Permissible Investments for Federal Credit Unions, 76122-76125 [E6-21662]
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Federal Register / Vol. 71, No. 244 / Wednesday, December 20, 2006 / Rules and Regulations
the report has not signed the report, the
name and position title of the individual
and the reasons such individual is
unable to, or refuses to, sign must be
disclosed in the report. All reports must
be dated and signed on behalf of the
Funding Corporation by:
(1) The chief executive officer (CEO);
(2) The officer in charge of preparing
financial statements; and
(3) A board member formally
designated by action of the board to
certify reports of condition and
performance on behalf of individual
board members.
(c) Certification of financial accuracy.
The report must be certified as
financially accurate by the signatories to
the report. If any signatory is unable to,
or refuses to, certify the report, the
institution must disclose the
individual’s name and position title and
the reason(s) such individual is unable
or refuses to certify the report. At a
minimum, the certification must
include a statement that:
(1) The signatories have reviewed the
report,
(2) The report has been prepared in
accordance with all applicable statutory
or regulatory requirements, and
(3) The information is true, accurate,
and complete to the best of signatories’
knowledge and belief.
(d) Management assessment of
internal control over financial reporting.
(1) Annual reports must include a report
by the Funding Corporation’s
management assessing the effectiveness
of the internal control over financial
reporting for the System-wide report to
investors. The assessment must be
conducted during the reporting period
and be reported to the Funding
Corporation’s board of directors.
Quarterly and annual reports must
disclose any material change(s) in the
internal control over financial reporting
occurring during the reporting period.
(2) The Funding Corporation must
require its external auditor to review,
attest, and report on management’s
assessment of internal control over
financial reporting. The resulting
attestation report must accompany
management’s assessment and be
included in the annual report.
I 25. Amend § 630.6 by revising
paragraph (a)(4)(ii) to read as follows:
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§ 630.6
Funding Corporation committees.
(a) * * *
(4) * * *
(ii) External auditors. The external
auditor must report directly to the SAC.
The SAC must:
(A) Determine the appointment,
compensation, and retention of external
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auditors issuing System-wide audit
reports;
(B) Review the external auditor’s
work;
(C) Give prior approval for any nonaudit services performed by the external
auditor, except the audit committee may
not approve those non-audit services
specifically prohibited by FCA
regulation; and
(D) Comply with the auditor
independence provisions of part 621 of
this chapter.
*
*
*
*
*
Subpart B—Annual Report to Investors
26. Amend § 630.20 as follows:
a. Remove paragraph (b)(3);
b. Remove paragraph (m)(2)(iii);
c. Redesignate paragraphs (m)(2)(iv)
through (vi) as paragraphs (m)(2)(iii)
through (v); and
I d. Revise the introductory text,
paragraphs (f) introductory text, (h)(1),
(i), (k), and (l) introductory text to read
as follows:
I
I
I
I
§ 630.20 Contents of the annual report to
investors.
The annual report must contain the
following:
*
*
*
*
*
(f) Selected financial data. At a
minimum, furnish the following
combined financial data of the System
in comparative columnar form for each
of the last 5 fiscal years, if material.
*
*
*
*
*
(h) Directors and management.
(1) Board of directors. Briefly describe
the composition of boards of directors of
the disclosure entities. List the name of
each director of such entities, including
the director’s term of office and
principal occupation during the past 5
years, or state that such information is
available upon request.
(2) * * *
(i) Compensation of directors and
senior officers. State that information on
the compensation of directors and
senior officers of Farm Credit banks is
contained in each bank’s annual report
to shareholders and that the annual
report of each bank is available to
investors upon request pursuant to
§ 630.3(g).
*
*
*
*
*
(k) Relationship with qualified public
accountant.
(1) If a change in the qualified public
accountant who has previously
examined and expressed an opinion on
the System-wide combined financial
statements has taken place since the last
annual report to investors or if a
disagreement with a qualified public
accountant has occurred that the
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Funding Corporation would be required
to report to the FCA under part 621 of
this chapter, disclose the information
required by § 621.4(c) and (d).
(2) Disclose the total fees paid during
the reporting period to the qualified
public accountant by the category of
services provided. At a minimum,
identify fees paid for audit services, tax
services, and non-audit services. The
types of non-audit services must be
identified and indicate audit committee
approval of the services.
(l) Financial statements. Furnish
System-wide combined financial
statements and related footnotes
prepared in accordance with GAAP, and
accompanied by supplemental
information prepared in accordance
with the requirements of § 630.20(m).
The System-wide combined financial
statements shall provide investors and
potential investors in FCS debt
obligations with the most meaningful
presentation pertaining to the financial
condition and results of operations of
the System. The System-wide combined
financial statement and accompanying
supplemental information shall be
audited in accordance with generally
accepted auditing standards by a
qualified public accountant. The
System-wide combined financial
statements shall include the following:
*
*
*
*
*
Dated: December 12, 2006.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. E6–21529 Filed 12–19–06; 8:45 am]
BILLING CODE 6705–01–P
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Part 703
RIN 3133–AD27
Permissible Investments for Federal
Credit Unions
National Credit Union
Administration (NCUA).
ACTION: Final rule.
AGENCY:
SUMMARY: NCUA is amending its
investments rule to allow federal credit
unions (FCUs) to enter into investment
repurchase transactions in which the
instrument consists of first-lien
mortgage notes subject to certain
limitations. The final rule expands FCU
authority to invest in mortgage-related
securities while addressing safety and
soundness concerns associated with this
new investment activity.
DATES: This rule is effective January 19,
2007.
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Federal Register / Vol. 71, No. 244 / Wednesday, December 20, 2006 / Rules and Regulations
FOR FURTHER INFORMATION CONTACT:
Technical Information: Jeremy Taylor,
Senior Investments Officer, Office of
Capital Markets and Planning, at
National Credit Union Administration,
1775 Duke Street, Alexandria, Virginia
22314, or telephone: (703) 518–6620.
Legal Information: Moisette Green, Staff
Attorney, Office of General Counsel, at
the above address or telephone: (703)
518–6540.
SUPPLEMENTARY INFORMATION:
rwilkins on PROD1PC63 with RULES
A. Background
In July 2006, NCUA proposed to
amend its investment rules in Part 703
to permit FCUs to engage in investment
repurchase transactions in which the
underlying instruments are mortgage
notes evidenced by participation or trust
receipts. 71 FR 42326 (July 26, 2006).
The preamble to the proposed rule
discussed the statutory authority, its
legislative history, and NCUA regulatory
implementation regarding FCU
investment in mortgage-backed and
mortgage-related securities. The Federal
Credit Union Act (Act) permits FCUs to
invest in securities offered and sold
pursuant to section 4(5) of the Securities
Act of 1933. 12 U.S.C. 1757(15)(A); 15
U.S.C. 77d(5). The Board had limited
this authority by regulation under the
eligible obligations rule so that FCUs
could only purchase the mortgage notes
of its members or those needed to
complete a pool of loans to be sold on
the secondary market. 12 CFR 701.23.
The proposal to amend § 703.14 to
permit mortgage note repurchase
transactions contained six conditions to
address safety and soundness concerns
including a credit concentration limit,
minimum credit rating, independent
assessment of market value, maximum
transaction term, custodial
requirements, and undivided interests
in mortgage notes. NCUA issued the
proposed rule with a 60-day comment
period and requested comments on the
plan to expand FCU investment
authority, the conditions in the
proposed rule, and whether a regulation
permitting mortgage note repurchase
transactions should contain additional
criteria.
B. Public Comments and the Final Rule
NCUA received comments from three
credit unions, three trade associations,
and one investment advisor on the
proposed rule. Two commenters agreed
with the use of independent, qualified
agents to assess the market value of the
mortgage notes and the requirements for
undivided interests in the mortgage
notes. Five commenters believed triparty custodial arrangements would
sufficiently identify the underlying
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loans in a mortgage note repurchase
transaction. Four commenters stated the
rule needed no additional underwriting
criteria because the definition of the
permissible securities in § 107(15)(A)
includes the required criteria. Relying
on reasons similar to those in the
comments regarding underwriting
criteria, five commenters contended the
rule should not address the quality of
the mortgage notes in repurchase
transactions. All the commenters
objected to the concentration limits,
credit rating requirements, and
maximum transaction term. The NCUA
Board has considered carefully the three
objections to the proposed rule.
Concentration Limits
The proposed rule contained
concentration limits of no more than
25% of a participating FCU’s net worth
with any one counterparty and 100% of
its net worth with all counterparties.
Commenters stated the proposed
concentration limits are too restrictive.
One commenter suggested the limits
should be 50% of net worth per
counterparty and a total limit similar to
the FCU borrowing limit in § 107(9) of
the Act, i.e., 50% of paid-in and
unimpaired capital and surplus. See 12
U.S.C. 1757(9). Two others stated the
existing requirements for investment
repurchase transactions in Part 703 are
sufficient and no additional limits are
necessary for mortgage note repurchase
transactions, unless an FCU’s directors
establishes them.
NCUA investment rules currently
require directors to develop investment
policies that outline how FCUs will
manage credit risk, including what
counterparties an FCU will use, criteria
for their selection, and the limits for
investments with each counterparty. 12
CFR 703.3. Additionally, § 703.13(c)
permits FCUs to enter into investment
repurchase transactions so long as the
underlying securities are permissible
investments, and the investing FCU
takes possession or is the recorded
owner of the security, receives a daily
assessment of the securities’ market
value, maintains adequate margins that
reflect the risk and term of the
transaction, and enters into signed
contracts with the approved
counterparties. The Board recognizes
there is no concentration limit for
investment repurchase agreements
under § 703.13(c). These repurchase
transactions involve permissible
investments that are of high credit
quality, for example, U.S. government
securities, investment grade rated
municipals, AA and AAA mortgage
related securities, and securities issued
or guaranteed by GSEs. In contrast,
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mortgage note repurchase agreements
involve unrated mortgage notes.
Additionally, the securities involved
in § 701.13(c) investment repurchase
transactions typically have an active
bid-ask market. Mortgage notes do not
have an active bid-ask market, although
the fair value of the mortgage notes may
be estimated with reasonable accuracy.
Thus, while the Board is comfortable
that credit unions can set prudential
margin requirements, mortgage notes
may have less liquidity than other
securities involved in repurchase
transactions. Moreover, the Board notes
the Office of the Comptroller of the
Currency limits mortgage notes to no
more than 25% of capital. See 12 U.S.C.
84(a)(2), (c)(4); 12 CFR 32.2(k)91)(iii),
(n); 12 CFR 32.3.
Thus, the Board having fully
considered the comments on this issue
has determined to maintain the
concentration limits as proposed
because it believes a 25% concentration
limit per counterparty is no more
restrictive than the limit for national
banks and maintains this and the 100%
limit for purposes of safety and
soundness.
Credit Rating Requirement
Commenters also objected to the
proposed requirement that the
counterparty to a mortgage note
repurchase agreement have a long-term
credit rating no lower than A¥(or its
equivalent). While mortgage note
repurchase transactions generally have a
short term, parties may rollover the
transactions and enter into subsequent
transactions, thereby creating a longer
term of exposure to the counterparty. It
is prudent to review the long-term rating
of debt issued by the counterparty when
rolling over repurchase transactions.
Economically, the credit exposure in a
mortgage note repurchase transaction
may be somewhat similar to an
investment grade asset-backed security
(ABS) if debt of the issuing entity has
been rated investment grade or if the
mortgage note is guaranteed by an entity
with investment grade debt. There is a
distinction, however, in that an
investment grade ABS is in and of itself
highly rated, and the participant is
relying on a credit rating of debt that is
not applicable to the mortgage note as
an indicator of the likelihood of default
of the counterparty. Thus, the Board
reasons that single A¥(the third highest
of the four long-term investment
grades), rather than BBB¥(the lowest
category of investment grade), is a
prudent and appropriate safety and
soundness standard.
While the final rule retains the
requirement for long- and short-term
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Federal Register / Vol. 71, No. 244 / Wednesday, December 20, 2006 / Rules and Regulations
credit ratings as in the proposed rule,
the final rule modifies the requirement
by allowing a third party, that has the
required credit rating, to fully guarantee
the mortgage note repurchase
transaction of a counterparty that does
not meet the requirement. This
modification reflects market practice in
which a parent company guarantees
mortgage note repurchase transactions
of its subsidiary. Accordingly, the final
rule requires a counterparty to have
acceptably rated debt or that a party
with acceptably rated debt guarantee the
transaction.
Maximum Transaction Term
Finally, commenters contended that
the maximum term of a mortgage note
repurchase transaction should be longer
than, as proposed, 30 days. Commenters
pointed out investors in the current
market have kept repurchase agreements
short due to the uncertain interest rate
environment and abnormal yield curve.
Commenters stated the market to
finance whole loans traditionally
mirrors the overall holding period of 45
to 90 days for securitization.
Additionally, commenters believe the
concentration limits and credit quality
of the counterparty are sufficient
safeguards given the aggregate size of
mortgage note repurchase transactions.
The Board is persuaded that a 90-day
transaction is consistent with market
practice and creates no additional safety
and soundness risks. Therefore, the
maximum transaction term in the final
rule is modified to 90 days.
While this final rule amends § 703.14
to create additional requirements for
investment repurchase transactions
when mortgage notes are the underlying
instruments, FCUs must still comply
with the requirements of § 703.13(c). For
instance, an FCU must obtain the daily
assessment required under
§ 703.13(c)(1). In addition, FCUs
investing in mortgage note repurchase
transactions must maintain adequate
margins that reflect a risk assessment of
the mortgage notes and the term of the
transactions under § 703.13(c)(1).
C. Regulatory Procedures
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Regulatory Flexibility Act
The Regulatory Flexibility Act
requires NCUA to prepare an analysis to
describe any significant economic
impact a rule may have on a substantial
number of small entities, those credit
unions with less than ten million
dollars in assets. The proposed rule
involves the permissibility of certain
investment repurchase transactions for
FCUs and is grounded in NCUA
concerns about the safety and
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soundness of the transactions and their
potential effects on FCUs and the
NCUSIF. Accordingly, the Board
determines and certifies that this
proposed rule does not have a
significant economic impact on a
substantial number of small credit
unions and that a Regulatory Flexibility
Analysis is not required.
Paperwork Reduction Act
NCUA has determined that this rule
will not increase paperwork
requirements under the Paperwork
Reduction Act of 1995 and regulations
of the Office of Management and
Budget.
Executive Order 13132
Executive Order 13132 encourages
independent regulatory agencies to
consider the impact of their actions on
state and local interests. In adherence to
fundamental federalism principles,
NCUA, an independent regulatory
agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive
order. This rule will not have
substantial direct effects on the states,
on the relationship between the national
government and the states, or on the
distribution of power and
responsibilities among the various
levels of government. NCUA has
determined that this rule does not
constitute a policy that has federalism
implications for purposes of the
executive order.
The Treasury and General Government
Appropriations Act, 1999—Assessment
of Federal Regulations and Policies on
Families
The NCUA has determined that this
rule will not affect family well-being
within the meaning of the Treasury and
General Government Appropriations
Act, 1999, Public Law 105–277, 112
Stat. 2681 (1998).
Small Business Regulatory Enforcement
Fairness Act
The Small Business Regulatory
Enforcement Fairness Act of 1996, Pub.
L. 104–121 (SBREFA), provides
generally for congressional review of
agency rules. A reporting requirement is
triggered in instances where NCUA
issues a final rule as defined by section
551 of the APA. 5 U.S.C. 551. NCUA has
requested a SBREFA determination from
the Office of Management and Budget,
which is pending. As required by
SBREFA, NCUA will file the
appropriate reports with Congress and
the General Accounting Office so that
the final rule may be reviewed.
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List of Subjects in 12 CFR Part 703
Credit unions, Investments,
Repurchase transactions.
By the National Credit Union
Administration Board on December 14, 2006.
Mary F. Rupp,
Secretary of the Board.
For the reasons set forth in the
preamble, the Board amends 12 CFR
part 703 as set forth below:
I
PART 703—INVESTMENT AND
DEPOSIT ACTIVITIES
1. The authority citation for part 703
is continues to read:
I
Authority: 12 U.S.C. 1757(7), 1757(8),
1757(15).
2. Amend § 703.1 by revising
paragraph (b)(2) to read as follows:
I
§ 703.1
Purpose and scope.
*
*
*
*
*
(b) * * *
(2) The purchase of real estate-secured
loans pursuant to Section 107(15)(A) of
the Act, which is governed by § 701.23
of this chapter, except those real estatesecured loans purchased as a part of an
investment repurchase transaction,
which is governed by §§ 703.13 and
703.14 of this chapter;
*
*
*
*
*
I 3. Amend § 703.2 by adding the
definition of ‘‘independent qualified
agent’’ alphabetically to read as follows:
§ 703.2
Definitions.
*
*
*
*
*
Independent qualified agent means an
agent independent of an investment
repurchase counterparty that does not
receive a transaction fee from the
counterparty and has at least two years
experience assessing the value of
mortgage loans.
*
*
*
*
*
I 4. Amend § 703.14 by adding new
paragraph (h) to read as follows:
§ 703.14
Permissible investments.
*
*
*
*
*
(h) Mortgage note repurchase
transactions. A federal credit union may
invest in securities that are offered and
sold pursuant to section 4(5) of the
Securities Act of 1933, 15 U.S.C. 77d(5),
only as a part of an investment
repurchase agreement under § 703.13(c),
subject to the following conditions:
(1) The aggregate of the investments
with any one counterparty is limited to
25 percent of the credit union’s net
worth and 100 percent of its net worth
with all counterparties;
(2) At the time a federal credit union
purchases the securities, the
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Federal Register / Vol. 71, No. 244 / Wednesday, December 20, 2006 / Rules and Regulations
counterparty, or a party fully
guaranteeing the transaction, must have
outstanding debt with a long-term rating
no lower than A¥or its equivalent and
outstanding debt with a short-term
rating, if any, no lower than A–1 or its
equivalent;
(3) The federal credit union must
obtain a daily assessment of the market
value of the securities under
§ 703.13(c)(1) using an independent
qualified agent;
(4) The mortgage note repurchase
transaction is limited to a maximum
term of 90 days;
(5) All mortgage note repurchase
transactions will be conducted under
tri-party custodial agreements; and
(6) A federal credit union must obtain
an undivided interest in the securities.
[FR Doc. E6–21662 Filed 12–19–06; 8:45 am]
BILLING CODE 7535–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 73
[Docket No. FAA–2005–22680; Airspace
Docket No. 05–ASW–3]
RIN 2120–AA66
Establishment of Restricted Area
5601F; Fort Sill, OK
Federal Aviation
Administration (FAA), DOT.
ACTION: Final rule.
AGENCY:
rwilkins on PROD1PC63 with RULES
SUMMARY: This action establishes
Restricted Area 5601F (R–5601F) over
Fort Sill, OK. The United States (U.S.)
Army requested that the FAA take
action to establish R–5601F to provide
additional airspace needed to support
new high angle air-to-ground training
requirements for Air Force, Navy, and
Marine aircraft operating over the
Falcon Bombing Range and to enhance
Fort Sill’s ability to host joint training.
DATES: Effective Date: 0901 UTC, March
15, 2007.
FOR FURTHER INFORMATION CONTACT:
Steve Rohring, Airspace and Rules,
Office of System Operations Airspace
and AIM, Federal Aviation
Administration, 800 Independence
Avenue, SW., Washington, DC 20591;
telephone: (202) 267–8783.
SUPPLEMENTARY INFORMATION:
Background
On November 2, 2005, the FAA
published in the Federal Register a
notice of proposed rulemaking (NPRM)
to establish R–5601F in response to a
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17:07 Dec 19, 2006
Jkt 211001
request from the U.S. Army (70 FR
66306). Interested parties were invited
to participate in this rulemaking
proceeding by submitting written
comments on the proposal to the FAA.
Five comments were received.
Discussion of Comments
The commenters included the Aircraft
Owners and Pilots Association (AOPA),
the Oklahoma Pilots Association (OPA),
and three individuals. The following is
a summary of those comments and the
FAA’s responses:
Three commenters expressed a
concern that R–5601F would harm the
Wichita Mountain Wildlife Refuge and
Lake Latonka.
Response: The FAA disagrees that R–
5601F would cause significant harm to
these areas because R–5601F would be
a narrow piece of airspace (typically less
than 3–4 miles from north to south) and
the Army agreed to restrict flight to
5,500 feet mean sea level and above,
over the Wildlife Refuge, to mitigate
adverse impacts. We also note that the
Wildlife Manager of the Wichita
Mountain Wildlife Refuge had no
objections to the establishment of R–
5601F as outlined in the draft
environmental assessment that was later
adopted.
Two commenters stated that R–5601F
should not be designated as a restricted
area because the activity would not
constitute ‘‘a hazard to nonparticipating aircraft’’ as required by
FAA Order 7400.2E.
Response: FAA Order 7400.2F,
Procedures for Handling Airspace
Matters (effective on February 16, 2006)
supercedes FAA Order 7400.2E. Both
versions specify that the purpose of a
restricted area is to confine or segregate
activities considered hazardous to
nonparticipating aircraft. The FAA
believes it is appropriate to designate
the needed maneuvering area as a
restricted area because the participating
aircraft will be maneuvering with armed
weapons while preparing to drop and/
or fire on the target areas. This activity
constitutes a hazard and must be
conducted within restricted airspace.
Two commenters stated that there
currently is not enough activity at Fort
Sill to justify a need for additional
restricted airspace.
Response: R–5601F would provide
the maneuvering airspace needed to
safely execute new high angle air-toground training requirements for Air
Force, Navy, and Marine aircraft.
One commenter expressed a concern
that the proposed R–5061F would
‘‘negatively impact general aviation by
closing one of the last VFR corridors left
in southern Oklahoma’’ and one other
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76125
commenter stated that the proposed
restricted area would restrict air tours
over the Wichita Mountain National
Wildlife Refuge and Lake Latonka.
Response: The FAA believes that the
impact would be minimal because the
Army plans to use the airspace less than
6 hours per day. Also, nonparticipating
aircraft will have the opportunity to fly
through the area when the airspace is
not in use and may contact Fort Sill
Approach for the status of R–5601F.
The Rule
The FAA is amending Title 14 Code
of Federal Regulations (14 CFR) part 73
to establish R–5601F adjacent to and
north of R–5601B and R–5601C.
Establishment of the new restricted area
will provide additional airspace needed
to support new high angle air-to-ground
training requirements for Air Force,
Navy, and Marine aircraft operating over
the Falcon Bombing Range and will
enhance Fort Sill’s ability to host joint
training.
The FAA has determined that this
regulation only involves an established
body of technical regulations for which
frequent and routine amendments are
necessary to keep them operationally
current. Therefore, this regulation: (1) Is
not a ‘‘significant regulatory action’’
under Executive Order 12866; (2) is not
a ‘‘significant rule’’ under Department of
Transportation (DOT) Regulatory
Policies and Procedures (44 FR 11034;
February 26, 1979); and (3) does not
warrant preparation of a regulatory
evaluation as the anticipated impact is
so minimal. Since this is a routine
matter that will only affect air traffic
procedures and air navigation, it is
certified that this rule, when
promulgated, will not have a significant
economic impact on a substantial
number of small entities under the
criteria of the Regulatory Flexibility Act.
Environmental Review
On October 4, 2006, the FAA adopted
the U.S. Army’s Finding of No
Significant Impact and Record of
Decision for the establishment of R–
5601F.
List of Subjects in 14 CFR Part 73
Airspace, Prohibited Areas, Restricted
Areas.
Adoption of the Amendment
In consideration of the foregoing, the
Federal Aviation Administration
amends 14 CFR part 73 as follows:
I
PART 73—SPECIAL USE AIRSPACE
1. The authority citation for part 73
continues to read as follows:
I
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]]>Agencies
[Federal Register Volume 71, Number 244 (Wednesday, December 20, 2006)]
[Rules and Regulations]
[Pages 76122-76125]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-21662]
=======================================================================
-----------------------------------------------------------------------
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 703
RIN 3133-AD27
Permissible Investments for Federal Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: NCUA is amending its investments rule to allow federal credit
unions (FCUs) to enter into investment repurchase transactions in which
the instrument consists of first-lien mortgage notes subject to certain
limitations. The final rule expands FCU authority to invest in
mortgage-related securities while addressing safety and soundness
concerns associated with this new investment activity.
DATES: This rule is effective January 19, 2007.
[[Page 76123]]
FOR FURTHER INFORMATION CONTACT: Technical Information: Jeremy Taylor,
Senior Investments Officer, Office of Capital Markets and Planning, at
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314, or telephone: (703) 518-6620. Legal Information:
Moisette Green, Staff Attorney, Office of General Counsel, at the above
address or telephone: (703) 518-6540.
SUPPLEMENTARY INFORMATION:
A. Background
In July 2006, NCUA proposed to amend its investment rules in Part
703 to permit FCUs to engage in investment repurchase transactions in
which the underlying instruments are mortgage notes evidenced by
participation or trust receipts. 71 FR 42326 (July 26, 2006). The
preamble to the proposed rule discussed the statutory authority, its
legislative history, and NCUA regulatory implementation regarding FCU
investment in mortgage-backed and mortgage-related securities. The
Federal Credit Union Act (Act) permits FCUs to invest in securities
offered and sold pursuant to section 4(5) of the Securities Act of
1933. 12 U.S.C. 1757(15)(A); 15 U.S.C. 77d(5). The Board had limited
this authority by regulation under the eligible obligations rule so
that FCUs could only purchase the mortgage notes of its members or
those needed to complete a pool of loans to be sold on the secondary
market. 12 CFR 701.23. The proposal to amend Sec. 703.14 to permit
mortgage note repurchase transactions contained six conditions to
address safety and soundness concerns including a credit concentration
limit, minimum credit rating, independent assessment of market value,
maximum transaction term, custodial requirements, and undivided
interests in mortgage notes. NCUA issued the proposed rule with a 60-
day comment period and requested comments on the plan to expand FCU
investment authority, the conditions in the proposed rule, and whether
a regulation permitting mortgage note repurchase transactions should
contain additional criteria.
B. Public Comments and the Final Rule
NCUA received comments from three credit unions, three trade
associations, and one investment advisor on the proposed rule. Two
commenters agreed with the use of independent, qualified agents to
assess the market value of the mortgage notes and the requirements for
undivided interests in the mortgage notes. Five commenters believed
tri-party custodial arrangements would sufficiently identify the
underlying loans in a mortgage note repurchase transaction. Four
commenters stated the rule needed no additional underwriting criteria
because the definition of the permissible securities in Sec.
107(15)(A) includes the required criteria. Relying on reasons similar
to those in the comments regarding underwriting criteria, five
commenters contended the rule should not address the quality of the
mortgage notes in repurchase transactions. All the commenters objected
to the concentration limits, credit rating requirements, and maximum
transaction term. The NCUA Board has considered carefully the three
objections to the proposed rule.
Concentration Limits
The proposed rule contained concentration limits of no more than
25% of a participating FCU's net worth with any one counterparty and
100% of its net worth with all counterparties. Commenters stated the
proposed concentration limits are too restrictive. One commenter
suggested the limits should be 50% of net worth per counterparty and a
total limit similar to the FCU borrowing limit in Sec. 107(9) of the
Act, i.e., 50% of paid-in and unimpaired capital and surplus. See 12
U.S.C. 1757(9). Two others stated the existing requirements for
investment repurchase transactions in Part 703 are sufficient and no
additional limits are necessary for mortgage note repurchase
transactions, unless an FCU's directors establishes them.
NCUA investment rules currently require directors to develop
investment policies that outline how FCUs will manage credit risk,
including what counterparties an FCU will use, criteria for their
selection, and the limits for investments with each counterparty. 12
CFR 703.3. Additionally, Sec. 703.13(c) permits FCUs to enter into
investment repurchase transactions so long as the underlying securities
are permissible investments, and the investing FCU takes possession or
is the recorded owner of the security, receives a daily assessment of
the securities' market value, maintains adequate margins that reflect
the risk and term of the transaction, and enters into signed contracts
with the approved counterparties. The Board recognizes there is no
concentration limit for investment repurchase agreements under Sec.
703.13(c). These repurchase transactions involve permissible
investments that are of high credit quality, for example, U.S.
government securities, investment grade rated municipals, AA and AAA
mortgage related securities, and securities issued or guaranteed by
GSEs. In contrast, mortgage note repurchase agreements involve unrated
mortgage notes.
Additionally, the securities involved in Sec. 701.13(c) investment
repurchase transactions typically have an active bid-ask market.
Mortgage notes do not have an active bid-ask market, although the fair
value of the mortgage notes may be estimated with reasonable accuracy.
Thus, while the Board is comfortable that credit unions can set
prudential margin requirements, mortgage notes may have less liquidity
than other securities involved in repurchase transactions. Moreover,
the Board notes the Office of the Comptroller of the Currency limits
mortgage notes to no more than 25% of capital. See 12 U.S.C. 84(a)(2),
(c)(4); 12 CFR 32.2(k)91)(iii), (n); 12 CFR 32.3.
Thus, the Board having fully considered the comments on this issue
has determined to maintain the concentration limits as proposed because
it believes a 25% concentration limit per counterparty is no more
restrictive than the limit for national banks and maintains this and
the 100% limit for purposes of safety and soundness.
Credit Rating Requirement
Commenters also objected to the proposed requirement that the
counterparty to a mortgage note repurchase agreement have a long-term
credit rating no lower than A-(or its equivalent). While mortgage note
repurchase transactions generally have a short term, parties may
rollover the transactions and enter into subsequent transactions,
thereby creating a longer term of exposure to the counterparty. It is
prudent to review the long-term rating of debt issued by the
counterparty when rolling over repurchase transactions. Economically,
the credit exposure in a mortgage note repurchase transaction may be
somewhat similar to an investment grade asset-backed security (ABS) if
debt of the issuing entity has been rated investment grade or if the
mortgage note is guaranteed by an entity with investment grade debt.
There is a distinction, however, in that an investment grade ABS is in
and of itself highly rated, and the participant is relying on a credit
rating of debt that is not applicable to the mortgage note as an
indicator of the likelihood of default of the counterparty. Thus, the
Board reasons that single A-(the third highest of the four long-term
investment grades), rather than BBB-(the lowest category of investment
grade), is a prudent and appropriate safety and soundness standard.
While the final rule retains the requirement for long- and short-
term
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credit ratings as in the proposed rule, the final rule modifies the
requirement by allowing a third party, that has the required credit
rating, to fully guarantee the mortgage note repurchase transaction of
a counterparty that does not meet the requirement. This modification
reflects market practice in which a parent company guarantees mortgage
note repurchase transactions of its subsidiary. Accordingly, the final
rule requires a counterparty to have acceptably rated debt or that a
party with acceptably rated debt guarantee the transaction.
Maximum Transaction Term
Finally, commenters contended that the maximum term of a mortgage
note repurchase transaction should be longer than, as proposed, 30
days. Commenters pointed out investors in the current market have kept
repurchase agreements short due to the uncertain interest rate
environment and abnormal yield curve. Commenters stated the market to
finance whole loans traditionally mirrors the overall holding period of
45 to 90 days for securitization. Additionally, commenters believe the
concentration limits and credit quality of the counterparty are
sufficient safeguards given the aggregate size of mortgage note
repurchase transactions. The Board is persuaded that a 90-day
transaction is consistent with market practice and creates no
additional safety and soundness risks. Therefore, the maximum
transaction term in the final rule is modified to 90 days.
While this final rule amends Sec. 703.14 to create additional
requirements for investment repurchase transactions when mortgage notes
are the underlying instruments, FCUs must still comply with the
requirements of Sec. 703.13(c). For instance, an FCU must obtain the
daily assessment required under Sec. 703.13(c)(1). In addition, FCUs
investing in mortgage note repurchase transactions must maintain
adequate margins that reflect a risk assessment of the mortgage notes
and the term of the transactions under Sec. 703.13(c)(1).
C. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact a rule may have on a
substantial number of small entities, those credit unions with less
than ten million dollars in assets. The proposed rule involves the
permissibility of certain investment repurchase transactions for FCUs
and is grounded in NCUA concerns about the safety and soundness of the
transactions and their potential effects on FCUs and the NCUSIF.
Accordingly, the Board determines and certifies that this proposed rule
does not have a significant economic impact on a substantial number of
small credit unions and that a Regulatory Flexibility Analysis is not
required.
Paperwork Reduction Act
NCUA has determined that this rule will not increase paperwork
requirements under the Paperwork Reduction Act of 1995 and regulations
of the Office of Management and Budget.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, NCUA, an independent
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies
with the executive order. This rule will not have substantial direct
effects on the states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. NCUA has
determined that this rule does not constitute a policy that has
federalism implications for purposes of the executive order.
The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this rule will not affect family well-
being within the meaning of the Treasury and General Government
Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681 (1998).
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996,
Pub. L. 104-121 (SBREFA), provides generally for congressional review
of agency rules. A reporting requirement is triggered in instances
where NCUA issues a final rule as defined by section 551 of the APA. 5
U.S.C. 551. NCUA has requested a SBREFA determination from the Office
of Management and Budget, which is pending. As required by SBREFA, NCUA
will file the appropriate reports with Congress and the General
Accounting Office so that the final rule may be reviewed.
List of Subjects in 12 CFR Part 703
Credit unions, Investments, Repurchase transactions.
By the National Credit Union Administration Board on December
14, 2006.
Mary F. Rupp,
Secretary of the Board.
0
For the reasons set forth in the preamble, the Board amends 12 CFR part
703 as set forth below:
PART 703--INVESTMENT AND DEPOSIT ACTIVITIES
0
1. The authority citation for part 703 is continues to read:
Authority: 12 U.S.C. 1757(7), 1757(8), 1757(15).
0
2. Amend Sec. 703.1 by revising paragraph (b)(2) to read as follows:
Sec. 703.1 Purpose and scope.
* * * * *
(b) * * *
(2) The purchase of real estate-secured loans pursuant to Section
107(15)(A) of the Act, which is governed by Sec. 701.23 of this
chapter, except those real estate-secured loans purchased as a part of
an investment repurchase transaction, which is governed by Sec. Sec.
703.13 and 703.14 of this chapter;
* * * * *
0
3. Amend Sec. 703.2 by adding the definition of ``independent
qualified agent'' alphabetically to read as follows:
Sec. 703.2 Definitions.
* * * * *
Independent qualified agent means an agent independent of an
investment repurchase counterparty that does not receive a transaction
fee from the counterparty and has at least two years experience
assessing the value of mortgage loans.
* * * * *
0
4. Amend Sec. 703.14 by adding new paragraph (h) to read as follows:
Sec. 703.14 Permissible investments.
* * * * *
(h) Mortgage note repurchase transactions. A federal credit union
may invest in securities that are offered and sold pursuant to section
4(5) of the Securities Act of 1933, 15 U.S.C. 77d(5), only as a part of
an investment repurchase agreement under Sec. 703.13(c), subject to
the following conditions:
(1) The aggregate of the investments with any one counterparty is
limited to 25 percent of the credit union's net worth and 100 percent
of its net worth with all counterparties;
(2) At the time a federal credit union purchases the securities,
the
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counterparty, or a party fully guaranteeing the transaction, must have
outstanding debt with a long-term rating no lower than A-or its
equivalent and outstanding debt with a short-term rating, if any, no
lower than A-1 or its equivalent;
(3) The federal credit union must obtain a daily assessment of the
market value of the securities under Sec. 703.13(c)(1) using an
independent qualified agent;
(4) The mortgage note repurchase transaction is limited to a
maximum term of 90 days;
(5) All mortgage note repurchase transactions will be conducted
under tri-party custodial agreements; and
(6) A federal credit union must obtain an undivided interest in the
securities.
[FR Doc. E6-21662 Filed 12-19-06; 8:45 am]
BILLING CODE 7535-01-P
