Asset Securitization, 36264-36269 [2014-14926]

Agencies

• National Credit Union Administration

[Federal Register Volume 79, Number 123 (Thursday, June 26, 2014)]
[Proposed Rules]
[Pages 36264-36269]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-14926]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 721 and 741

RIN 3133-AE29


Asset Securitization

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) proposes to amend its regulations to 
clarify that a natural person federal credit union (FCU) is authorized 
to securitize loans that it has originated, as an activity incidental 
to the business for which an FCU is chartered, provided the transaction 
meets certain requirements. The proposed rule would also apply those 
requirements to federally insured, state-chartered credit unions 
(FISCUs) that are permitted by state law to securitize their assets.

DATES: Comments must be received on or before August 25, 2014.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web site: https://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     Email: Address to regcomments@ncua.gov. Include ``[Your 
name]--Comments on Proposed Rule--Asset Securitization'' in the email 
subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Gerard Poliquin, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT: Dale Klein, Senior Capital Markets 
Specialist, Office of Examination and Insurance, at the above address 
or telephone (703) 518-6360; Jeremy Taylor, Senior Capital Markets 
Specialist, Office of National Examinations and Supervision, at the 
above address or telephone (703) 518-6640; or Lisa Henderson, Staff 
Attorney, Office of General Counsel, at the above address or telephone 
(703) 518-6540.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    1. Federal Credit Union Authority To Securitize Assets
    2. Why is NCUA proposing this rule?
II. Proposed Rule
    1. Part 721--Incidental Powers
    2. Asset Securitization Activities
    3. Loans the FCU Has Originated
    4. Authority To Create Issuing Entities
    5. Other Minimum Requirements
    6. Residual Interests and Retained Interests
    7. Implicit Recourse Prohibited
    8. Federally Insured, State-Chartered Credit Unions
III. Safe Harbor
IV. Regulatory Procedures
    1. Regulatory Flexibility Act
    2. Paperwork Reduction Act
    3. Executive Order 13132
    4. Assessment of Federal Regulations and Policies on Families

I. Background

1. Federal Credit Union Authority To Securitize Assets

    For purposes of this rule, ``securitizing assets'' means acting as 
a sponsor of a securitization, i.e., organizing and initiating a 
securitization transaction by transferring financial assets to an 
entity that will issue obligations supported by such assets. While the 
Federal Credit Union Act (the Act) explicitly authorizes an FCU to sell 
its loans,\1\ it provides no express authority to securitize them. The 
Act does, however, authorize an FCU to ``exercise such incidental 
powers as shall be necessary or requisite to enable it to carry on 
effectively the business for which it is incorporated.'' \2\ Under NCUA 
regulations, an activity meets the definition of an incidental power 
activity if it meets a three-part test.\3\ As discussed below, the 
Board has determined that securitizing assets meets that test as long 
as the assets being securitized are in the form of loans originated by 
the sponsoring FCU to its members.
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    \1\ 12 U.S.C. 1757(13).
    \2\ 12 U.S.C. 1757(17).
    \3\ 12 CFR 721.2.
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    Under the first prong of the test, an activity must be convenient 
or useful in

[[Page 36265]]

carrying out the mission or business of credit unions consistent with 
the Act. One of the fundamental purposes of credit unions is making 
loans to members.\4\ Credit unions must have sufficient liquidity to 
make loans, and the Act provides a number of means for FCUs to obtain 
cash to fund lending, including receiving shares, investing excess 
funds, borrowing, and selling eligible obligations.\5\ Securitizing 
assets is another means of obtaining cash to fund lending. As such, it 
is convenient and useful in carrying out a credit union's central 
mission.
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    \4\ 12 U.S.C. 1752(1).
    \5\ 12 U.S.C. 1757(6), (7), (9), and (13).
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    Under the second part of the test, the activity must be the 
functional equivalent or logical outgrowth of activities that are part 
of the mission or business of credit unions. FCUs already make loans 
and either hold them on their books or sell them, or sell a 
participation interest in them, into the secondary market. Selling 
loans by repackaging them as securities is a logical outgrowth of an 
FCU's mission and business.
    Finally, the activity must involve risks similar in nature to those 
already assumed as part of the business of credit unions. Risk is 
fundamental to the operation of a credit union, and credit unions must 
balance risk and reward responsibly. Making and selling loans present 
FCUs with, at a minimum, reputation risk, strategic risk, credit risk, 
transaction risk, liquidity risk, and compliance risk. While 
securitizing loans introduces more complex legal and operational risks, 
these risk types are inherent in other credit union activities and are 
thus similar in nature to those already assumed as part of the business 
of credit unions. Accordingly, NCUA has concluded that FCUs have the 
incidental power to securitize assets.

2. Why is NCUA proposing this rule?

    The Board proposes to amend its regulations to clarify that, under 
certain circumstances, an FCU has the incidental authority to 
securitize loans that it has originated. The Board believes that there 
are a number of potential benefits of securitization. First, 
securitization provides originators with an additional source of 
funding or liquidity to meet members' needs. Second, securitization may 
be used to reduce interest rate risk by converting fixed-rate assets 
into cash. Finally, the sale of assets may reduce an FCU's regulatory 
costs by allowing it to optimize its capital management. The details of 
how an FCU may operate an asset securitization program are discussed in 
more detail below.

II. Proposed Rule

1. Part 721--Incidental Powers

    The proposed rule adds a new provision to Part 721 of NCUA's 
regulations, which addresses the incidental powers of FCUs. Section 
721.3 enumerates the categories of activities that are preapproved as 
incidental powers of an FCU. The proposed rule adds a new paragraph (n) 
to Sec.  721.3 to establish securitizing loans as a preapproved 
incidental power.

2. Asset Securitization Activities

    Paragraph (1) of the proposed rule labels the newly approved 
category ``asset securitization activities'' in which an FCU acts as 
the sponsor of an asset-backed security. Paragraph (2) defines 
``sponsor,'' ``asset-backed security,'' and other relevant terms.

3. Loans the FCU Has Originated

    Paragraph (3) of the proposed rule provides that an FCU may 
securitize and sell loans it has originated. As discussed above, 
securitizing loans presents more complex risks than simply making and 
selling loans. Allowing FCUs to purchase loans for the purpose of 
issuing asset-backed securities would add an additional layer of risk, 
in an area that is uncharted for both FCUs and NCUA. Accordingly, for 
safety and soundness reasons, the proposed rule limits FCUs to 
securitizing only loans it has originated.\6\ To avoid confusion, the 
proposed rule clarifies that the purchase and re-underwriting of a loan 
does not meet the origination requirement.
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    \6\ The Board notes that this limitation does not prevent FCUs 
from purchasing loans to complete a pool to be sold on the secondary 
market, other than through a securitization. 12 CFR 701.23(b).
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4. Authority To Create Issuing Entities

    To securitize assets, a sponsor must be able to create an issuing 
entity, commonly known as a special purpose vehicle or special purpose 
entity, to hold the assets collateralizing the asset-backed security. 
The Board considers an FCU's authority to create such entities to be 
included within the general incidental power to securitize assets, but 
has made that authority explicit in paragraph (4) of the proposed rule 
to avoid confusion.\7\ An issuing entity can take the form of a 
corporation, trust, partnership, or limited liability company, and is a 
vehicle whose operations are typically limited to the acquisition and 
financing of specific assets. The proposed rule requires that any 
issuing entity created by an FCU be bankruptcy remote from the FCU, 
which means the issuing entity's assets are isolated from any creditors 
of the FCU should the FCU become insolvent. This can be achieved 
through a variety of methods, including limiting the issuing entity's 
purpose, indebtedness, assets, and other liabilities, as well as by 
ensuring through its corporate governance process that decisions 
regarding bankruptcy will be made from the point of view of the issuing 
entity itself, not the FCU.
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    \7\ The Board notes that NCUA's regulations governing credit 
union service organizations (CUSOs) do not apply to the creation of 
issuing entities. 12 CFR 712. Further, acting as an issuing entity 
is not a preapproved CUSO activity. 12 CFR 712.5.
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5. Other Minimum Requirements

    Paragraph (5) of the proposed rule establishes the following seven 
minimum safety and soundness requirements for an FCU engaging in 
securitizing assets:
a. Compliance With All Federal and State Laws and Regulations
    An FCU engaged in securitizing transactions may be subject to 
numerous registration, disclosure, filing, reporting, and other legal 
requirements. The complexity of asset securitization transactions 
requires an FCU that participates in securitization activities to fully 
investigate all applicable laws and regulations, to establish policies 
and procedures to assure legal review of all securitization activities, 
and to take steps to protect itself from liability in the case of 
problems with particular asset-backed securitization transactions.
b. Independent Risk Management
    An FCU engaged in securitizations must have in place independent 
risk management controls commensurate with the complexity and volume of 
its securitizations and its overall risk exposures. The risk management 
controls must ensure that securitization policies and operating 
procedures, including clearly articulated risk limits, are in place and 
appropriate for the FCU.
c. Annual Audit
    As an added measure of safety and soundness, the proposed rule 
requires an FCU engaged in securitization transactions to have an 
annual audit of its financial statements performed in accordance with 
generally accepted auditing standards by an independent licensed 
auditor. The proposed rule further requires that the financial 
statements include all aspects of accounting and disclosure for 
sponsored

[[Page 36266]]

securitizations in accordance with generally accepted accounting 
principles.
d. Board Knowledge
    The board of directors of an FCU engaged in securitizations must 
have a general understanding of the risks and benefits of 
securitization activities and how those activities fit into the credit 
union's strategic and business plans.
e. Management Expertise
    Senior management responsible for an FCU's securitization 
activities must possess sufficient expertise to oversee those 
activities. Unlike many other credit union activities, an FCU engaged 
in securitizing assets is likely to engage outside parties for much of 
the required procedures. It is not necessary for the FCU to possess all 
of the required skills in house. However, senior FCU management must 
have sufficient understanding and familiarity with the process to 
competently select and oversee parties hired or engaged to support the 
activities.
f. Board Approved Policy
    An FCU engaged in securitizations must have a credit union board 
approved asset securitization policy that includes or addresses, at a 
minimum, the following items:
     A statement of the business purpose for engaging in 
securitization activities, including the general scope of the 
activities and the level of acceptable risk.
     The governance of securitization activities;
     A written and consistently applied accounting methodology;
     Regulatory reporting requirements;
     Valuation methods, including those applicable to the FCU's 
residual interests and retained interests in the securitization 
transaction, and procedures to formally approve changes to those 
assumptions;
     The management reporting process; and
     Exposure limits and requirements for both aggregate and 
individual transaction monitoring.
g. Internal Controls
    Effective internal controls are essential to an FCU's management of 
the risks associated with securitization. When properly designed and 
consistently enforced, a sound system of internal controls will help 
management safeguard the FCUs resources, ensure that financial 
information and reports are reliable, and comply with contractual 
obligations, including securitization covenants. It will also reduce 
the possibility of significant errors and irregularities, as well as 
assist in their timely detection when they do occur. Internal controls 
typically: (1) Limit authorities, (2) safeguard access to and use of 
records, (3) separate and rotate duties, and (4) ensure both regular 
and unscheduled reviews, including testing.

6. Residual Interests and Retained Interests

    The sponsor of an asset-backed security typically retains an 
interest in a securitization. Except in certain limited circumstances, 
NCUA regulations prohibit an FCU from investing in stripped mortgage 
backed securities and residual interests in collateralized mortgage 
obligations.\8\ Paragraph (6)(a) of the proposed rule clarifies that 
those prohibitions do not apply to interests retained in the course of 
sponsoring a securitization transaction.
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    \8\ 12 CFR 703.16(c) and (d).
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    Paragraph (6)(b) of the proposed rule requires an FCU to use 
reasonable and supportable assumptions and modeling methodologies to 
assign values to residual interests and retained interests. These 
assumptions and methodologies must be fully documented. The key 
assumptions in all valuation analyses include prepayment or payment 
rates, default rates, loss severity factors, and discount rates. 
Paragraph 6(b) also requires an FCU to recognize credit impairment for 
all residual interests and retained interests in accordance with 
generally accepted accounting principles.
    Residual interests and retained interests concentrate risks to 
support investor interests. Therefore their value is more susceptible 
to credit and market risks than the underlying pool of assets. Because 
of these heightened risks, paragraph (6)(c) of the proposed rule limits 
the amount of residual interests and retained interests that an FCU may 
carry to 25% of the FCU's net worth. Residual interests and retained 
interests in pass-through securities, which generally have the same 
profile of risk as the underlying assets, are not included in this 
limitation. The Board specifically requests comment on the 
appropriateness of this limit, including a detailed rationale for any 
recommended higher limit.

7. Implicit Recourse Prohibited

    Sponsors of asset-backed securities may provide contract-based 
support for a securitization through, among other things, 
overcollateralization, maintaining a seller's or transferor's interest, 
and issuing stand-by letters of credit for cash flow purposes. In 
addition to these legal obligations, in certain circumstances, an 
originator may wish to provide post-sale credit support to poorly 
performing asset pools, commonly referred to as ``implicit'' recourse. 
To limit risk, however, paragraph (7) of the proposed rule prohibits 
FCUs from providing implicit recourse to a securitization.

8. Federally Insured, State-Chartered Credit Unions

    The proposed rule amends Part 741 by adding a new Sec.  741.226 to 
extend the proposed securitization requirements to FISCUs. The Board 
believes that there could be a risk to the National Credit Union Share 
Insurance Fund if state law permits a FISCU to sponsor a securitization 
and the state's associated safety and soundness requirements vary from 
those applicable to FCUs.

III. Safe Harbor

    This proposal is related to a companion proposal to amend Sec.  
709.10, published elsewhere in today's Federal Register. Section 709.10 
governs the authority of the Board, when acting as conservator or 
liquidating agent of any federally insured credit union (FICU), to 
disaffirm or repudiate transfers of financial assets by a FICU in 
connection with a securitization or participation. Section 709.10 was 
issued to provide a ``safe harbor'' by confirming ``legal isolation'' 
if all other standards for off balance sheet accounting treatment were 
met by the transfer in connection with a securitization or a 
participation. In 2000, when current Sec.  709.10 was adopted, 
satisfaction of legal isolation was vital to securitization 
transactions because of the risk that the pool of financial assets 
transferred into the securitization trust could be recovered in 
bankruptcy or in a credit union liquidation. If the transfer satisfied 
this condition, the regulation confirmed that the transferred assets 
were legally isolated from the FICU in an NCUA conservatorship or 
liquidation.
    In 2009, the Financial Accounting Standards Board finalized 
modifications to generally accepted accounting principles (GAAP) that 
affected whether an issuing entity must be consolidated for financial 
reporting purposes, thereby subjecting many issuing entities to GAAP 
consolidation requirements. As a result of the modifications, legal and 
accounting treatment of a securitization transaction may no longer be 
aligned, and the safe harbor provision of current Sec.  709.10 may not 
apply to a transfer in connection with a securitization that does not 
qualify for off balance sheet

[[Page 36267]]

treatment. The companion proposal would amend Sec.  709.10 to provide 
safe harbor for transfers in connection with securitizations under the 
revised accounting standards. The Board requests comment on whether the 
proposed safe harbor requirements should be included in any final rule 
that addresses FCU authority to securitize assets.

IV. Regulatory Procedures

1. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
of any significant economic impact any proposed regulation may have on 
a substantial number of small entities (primarily those under $50 
million in assets).\9\ This proposed rule will only apply to the 
largest credit unions, as securitizing assets requires significant 
infrastructure and resources. Accordingly, it will not have a 
significant economic impact on a significant number of small credit 
unions.
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    \9\ 5 U.S.C. 603(a); 12 U.S.C. 1787(c)(1).
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2. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or increases an existing burden.\10\ For purposes of the PRA, 
a paperwork burden may take the form of a reporting or recordkeeping 
requirement, both referred to as information collections. The proposed 
changes to part 721 impose one new information collection requirement. 
As required by the PRA, NCUA is submitting a copy of this proposal to 
OMB for its review and approval. Persons interested in submitting 
comments with respect to the information collection aspects of the 
proposed rule should submit them to OMB at the address noted below.
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    \10\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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a. Estimated PRA Burden
    The information collection requirement is found in section 
721.3(n)(5)(iii) of the proposed rule. That provision requires an FCU 
that undertakes securitization activities to have a credit union board 
approved policy stating the purpose and governance of securitization 
activities. NCUA estimates that it will take 50 hours to develop a 
securitization policy initially and 10 hours to maintain the policy 
annually. As NCUA further estimates that only one FCU will undertake 
asset securitization activities, the initial paperwork burden is 50 
hours and ongoing burden is 10 hours.
b. Submission of Comments
    NCUA considers comments by the public on this proposed collection 
of information in:
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of NCUA, 
including whether the information will have a practical use;
     Evaluating the accuracy of NCUA's estimate of the burden 
of the proposed collection of information, including the validity of 
the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses.
    OMB will make a decision concerning the collection of information 
contained in the proposed regulation between 30 and 60 days after 
publication of this document in the Federal Register. Therefore, a 
comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication. This does not affect the 
deadline for the public to comment to NCUA on the substantive aspects 
of the proposed regulation.
    Comments on the proposed information collection requirements should 
be sent to: Office of Information and Regulatory Affairs, OMB, New 
Executive Office Building, Washington, DC 20503; Attention: NCUA Desk 
Officer, with a copy to Tracy Crews at the National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.

3. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. The proposed rule does 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, 
therefore, determined that this proposal does not constitute a policy 
that has federalism implications for purposes of the executive order.

4. Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this proposed rule will not affect family 
well-being within the meaning of Sec.  654 of the Treasury and General 
Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681 
(1998).

List of Subjects

12 CFR Part 721

    Credit unions, Functions, Implied powers, Reporting and 
recordkeeping requirements.

12 CFR Part 741

    Credit, Credit unions, Reporting and Recordkeeping requirements, 
Share insurance.

    By the National Credit Union Administration Board, on June 19, 
2014.
Gerard Poliquin,
Secretary of the Board.

    For the reasons discussed above, the National Credit Union 
Administration proposes to amend parts 721 and 741 as follows:

PART 721--INCIDENTAL POWERS

0
1. The authority citation for part 721 continues to read as follows:

    Authority: 12 U.S.C. 1757(17), 1766, 1789.

0
2. In Sec.  721.3, add paragraph (n) to read as follows:


Sec.  721.3  What categories of activities are preapproved as 
incidental powers necessary or requisite to carry on a credit union's 
business?

* * * * *
    (n)(1) Asset securitization activities. Asset securitization 
activities are activities in which a federal credit union acts as the 
sponsor of an asset-backed security.
    (i) Purpose. This section authorizes federal credit unions to offer 
and sell loans they have originated into securitization vehicles and 
sets minimum safety and soundness standards for securitization 
transactions.
    (ii) Scope. This section applies to natural person federal credit 
unions.
    (2) Definitions.
    As used in this paragraph (n):
    Asset-backed security has the same meaning as in section 3(a)(79) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(79).
    Bankruptcy remote means insulated from the consequences of any 
related party's insolvency.
    Financial asset means cash or a contract or instrument that conveys 
to one entity a contractual right to receive

[[Page 36268]]

cash or another financial instrument from another entity.
    Issuing entity means an entity that owns a financial asset or 
financial assets transferred by the sponsor and issues obligations 
supported by such asset or assets. Issuing entities may include, but 
are not limited to, corporations, partnerships, trusts, and limited 
liability companies and are commonly referred to as special purpose 
vehicles or special purpose entities. To the extent a securitization is 
structured as a multi-step transfer, the term issuing entity would 
include both the issuer of the obligations and any intermediate 
entities that may be a transferee. Notwithstanding the foregoing, a 
Specified GSE or an entity established or guaranteed by a Specified GSE 
does not constitute an issuing entity.
    Obligation means a debt or equity (or mixed) beneficial interest or 
security that is primarily serviced by the cash flows of one or more 
financial assets or financial asset pools, either fixed or revolving, 
that by their terms convert into cash within a finite time period, or 
upon the disposition of the underlying financial assets, and by any 
rights or other assets designed to assure the servicing or timely 
distributions of proceeds to the security holders issued by an issuing 
entity. The term may include beneficial interests in a grantor trust, 
common law trust or similar issuing entity to the extent that such 
interests satisfy the criteria set forth in the preceding sentence, but 
does not include LLC interests, partnership interests, common or 
preferred equity, or similar instruments evidencing ownership of the 
issuing entity.
    Originate means to make an extension of credit.
    Recourse means an arrangement in which a credit union retains, in 
form or in substance, any credit risk directly or indirectly associated 
with an asset it has sold (in accordance with generally accepted 
accounting principles) that exceeds a pro rata share of the credit 
union's claim on the asset.
    Residual interest means any on-balance sheet asset that represents 
an interest created by a transfer of financial assets through a 
securitization that exposes a federal credit union to credit risk 
directly or indirectly associated with the transferred assets that 
exceeds a pro rata share of the credit union's claim on the assets, 
whether through subordination provisions or other credit enhancement 
techniques.
    Retained interest means an interest in a securitization held by the 
sponsor or issuing entity.
    Securitize means to sponsor a securitization.
    Securitization means the issuance by an issuing entity of 
obligations for which the investors are relying on the cash flow or 
market value characteristics and the credit quality of transferred 
financial assets (together with any external credit support permitted 
by this section) to repay the obligations.
    Seller's interest means the ownership interest in the issuing 
entity's assets that have not been allocated to any investment 
certificate holder.
    Specified GSE means each of the following: (i) The Federal National 
Mortgage Association and any affiliate thereof; (ii) Federal Home Loan 
Mortgage Corporation and any affiliate thereof; (iii) the Government 
National Mortgage Association; and (iv) any federal or state sponsored 
mortgage finance agency.
    Sponsor means a person or entity that organizes and initiates a 
securitization transaction by transferring financial assets, either 
directly or indirectly, including through an affiliate, to an issuing 
entity, whether or not such person owns an interest in the issuing 
entity or owns any of the obligations issued by the issuing entity.
    Transfer means (i) the conveyance of a financial asset or financial 
assets to an issuing entity; or (ii) the creation of a security 
interest in such asset or assets for the benefit of the issuing entity.
    (3) Securitization. As a part of its business, a federal credit 
union may securitize and sell loans that it has originated. The 
purchase and re-underwriting of a loan does not constitute origination 
within the meaning of this paragraph.
    (4) Authority to create issuing entities. A federal credit union is 
authorized to create issuing entities for the purpose of securitizing 
loans that it has originated. Any issuing entity created under this 
authority must be bankruptcy remote or otherwise isolated for 
insolvency purposes from the federal credit union.
    (5) Other minimum requirements. A federal credit union engaged in 
securitization transactions, as authorized in paragraph (n)(3) of this 
section, must meet the following requirements.
    (i) The federal credit union must with all applicable federal and 
state laws and regulations.
    (ii) The federal credit union must put in place a risk management 
process that is independent of the securitization process to monitor 
securitization pool performance on an aggregate and individual 
transaction level.
    (iii) The federal credit union's supervisory committee must obtain 
an annual audit of the credit union's financial statements performed in 
accordance with generally accepted auditing standards by an independent 
licensed auditor. The financial statements subject to audit must 
include all aspects of accounting and disclosure for sponsored 
securitizations in accordance with generally accepted accounting 
principles.
    (iv) The federal credit union's board of directors must possess a 
general understanding of asset securitization.
    (v) The federal credit union's senior executive officers 
responsible for securitization activities must possess sufficient 
expertise to oversee those activities.
    (vi) The federal credit union must have a credit union board 
approved policy, stating the purpose of securitization activities and 
establishing principles for their governance.
    (vii) The federal credit union's internal audit or internal risk 
review function must periodically review data integrity, model 
algorithms, key underlying assumptions, and the appropriateness of the 
valuation and modeling process for the securitized assets retained by 
the federal credit union, and report the findings of such reviews 
directly to the federal credit union's board or an appropriate board 
member.
    (6) Residual interests and retained interests.
    (i) Any provision in part 703 of this chapter that limits a federal 
credit union's ability to hold a stripped mortgage backed security or 
residual interest in a collateralized mortgage obligation does not 
apply to such an instrument retained in the course of sponsoring a 
securitization transaction.
    (ii) A federal credit union must employ reasonable and supportable 
valuation assumptions and modeling methodologies to establish, 
evaluate, and adjust the carrying value of residual interests and 
retained interests on a regular and timely basis and must recognize 
credit impairment for all residual interests and retained interests in 
accordance with generally accepted accounting principles.
    (iii) A federal credit union must limit the maximum amount of all 
residual interests and retained interests to 25 percent of net worth. 
Residual interests and retained interests in pass-through securities, 
which assume a pro-rata share of risk, are not included in this 
limitation.
    (7) Implicit recourse prohibited. A federal credit union may not 
provide post-sale credit support beyond the contractual obligations 
entered into at the time of issuance of a securitization transaction.

[[Page 36269]]

PART 741--REQUIREMENTS FOR INSURANCE

0
3. Add Sec.  741.226 to read as follows:


Sec.  741.226  Asset securitization.

    Any credit union that is insured pursuant to Title II of the Act 
must adhere to the requirements stated in Sec.  721.3(n) of this 
chapter.

[FR Doc. 2014-14926 Filed 6-25-14; 8:45 am]
BILLING CODE 7535-01-P