NASCUS Comments on SCU Impact from Proposal to Remove Credit Rating References

May 2, 2011 —In a May 2 letter to the National Credit Union Administration (NCUA), NASCUS provided input on the state-chartered credit union impact of the proposed rule to remove references to credit ratings in determining the credit-worthiness of a security as directed by Title IX of the Dodd-Frank Act.

NCUA’s proposal affects four chapters of NCUA’s regulations. In particular, NASCUS commented on the impact of changes to Part 703 regarding investments. Changes to NCUA’s investment rules apply to state-chartered federally insured credit unions (FISCUs) via Part 741.3(2), Special Reserve for Non-Conforming Investments. It requires FISCUs to establish an additional special reserve for investments if those credit unions are permitted by their respective state laws to make investments beyond those authorized in the Act or the NCUA Rules and Regulations.

Currently, many state investment rules for credit unions contain the same “rating based” structure that NCUA is now changing. NCUA should make clear in the preamble to the final rule that state investment authority is not deemed “beyond those authorized” and therefore does not trigger Part 741.3(2) non-conforming reserve requirements if the state investment authority and the NCUA proposed rule result in the same credit quality. The proper focus of a regulatory analysis of the application of §741.3 should be the underlying credit quality and not the specific wording of the state rule, NASCUS wrote.

Further, NASCUS recommends NCUA clarify the proposed rule’s treatment of municipal securities. The proposal imposes concentration limits on such investments which raises several concerns for FISCUs 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 also commented on implementation of these changes. While the Dodd-Frank Act provided a certain deadline for the federal agencies to study the removal of references to credit ratings and the modification of rules, it was silent as to effective date for compliance with new rules. Given the possible effect on credit unions holding securities now limited by the proposal, NCUA should explicitly provide for grandfathering of existing holdings similar to the grandfather exemption found in §703.18. To view our full comment letter, click here.