WASHINGTON (5/4/11)--The Credit Union National Association (CUNA) has said it is concerned with the potential unintended effects of the National Credit Union Administration’s (NCUA) proposal to completely prohibit credit unions from relying on credit ratings to assess credit risk. CUNA in a recent comment letter said that the Dodd-Frank Act “does not require that regulators preclude the institutions they oversee from relying on credit ratings.” Credit ratings “can be useful to credit unions as part of a comprehensive approach to assessing credit risk,” the letter adds. CUNA has urged the NCUA to consider permitting credit unions to rely on credit ratings “as long as the credit union also conducts further reasonable and appropriate due diligence.” The Dodd-Frank Act requires federal financial regulators to replace references to or requirements in their regulations regarding credit ratings with new standards of creditworthiness as established by each agency. The NCUA’s suggested method for replacing these ratings may create issues for credit unions, CUNA noted. The NCUA has proposed replacing the current requirement that a security be assigned a specific grade (such as AA, A, or BB) to be a permissible investment, with the requirement that the security satisfy a narrative standard on credit quality. The narrative must generally include an internal analysis of the issuer of a given security, with a statement showing that the credit union considers the security provider to be capable of meeting its financial commitments. CUNA said that the subjective nature of the NCUA’s proposed narrative standard “may cause confusion as to whether the standard has been met.” CUNA also suggested that the NCUA provide additional supervisory guidance on the indicators that support a determination that an issuer has the capacity needed to meet its financial commitments before the rule goes final. Further, CUNA’s letter stated that CUNA does not believe “credit unions or their advocacy organizations can fully assess the implications of these provisions and provide meaningful comments beyond superficial reactions without being able to review the guidance on these issues that NCUA has indicated it will develop.” The guidance should also be open to comment from the public. For the full CUNA comment letter, use the resource link. The National Association of State Credit Union Supervisors (NASCUS) has also commented on the NCUA proposal, encouraging the agency to clarify the proposal’s treatment of municipal securities. NASCUS in a release noted that the proposed municipal security concentration limits “raises several concerns” for federally insure state credit unions “and the application of non-conforming investment reserve requirements. “If NCUA chooses to expand the municipal security concentration limits to state-chartered credit unions for reserving, NCUA should consider the potential utility of such holdings to state-chartered credit unions, including the tax status and low level of risk,” NASCUS Said.