ALEXANDRIA, Va. — A final rule approved Thursday by the NCUABoard 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 inthe Dodd-Frank Act after credit ratings plunged in the financialcrisis.

Instead, natural person credit unions and corporates will adoptwhat Director of Capital Markets J. Owen Cole, Jr. called a“narrative standard.”

According to the Board Action Memorandum, credit unions will nowconsider the following factors as appropriate to determineeligibility: credit spreads, securities-related research, internalor external credit risk assessments, default statistics, inclusionon index, credit enhancements, price and yield consistencies andasset class-specific factors.

The NCUA will provide supervisory guidance to credit unions andcorporates before the effective date, which will come 180 daysafter the rule is published in the Federal Register.

Cole said while the manner in which credit quality is defined inregulations has changed, credit quality expectations from the NCUAhave not. In fact, Cole said, credit unions practicing effectiverisk management may find this new rule has little impact on theirdue diligence process.

NAFCU General Counsel Carrie Hunt said because the new narrativestandard is more subjective than a clear-cut credit rating, therule creates the potential for examiners and credit union managersto disagree on whether an investment is creditworthy.

“The ability for a credit union to prove it made a qualityinvestment just became more difficult,” she said. She added thatNAFCU is willing to work with the agency to amend the rule, addingmore objective standards to avoid such situations.

Cole said during the meeting how examiners judge investmentcreditworthiness remains unchanged.

“They no longer have a bright-line credit rating in the rules,but due diligence expectations won't change,” he said. Examinerswill continue to scrutinize a credit union's due diligence process,including risk management before and after the investmentpurchase.

Cole also said the NCUA will “probably have to do more work asto what defines high credit quality.”

The NCUA Board also approved the 2013 Temporary Corporate Credit Union Stabilization Fund budgetduring the meeting. The $6.145 million budget represents a 20%decline from 2012's budget and includes the addition of five fulltime positions that will decrease the cost of outsideconsultants.

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 declinesignificantly, and increase the cost of performing securityvaluations, the TCCUSF budget could increase, Woodson said.

The board also approved a final rule described by AssociateGeneral Counsel Frank Kressman as an “administrative housekeepingmatter” that involves the amount credit unions can deduct forfidelity bonds.

When the NCUA eliminated RegFlex in July, it affected thefidelity bond rule, because the standard was based upon asset sizeand RegFlex status. The final rule now bases standards on assets,CAMEL ratings and net worth.

Other items approved by the board were conversions to communitycharters for two credit unions: the $91 million Focus FCU ofOklahoma City and the $274 million The Atlantic FCU of Kenilworth,N.J.

The board also recognized retiring Executive Director DavidMarquis, who is retiring at year-end after 34 years with the NCUA.He will be replaced by Region I Director Mark Treichel effectiveDec. 30.