The NCUA is currently considering amendments to Part 703, theinvestment regulation. NCUA has not yet issued proposed changes. Ifyou agree that the following idea is worth including in theinvestment regulation, I ask you to express your support to theNCUA.

Many credit unions are at risk due to the inability to earnsufficient net income to pay the assessments for the shareinsurance fund and to rebuild capital that was lost due to thecorporate credit unions collapse, the real estate crash and thecontinuing crisis of confidence by consumers. The permissibleinvestment options provide anemic returns. Credit unions have tochase loan yield to survive in the long term. How do credit unionswith low loan demand safely earn loan yield?

I have advocated for the NCUA to permit credit unions to buyshares in a registered mutual fund consisting of credit unionloans. The mutual fund will consist only of credit union loans andsome cash or cash equivalent assets for redemption purposes. Thefund will be registered with the SEC. The fund will only buy loansthat meet its underwriting criteria.

The loans will be underwritten and serviced by credit unionsthat have passed a vigorous certification process by the fundmanager. Certified credit union lenders will demonstrate a highlevel of lending expertise in the types of loans sold and asuccessful history of lending. Loan purchases will also have to beapproved by the fund manager. The portfolio will be reviewedperiodically by a third party for quality control purposes.

The portfolio will be reviewed daily by a nationally knowncompany that will provide a daily value of the fund's assets thatwill enable the fund to be traded daily. The fund will havechannels to sell loans if liquidity is needed or nonperformingloans have to be removed from the fund. The loan documents forloans held in the fund will be stored electronically and accessibleremotely by the fund shareholders and regulators. If the fundmanager sees a pattern of defaults (geographically, by lender ortype of loan) the fund manager can take mitigating steps quickly tostem losses.

Credit unions share loan yield through loan participations whereloan-rich credit unions sell loan yield to loan-poor credit unions.The lending risks in a loan are spread between two or more creditunions. Yet the NCUA is wary of the risks of loan participationswhere the lending problems in one credit union can lead to lendingproblems in multiple credit unions. I am a big fan of loanparticipations, but I think the mutual fund concept has notableadvantages over loan participations.

There are multiple highly qualified third parties reviewing thequality of the loans purchased in the fund. The buyers of loanparticipations may or may not have know what they are buying.

The loan performance risks in a fund are spread over hundreds ofloans. If a loan defaults in the fund, the fund's investmentperformance is marginally affected. If a loan goes bad in a loanparticipation, credit union assets are lost.

Loan concentration is mitigated much better in the fund. Thefund is highly liquid and a loan participation is not. Theelectronic accessibility of the loan documents and the transparencyof the loan performance of hundreds of credit union loans willenable credit unions and the regulators with a highly efficientmeans to judge and manage risk. The fund gives both credit unionsand regulators the ability to see loans on a systemwide basis, spotproblems sooner and react to problems proactively. The fund isoverseen by the SEC with all of its investor protection provisionsof disclosure and transparency.

We have determined that the expenses will be limited to 150basis points. The question is whether all of the above advantagesare worth the cost. In the end, the marketplace will determine thesuccess of such mutual funds. If a fund performs well and givesgood value, credit unions will buy and hold shares. If a fund doesnot perform well, it will be easily detected and avoided. The keyis having a fund that is liquid so credit unions can quickly andeffectively react to problems.

The Federal Credit Union Act enables credit unions to buy sharesin a registered mutual fund consisting of credit union loans. TheNCUA approved a pilot program in 2005 (now discontinued by theparticipants) that permitted credit unions to buy shares in anunregistered mutual fund consisting of member business loans. TheNCUA has recently confirmed that credit union may sell loans to amutual fund but has not confirmed that credit unions may buy sharesfrom such a mutual fund. What is more appropriate for credit unionsto invest in than credit union loans? We say we need to innovate tosucceed and innovation requires the willingness to try somethingdifferent.

If you believe that credit unions should be given a chance tobuy shares in a registered mutual fund consisting of CU loans,write to the NCUA. Express your opinion in your own words orenclose this article with your endorsement. Now is the time as theNCUA considers amendments to its investment regulation.

Guy A. Messick is an attorney with Messick & Weber PC inMedia, Pa. Contact 610-891-9000 or [email protected]