The Honorable Rick Metsger, Chairman
The Honorable J. Mark McWatters, Board Member
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428
RE: Proposed Rule – Asset Securitization (RIN 3133-AE29)
Dear Chairman Metsger and Board Member McWatters:
On behalf of the National Association of Federally-Insured Credit Unions (NAFCU), the only national trade association focusing exclusively on federal issues affecting the nation’s federally-insured credit unions, I am writing in regard to the National Credit Union Administration’s (NCUA) now two-year-old proposed rule on asset securitization. NAFCU and its members strongly support the NCUA’s efforts to explicitly permit credit unions to securitize loans they have originated. Asset securitization provides an invaluable method for credit unions to increase available liquidity and benefit their members.
NAFCU urges the NCUA to provide an update on the status of the asset securitization proposed rule and the agency’s anticipated next steps. In addition, NAFCU requests the opportunity to meet with the NCUA to discuss the proposal, credit unions’ concerns, and suggestions for improving a future iteration of the rule to best address the industry’s needs.
General Comments
In June 2014, the NCUA’s proposed rule on asset securitization was published in the Federal Register. NAFCU provided its comments within the 60-day comment period to express its overall support for the proposal. Since then, the financial landscape has changed quite a bit, in particular in the housing market. Fannie Mae and Freddie Mac may be removed from conservatorship in the near future and there is much discussion of major housing finance reform on the horizon. Recently, the White House explained that housing finance reform should be a primary initiative of the next administration so that more consumers have access to affordable housing options.
Moreover, the Federal Housing Finance Agency (FHFA) has championed several proposals for GSE reform, including a common securitization platform for Fannie and Freddie. Such efforts represent increased confidence in the housing market as well as an attempt to expand the concentration of risk to reduce overall systemic risk. The NCUA should follow the FHFA’s example in spreading risk and recognize the value in allowing credit unions to be more involved in the secondary market. In fact, a cost-effective securitization program would mean credit unions could develop alternative sources of funding and reduce their reliance on huge housing giants like Fannie and Freddie.
Furthermore, in light of a vastly improved financial environment, credit unions should be given every opportunity possible to help their members achieve the American dream and establish financial stability. A strong mechanism for credit union asset securitization may be the key. Therefore, NAFCU requests the NCUA move forward with finalizing this rule.
Recommended Changes to the Existing Proposal
As mentioned above, NAFCU previously submitted a comment letter on the proposed rule regarding asset securitization. Some of NAFCU’s recommendations for improving the language of the proposal included: (1) expanding the eligibility of loans beyond those originated by the securitizing credit union, in particular, by permitting the use of purchased loans needed to complete a pool as well as allowing the aggregation of loans by credit union service organizations (CUSOs); (2) providing flexibility in the levels of residual and retained interests in securitized assets that a credit union may hold; (3) authorizing credit unions to have special purpose vehicles with the authority to enter into derivative transactions; and (4) providing additional clarifications on the types of securitization transactions in which credit unions may engage.
NAFCU still believes that the NCUA should weigh these recommendations when considering how to improve the proposed rule. In addition, NAFCU strongly urges the NCUA to evaluate the accessibility of the proposed asset securitization mechanism for credit unions of all sizes. Smaller credit unions may not have the capacity to originate as many loans as are currently envisioned to be able to participate in a securitization program. It is essential that the majority of credit unions are able to take advantage of the authority outlined in the proposed rule; otherwise its adoption is practically worthless. One measure that would help ensure credit unions overcome such a limitation is a cost-efficient credit enhancement for investors. Thus, NAFCU asks the NCUA to carefully reconsider the proposed rule’s prohibition on “implicit recourse.”
Another option for combatting the inaccessibility issue is, as noted above, to permit the aggregation of loans into large pools which can then be efficiently securitized and resold on the secondary market. This can be accomplished through either allowing credit unions to act as aggregators or to collaborate on the creation of a network of special purpose vehicles to perform the aggregation on behalf of participating credit unions. The use of special purpose vehicles is a central part of agency and private-label securitization transactions and should likewise be a primary component of the NCUA’s asset securitization proposal.
In particular, small credit unions might not even be able to participate in securitization without the help of an outside aggregator. Other credit unions or credit union service organizations may satisfy this role as aggregator. The NCUA’s proposal, however, makes clear that “acting as an issuing entity is not a preapproved CUSO activity.” NAFCU requests that the NCUA remove this restriction from the asset securitization proposal because CUSOs are extremely beneficial to the credit union industry and may be the best way to facilitate the securitization program. CUSOs provide an opportunity for credit unions to obtain a level of increased specialization and expertise that they would otherwise be hard-pressed to achieve. CUSOs help to deliver innovation and also foster economies of scale. NAFCU recognizes that this may require significant educational opportunities for credit unions, but the ultimate benefits are likely to drastically outweigh the temporary cost of skill development.
Credit unions originate high quality loan products and hence have superior assets, so their entrance into the secondary market could have exceptionally positive effects on the economy. Credit union members and investors alike would benefit from such securitization offerings. NAFCU encourages the NCUA to provide the industry with some clarification on the status of this proposed rule and where the agency plans to go from here. Considering the potential benefits to be realized by such a program, which the NCUA has identified itself, NAFCU hopes to see considerable movement on this proposal in the next few months.
Conclusion
NAFCU strongly supports the NCUA’s efforts regarding asset securitization. NAFCU would appreciate the chance to meet with the NCUA to discuss this proposal, its possible implications for credit unions and their members, and other future initiatives. If you have any questions or concerns, please do not hesitate to contact me at akossachev@nafcu.org or (703) 842-2212.
Sincerely,
Ann Kossachev
Regulatory Affairs Counsel