WASHINGTON, DC (August 2, 2017) — National Association of Federally-Insured Credit Unions (NAFCU) Regulatory Affairs Counsel Ann Kossachev today wrote the National Credit Union Administration regarding the agency’s upcoming guidance on asset securitization by federal credit unions. Kossachev urged the NCUA to, “carefully consider the importance of establishing a level playing field.”
Kossachev noted the changes and improvements in the financial landscape in recent years. She said “credit unions should be given every opportunity possible to help their members achieve the American dream and establish financial stability.”
She offered the following recommendations for the agency’s upcoming guidance on asset securitization:
Kossachev wrote the letter in response to a recent agency legal opinion letter issued in June on federal credit unions’ authority to issue and sell securities. NAFCU is also seeking a meeting with the agency to discuss the legal opinion letter and the upcoming guidance on asset securitization.
Below please find the full-text of the letter.
August 2, 2017
The Honorable J. Mark McWatters, Chairman
The Honorable Rick Metsger, Board Member
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428
RE: Asset Securitization
Dear Chairman McWatters and Board Member Metsger:
On behalf of the National Association of Federally-Insured Credit Unions (NAFCU), the only national trade association focusing exclusively on federal issues affecting the nation’s federally-insured credit unions, I am writing in regard to the National Credit Union Administration’s (NCUA) recently released Legal Opinion Letter on credit unions’ authority to issue and sell securities. NAFCU and its member credit unions would like to thank the NCUA for exploring the issue of asset securitization, which provides an invaluable method for credit unions to increase available liquidity to provide more products and services to their members. NAFCU urges the NCUA to carefully consider the importance of establishing a level playing field that ensures credit unions of all sizes can participate in securitizations. In addition, NAFCU requests the opportunity to meet with the NCUA to discuss the Legal Opinion Letter, credit unions’ concerns, and suggestions for crafting the upcoming guidance on asset securitization to best address the industry’s needs.
General Comments
In June 2014, the NCUA’s proposed rule to amend its regulations to clarify that a federal credit union is authorized to securitize its assets by issuing and selling securities was published in the Federal Register. NAFCU provided its comments within the 60-day comment period to express its overall support for the proposal. Since then, the NCUA has remained silent regarding the proposal, until recently. During its June 2017 Board Meeting, the NCUA Board explained that an amendment to the Federal Credit Union Act (FCU Act) or NCUA’s regulations is unnecessary because a federal credit union already has the requisite authority to issue and sell securities as part of its incidental powers under the FCU Act.
In the years since the NCUA’s proposal, the nation’s financial landscape has changed quite a bit, in particular in the housing market. There is a bipartisan push for housing finance reform, which may mean that Fannie Mae and Freddie Mac (GSEs) will be removed from conservatorship in the near future. Moreover, the Federal Housing Finance Agency’s (FHFA) recent efforts to enhance the existing housing finance system symbolize increased confidence in the housing market as well as an attempt to spread credit risk and reduce overall systemic risk. But more remains to be done.
In light of the improved financial environment, credit unions should be given every opportunity possible to help their members achieve the American dream and establish financial stability. NAFCU and its member credit unions are very pleased that the NCUA has recognized the importance of asset securitization and come to the conclusion that the FCU Act authorizes such an activity. NAFCU now requests the opportunity to work closely with the NCUA in developing the guidance for asset securitization to ensure that credit unions’ interests are fully incorporated.
Recommendations for the Upcoming Guidance
Although the creation of an economically feasible securitization program should follow a measured approach, it also requires a very large block of securities backed by homogenousassets. To achieve this and permit credit unions of all sizes to participate, credit unions must have at their disposal a large pool of assets eligible for securitization as well as various aggregation mechanisms in place. In line with this central tenet, NAFCU has in previous letters requested the following: (1) expanding the eligibility of loans beyond those originated by the securitizing credit union, in particular, by permitting the use of purchased loans needed to complete a pool as well as allowing the aggregation of loans by credit union service organizations (CUSOs); (2) providing flexibility in the levels of residual and retained interests in securitized assets that a credit union may hold; (3) authorizing credit unions to have special purpose vehicles with the authority to enter into derivative transactions; and (4) providing additional clarifications on the types of securitization transactions in which credit unions may engage.
The NCUA should weigh these requests in crafting its asset securitization guidance. To create workable and sustainable securities that appeal to private investors, NAFCU and its member credit unions believe that the above recommendations must be incorporated in the guidance. Most importantly, many credit unions certainly do not have the capacity to originate as many loans as are necessary to be able to securitize assets on their own. In fact, very few credit unions are presently capable of packaging the requisite amount of loans. It is crucial that the majority of the industry is able to take advantage of this opportunity; otherwise its official authorization is practically worthless. Therefore, the NCUA’s guidance must permit aggregation mechanisms.
One of the best ways to combat the inaccessibility issue is to permit the aggregation of loans into large pools which can then be efficiently securitized and resold on the secondary market. This can be accomplished through either allowing credit unions to act as aggregators or to collaborate on the creation of a network of special purpose vehicles to perform the aggregation and securitization on behalf of participating credit unions. The use of special purpose vehicles is a central part of GSE and private-label securitization transactions and should likewise be a primary component of the NCUA’s asset securitization guidance.
Additionally, the NCUA’s 2014 proposal noted that “acting as an issuing entity is not a preapproved CUSO activity.” This prohibition should not carry through to the upcoming guidance on asset securitization because CUSOs are extremely beneficial to the credit union industry and may be the best way to facilitate the securitization program and ensure the continued safety and soundness of the industry. CUSOs provide an avenue for credit unions to obtain a level of increased specialization and expertise that they would otherwise struggle to achieve. CUSOs help to deliver innovation and also foster economies of scale. Although credit unions may experience a significant learning curve, the ultimate benefits are likely to drastically outweigh the one-time educational and skill development costs.
The guidance should also specifically authorize the use of credit enhancements, or implicit recourse, and other tools to make credit union assets more attractive to private investors. The NCUA should let the prohibition on implicit recourse remain a relic of the defunct 2014 proposal. There is no question that credit unions offer the highest quality loans, but because this securitization program will still be in its infancy, investors may be skittish. Allowing the use of credit enhancements is a cost-efficient approach to making the securitization program as effective as possible.
NAFCU encourages the NCUA to reach out to and collaborate with credit unions, large and small, in the development of the asset securitization guidance. Given the potential positive effects the securitization program may have on the industry, NAFCU hopes to see considerable flexibility in the upcoming guidance to provide credit unions with endless opportunities for success.
Conclusion
NAFCU strongly supports the NCUA’s efforts regarding asset securitization. NAFCU would appreciate the chance to meet with the NCUA to discuss the recent Legal Opinion Letter, its possible implications for credit unions and their members, and the future of asset securitization. If you have any questions or concerns, please do not hesitate to contact me at akossachev@nafcu.org or (703) 842-2212.
Sincerely,
Ann Kossachev
Regulatory Affairs Counsel
The National Association of Federally-Insured Credit Unions is the only national trade association focusing exclusively on federal issues affecting the nation’s federally-insured credit unions. NAFCU membership is direct and provides credit unions with the best in federal advocacy, education and compliance assistance. For more information on NAFCU, go to www.nafcu.org or @NAFCU on Twitter.
The National Association of Federally-Insured Credit Unions is the only national trade association focusing exclusively on federal issues affecting the nation’s federally-insured credit unions. NAFCU membership is direct and provides credit unions with the best in federal advocacy, education and compliance assistance. For more information on NAFCU, go to www.nafcu.org or @NAFCU on Twitter.
