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CU System
CUSOs and restructured loans highlighted in article
FORT LAUDERDALE, Fla. (8/20/09)--The National Credit Union Administration's (NCUA) guidance on selling nonperforming loans to credit union service organizations (CUSOs) is the topic of an article in a Florida-based business review. Wednesday's article in Broward Daily Business Review notes that the decision is expected to help credit unions during the recession by removing nonperforming loans from their books. CUSOs previously could purchase, service and collect on troubled loans but were not allowed to restructure them because they are not allowed to make consumer loans, said Miami attorney Michael Lozoff, who obtained a clarification from NCUA on behalf of credit unions he works with. Now a CUSO can restructure the loan if 1) the credit union has made the original underwriting decision and 2) the loan involves no new credit or principal extended by the CUSO. A credit union wanting a loan off its books so it doesn't take a hit or show a loan as delinquent can sell it to the CUSO. That turns the loan into an asset. The credit union gets some payment--say 20 cents on the dollar. It pays the balance from its loan-loss reserve account and gives the loan to the CUSO to collect. The article outlines the debate on whether this is good. While selling bad loans to a CUSO makes operational sense, it doesn't change the fact that it has a bad loan, said Kamal Mustafa, chairman of Invictus Consulting Group, a New York firm that works with credit unions and small to medium-size banks. In the article, he noted this merely moves the problem. Some credit unions may put a lot of bad assets into a CUSO. Lozoff, however, said that a nonperforming loan can be converted to a performing loan through effective restructuring. And that, he told the publication, is a solved problem. The operational challenge for credit unions is whether it is cost-effective to create the program internally or share resources through a collaborate effort such as a CUSO, he said. The article also addresses the structure of CUSOs and notes the cooperative efforts involved with several credit unions consolidating back operations through a CUSO. "Banks typically don't cooperate to that extent because they're more in direct competition," Lozoff told the publication.


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