NCUA Rules 701 and 714 – Financial Innovation: Loan Participations, Eligible Obligations, and Notes of Liquidating Credit Unions
February 28, 2023
Melane Conyers-Ausbrooks
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428
Re: NASCUS Comments on NCUA Notice of Proposed Rulemaking (NPRM) NCUA-2022-0185; NCUA Rules 701 and 714: Financial Innovation: Loan Participations, Eligible Obligations, and Notes of Liquidating Credit Unions (RIN 3133-AF49)
Dear Secretary Conyers-Ausbrooks:
The National Association of State Credit Union Supervisors (NASCUS)[1] provides the following comments on the NCUA NPRM; Financial Innovation: Loan Participations, Eligible Obligations, and Notes of Liquidating Credit Unions.[2]
The proposed rule is intended to codify NCUA opinion pronouncements into the final rule. The proposed changes would clarify current regulations relating to the classification of loans to members, purchases of member obligations, and purchased participation loans as well as provide additional flexibility for federally insured credit unions (FICUs) and federal credit unions (FCUs) to partner with users of advanced technologies offered by the financial technology (fintech) sector.
In general, implementation of the proposed changes should foster clarity while appropriately codifying previous NCUA legal opinions and shifting to a more flexible principle-based regulatory framework. While additional steps can be taken to ensure stakeholder understanding of applicable regulations, the NPRM represents a substantial step in that process.
Proposed Amendments Appropriately Codify Previous NCUA Legal Opinions
NASCUS supports the proposed rulemaking and commends NCUA for actively seeking to clarify and codify the concepts outlined in NCUA Legal Opinion 15-0813, Loan Participations in Indirect Loans – Originating Lender[3] regarding the appropriate classification of an investment as a member obligation, member loan or a participation of a loan.
By refining the definitions of indirect leasing, indirect lending, indirect lending arrangement, and indirect leasing arrangements in Part 701.21(c)(9) the proposed rule provides additional clarification to FCUs as to NCUA’s review concepts regarding the reasonable utilization of third-party agents, including Credit Union Service Organizations (CUSOs) and fintechs, toward generating and maintaining loan and lease portfolios.
Expansion of the “originating lender” definition under Part 701.22(a)(3) to specifically include participants that appropriately acquire loans through an indirect lending arrangement further embeds concepts present in the original opinion. Further, codifying the existing NCUA interpretation eliminates the uncertainty that NCUA policy might change and disrupt such a critical credit union practice.
Proposed Rules Appropriately Shift Toward Principle-Based Supervision
Removal of certain specific investment limitations currently imposed by Part 701.22 and Part 701.23(b)(2), and relevant to FISCUs through implications of Part 741.225[4] is an important step toward ensuring appropriate risk management programs as opposed to limitations on inherent risk. Combined with the inclusion of principle-based safety and soundness expectations outlined in proposed Part 701.23(b)(6) this shift appropriately outlines broad safety and soundness expectations of risk management as opposed to strict investment limitations imposed by static, inflexible, and arbitrary limitations without regard to related risk management program effectiveness.
These changes will result in a clearer understanding of the safety and soundness responsibilities of the acquirer and the implications of utilizing a third-party agent in a lending program. While these changes will speak primarily to the credit and legal risk implications of such programs, and appropriate responsibilities of the management team, the proposed changes may also substantially impact the options available to an institution relating to balance sheet management, specifically the mitigation of future interest rate and liquidity risks.
NASCUS strongly encourages NCUA to continue to utilize the broad language of “very soon after” pertaining to the assignment provisions of the rule definitions to ensure appropriate flexibility to address the various timeframes required to appropriately assign loans backed by different collateral types and to ensure a more forward-looking regulation that can help ensure future evolution as loan and lease products continue to evolve.
NASCUS also believes that not further defining the meaning of “final underwriting decision” is appropriate so as to not outline requirements more specific than what would be found in general safety and soundness requirements based on a host of situational factors. Implementation of additional requirements through definition could stifle innovation as new products are created and/or create unintended regulatory burden that may be unnecessary due to the specifics of the underwriting situation.
NCUA Should Segregate Insurance Requirements from Charter Requirements
NASCUS commends the tone of the amendments presented as part of the NPRM. However, NCUA rulemaking and stakeholder understanding of proposed amendments continue to be hindered by the significant interplay within NCUA rules. In this case, the application of Part 741 to Parts 701.21, 22, and 23. The predominance of sections amended by this NPRM apply only to FCUs. To understand the implication of the amendments upon FISCUs requires verification of the applicability of each section of the amended rules through review of Part 741.
As outlined by the preamble of this NPRM, NCUA clearly intends to ensure an understandable and consistently applied regulatory schema related to its dual responsibilities as a charterer of FCUs and a deposit insurer of FISCUs. NASCUS continues to believe that significant clarity of NCUA’s regulatory roles would be better achieved through the implementation of a distinct set of rules specific to each of those roles.
Sincerely,
John J. Kolhoff
Senior Vice President, Policy and Supervision
NASCUS
[1] NASCUS is the professional association of the nation’s forty-five state credit union regulatory agencies that charter and supervise over 1900 state credit unions. NASCUS membership includes state regulatory agencies, state chartered and federally chartered credit unions, and other important stakeholders in the state system. State-chartered credit unions hold over half of the $2.2 trillion assets in the credit union system and are proud to represent nearly half of the 134 million members. The remaining 5 states lack state-chartered credit unions.
[2] Financial Innovation: Loan Participations, Eligible Obligations, and Notes of Liquidating Credit Unions, 87 Fed. Reg. 80,479 (Dec. 30, 2023),
[3] NCUA Legal Op. 15-0813 (Aug. 10, 2015) available at https://www.ncua.gov/regulation-supervision/legal-opinions/2015/loan-participations-indirect-loans-originating-lenders.
[4][78 fr 37958, June 25, 2013] Available at https://www.ecfr.gov/current/title-12/chapter-VII/subchapter-A/part-741/subpart-B/section-741.225