ALEXANDRIA, Va. — A final rule approved Thursday by the NCUA Board during its December meeting eliminates the use of credit ratings as standards of investment creditworthiness.
The rule was prompted by a statutory requirement set forth in the Dodd-Frank Act after credit ratings plunged in the financial crisis.
Instead, natural person credit unions and corporates will adopt what Director of Capital Markets J. Owen Cole, Jr. called a “narrative standard.”
According to the Board Action Memorandum, credit unions will now consider the following factors as appropriate to determine eligibility: credit spreads, securities-related research, internal or external credit risk assessments, default statistics, inclusion on index, credit enhancements, price and yield consistencies and asset class-specific factors.
The NCUA will provide supervisory guidance to credit unions and corporates before the effective date, which will come 180 days after the rule is published in the Federal Register.
Cole said while the manner in which credit quality is defined in regulations has changed, credit quality expectations from the NCUA have not. In fact, Cole said, credit unions practicing effective risk management may find this new rule has little impact on their due diligence process.
NAFCU General Counsel Carrie Hunt said because the new narrative standard is more subjective than a clear-cut credit rating, the rule creates the potential for examiners and credit union managers to disagree on whether an investment is creditworthy.
“The ability for a credit union to prove it made a quality investment just became more difficult,” she said. She added that NAFCU is willing to work with the agency to amend the rule, adding more objective standards to avoid such situations.
Cole said during the meeting how examiners judge investment creditworthiness remains unchanged.
“They no longer have a bright-line credit rating in the rules, but due diligence expectations won’t change,” he said. Examiners will continue to scrutinize a credit union’s due diligence process, including risk management before and after the investment purchase.
Cole also said the NCUA will “probably have to do more work as to what defines high credit quality.”
The NCUA Board also approved the 2013 Temporary Corporate Credit Union Stabilization Fund budget during the meeting. The $6.145 million budget represents a 20% decline from 2012’s budget and includes the addition of five full time positions that will decrease the cost of outside consultants.
The change will not affect the NCUA’s 2013 operating budget, Chief Financial Officer Mary Ann Woodson told the board.
Should the residential mortgage credit markets decline significantly, and increase the cost of performing security valuations, the TCCUSF budget could increase, Woodson said.
The board also approved a final rule described by Associate General Counsel Frank Kressman as an “administrative housekeeping matter” that involves the amount credit unions can deduct for fidelity bonds.
When the NCUA eliminated RegFlex in July, it affected the fidelity bond rule, because the standard was based upon asset size and RegFlex status. The final rule now bases standards on assets, CAMEL ratings and net worth.
Other items approved by the board were conversions to community charters for two credit unions: the $91 million Focus FCU of Oklahoma City and the $274 million The Atlantic FCU of Kenilworth, N.J.
The board also recognized retiring Executive Director David Marquis, who is retiring at year-end after 34 years with the NCUA. He will be replaced by Region I Director Mark Treichel effective Dec. 30.