence review warranted, even for a highly critical service. Although some credit unions may use the request-for-proposal process as a due diligence tool for critical services, remember that due diligence is an expense both for the credit union and the vendor, so make sure the information sought is truly relevant to answering these three key questions: Is the business plan realistic and achievable?
And do the financial statements provide reasonable assurance that the CUSO can fulfill the agreement? An important due diligence step is to speak to both current credit union clients and credit unions that are no longer clients of that CUSO.
For example, several credit unions in Washington D. If there was an anthrax scare or severe weather that displaced a credit union from its offices, the services available in the marketplace did not guarantee that the credit unions would have a place to operate from remotely.
Under any due diligence analysis, there was risk with investing and using a new company for this highly critical service. However, the credit unions determined that the staff involved was well qualified and the business plan was achievable. Today Ongoing Operations, LLC has three state-of-the-art business continuity centers in Maryland, Oregon and Colorado that are serving a rapidly growing nation-wide credit union client base.
The CUSO has the obligation to disclose all fees and expenses and how income is dispersed.
The credit union is entitled to a fully transparent view of the business model so that all participants and their incentives are known.
The key concern in using any third party is protecting the member relationship. The contract should state that the CUSO will comply with applicable privacy laws and will employ verifiable safeguards to protect the member information.
There needs to be a provision that the CUSO will not continue to solicit members after the contract has terminated. The contract should also acknowledge that the CUSO has no proprietary rights to the member relationship and will cooperate with the transfer of the business as the credit union dictates.
The contract should give the credit union the right to obtain injunctive relief to stop a violation of the confidentiality and non-solicitation provisions. The duties of the parties must be clearly stated in the agreement, including regulatory compliance. It is critical to the management of the relationship that the performance expectations be objectively and measurably stated.
You cannot monitor and manage unless you can objectively measure. The performance needs to be monitored through a reporting process and compared to the expectations. I strongly recommend that a senior level staff person be assigned to monitor and manage third party relationships.
The failure to meet the performance expectations should have consequences that the non-defaulting party can implement, such as termination of the agreement.schwenkreis.com is America’s Debt Help Organization, serving the public with thorough, accurate and accessible online information about personal finances.
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There was a day when credit unions relied on internal staff to perform most of their member services and backroom operations. This “internal model” has evolved into a “blended model,” where many functions are outsourced to third-party service providers, often to credit union service organizations (CUSOs).
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