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NCUA proposes to allow FCUs to securitize own loans
ALEXANDRIA, Va. (6/20/14)--The National Credit Union board took steps at its monthly meeting Thursday to allow a natural person credit union to securitize loans it has originated, as well as a companion proposed rule that would allow for safe harbor during securitization.

Securitization can be used as an activity incidental to the business for which a federal credit union is chartered, if the transaction meets certain requirements. The proposed rule would also apply to federally insured, state-chartered credit unions (FISCUs) that are permitted by state law to securitize their assets.

The proposed rule would establish seven minimum safety and soundness requirements for a federal credit union engaging in securitizing assets: compliance with all federal and state laws and regulations; independent risk management; an annual audit; sufficient board knowledge regarding the activities; relevant management expertise; a Board-approved securitization policy; and internal controls.

Dale Klein, senior capital markets specialist with the Office of Examination and Insurance, said securitization could provide credit unions that originate certain loans three benefits: an additional source of liquidity, possible reduction of interest rate risk associated with originated fixed rate loans, and a chance for certain credit unions to better optimize capital management.

The Credit Union National Association has said it believes the proposed rule could be helpful for credit unions that originate loans and wish to securitize their assets but as issued, may only be useful to very large credit unions. 

"I estimate a credit union would have to originate at least $100 million worth of securitizable loans each quarter. Only credit unions with vast origination capacities would be able to do that," Klein said.

A credit union that securitizes assets would have to create an issuing entity to hold the assets collateralizing the asset-backed security. The proposed rule would limit the amount of residual interests and retained interests that a federal credit union may carry to 25% of the its net worth. 

NCUA Board Member Rick Metsger said while there are a few credit unions who are capable of securitizing loans, he thinks "it's a good tool to have in the toolbox" for institutions that are able.

After a final rule is adopted, NCUA staff stated that guidance will be provided to assist credit unions who may choose to securitize their loans. 

The proposed securitization rule is related to another proposed rule discussed by the board, a proposed safe harbor rule that governs the authority of the Board, when acting as conservator or liquidating agent for any federally insured credit union, to disaffirm or repudiate transfers of financial assets in connection with a securitization or participation.

NCUA Board Chair Debbie Matz called the proposed rule "essential to creating a viable market for credit union securitizations," and that it would protect investors in the event of a credit union being conserved or liquidated. The proposed rule would provide greater certainty to promote investor confidence and a level playing field for credit unions to sponsor securitizations.

CUNA will be issuing a regulatory call to action shortly to solicit input and feedback from credit unions. The NCUA is seeking comments on both proposed rule for 60 days following their publication in the Federal Register.

Use the resource links below for more information.

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