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Washington
Legal opinion a step toward mutual fund for MBLs CUSO attorney says
ALEXANDRIA, Va. (5/19/11)--In a legal opinion letter that clarifies its rules regarding the sale of loans, the National Credit Union Administration (NCUA) said a federal credit union is permitted to sell loans of its members to a registered mutual fund. The agency letter, signed by Hattie M. Ulan, NCUA associate general counsel, was in response to an inquiry from Guy Messick, a credit union attorney with Messick & Weber P.C., Media, Pa. Messick told News Now that his firm approached the NCUA to take an existing pilot project “to the next level,” that is from an unregistered mutual fund to a registered mutual fund. Messick said the underlying assets are credit union business loans. The NCUA legal opinion said permission for a federal credit union to sell members’ loans to a registered mutual fund is found in section 701.23 of the agency’s regulations, which controls the purchase, sale, and pledge of eligible obligations. The NCUA letter notes that “eligible obligations” is defined as a loan or group of loans. The letter goes on to say that such sales are permissible provided the credit union’s board of directors or investment committee approves the sale, and a written agreement and a schedule of the eligible obligations covered by the agreement are retained in the seller's office. Messick said the purpose of his approach is to provide a liquidity tool for credit unions with a large lending demand and a means to sell business loans to relieve pressures on the aggregate business loan regulatory cap. Also, Messick said, it is intended to be a way “to share loan yield with credit unions by a means that is safer then loan participations because the repayment risk is spread across hundreds or even thousands of loans,” or, in other words, buying shares in a mutual fund such as this would be a safer investment than purchasing a loan participation. The NCUA opinion letter is just a step in Messick & Weber’s pursuit of this authority. As yet, credit unions cannot benefit from the yield of such a fund because they are not permitted to buy shares in the fund. Messick maintained that the Federal Credit Union Act confers power to the NCUA to permit this type of investment and contended it is a policy decision as to whether NCUA will permit it. “This power could also permit the creation of mutual funds consisting of any types of credit union loans including mortgage loans. With the uncertainty over the future of Fannie Mae and Freddie Mac, this could be a valuable tool for credit unions,” Messick argues. “There is capital in the system to share,” Messick said, “Loan participations can share loan yield but mutual funds of credit union loans is a more efficient and less risky means to share yield.” Another benefit of the mutual fund plan, Messick said, is that outside institutional investors could buy into these mutual funds and that would add further liquidity to the credit union system.
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