Mortgage Servicing Rights, 86867-86871 [2020-28278]

Download as PDF 86867 Proposed Rules Federal Register Vol. 85, No. 251 Thursday, December 31, 2020 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Parts 703 and 721 RIN 3133–AF26 Mortgage Servicing Rights National Credit Union Administration (NCUA). ACTION: Proposed rule. AGENCY: The NCUA Board (Board) proposes to amend its investment regulation to permit federal credit unions (FCUs) to purchase mortgage servicing rights from other federally insured credit unions under certain conditions. Under the proposed rule, eligible FCUs may purchase the mortgage servicing rights of loans that the FCU is otherwise empowered to grant, provided these investments are consistent with safety and soundness and made in accordance with the FCU’s policies and procedures that address the risk of these investments and servicing practices. DATES: Comments must be received on or before February 1, 2021. ADDRESSES: You may submit written comments, identified by RIN 3133– AF26, 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. • Fax: (703) 518–6319. Include ‘‘[Your Name]—Comments on Proposed Rule: Mortgage Servicing Rights’’ in the transmittal. • Mail: Address to Melane ConyersAusbrooks, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314–3428. Public Inspection: You may view all public comments on the Federal eRulemaking Portal at https:// www.regulations.gov as submitted, except for those we cannot post for technical reasons. The NCUA will not edit or remove any identifying or khammond on DSKJM1Z7X2PROD with PROPOSALS SUMMARY: VerDate Sep<11>2014 17:54 Dec 30, 2020 Jkt 253001 contact information from the public comments submitted. Due to social distancing measures in effect, the usual opportunity to inspect paper copies of comments in the NCUA’s law library is not currently available. After social distancing measures are relaxed, visitors may make an appointment to review paper copies by calling (703) 518–6540 or emailing OGCMail@ncua.gov. FOR FURTHER INFORMATION CONTACT: Rick Mayfield, Senior Capital Markets Specialist; Lou V. Pham, Senior Credit Specialist, Office of Examination & Insurance, or Ian Marenna, Associate General Counsel; Chrisanthy Loizos, Senior Trial Attorney, Office of General Counsel, at 1775 Duke Street, Alexandria, VA 22314 or telephone: (703) 518–6300 or (703) 581–6540. SUPPLEMENTARY INFORMATION: I. Background II. Legal Authority III. Summary of the Proposed Rule IV. Regulatory Procedures I. Background Generally, when a lender originates a mortgage loan, the lender may retain the loan and the servicing function for the loan in its portfolio, sell the loan along with the mortgage servicing rights to another party, or separate the mortgage servicing rights (MSRs) from its mortgage loan and transfer only the loan or the MSRs to another party. This proposed rulemaking focuses on the purchase of MSRs, as assets that are apart from their underlying mortgage loans. The Board proposes to permit FCUs to purchase MSRs by removing MSRs from the list of prohibited investments 1 in the Investment and Deposit Activities Rule (investment rule) and adding the purchase of MSRs from other federally insured credit unions (FICUs) to the rule’s list of permissible investments for FCUs.2 Under the investment rule, MSRs are defined as ‘‘a contractual obligation to perform mortgage servicing and the right to receive compensation for performing those services. Servicing is the administration of a mortgage loan, including collecting monthly payments and fees, providing recordkeeping and escrow functions, and, if necessary curing defaults and foreclosing.’’ 3 1 12 CFR 703.16. CFR 703.14. 3 12 CFR 703.2. 2 12 PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 While the Federal Credit Union Act specifies the statutory investment powers for FCUs,4 the NCUA has adopted regulatory prohibitions against certain investments and investment activities on the basis of safety and soundness concerns, including investments in MSRs.5 Mortgage servicing rights can be derived through various processes. Because FCUs are currently prohibited from purchasing MSRs by regulation, they are primarily derived when an FCU originates a residential mortgage loan and sells the loan to investors on the secondary market or other purchasers while the retaining the corresponding servicing rights. Alternatively, and to a lesser degree, FCUs can retain MSRs if they later sell residential mortgage loans that they had purchased from the originating lender. Mortgage loan servicers function as intermediaries between borrowers and owners of the mortgage loans. MSRs entitle the servicer to receive compensation from the owner of the mortgage loan in return for performing servicing activities for the underlying mortgage loan. These servicing functions are subject to a servicing agreement and consumer protection laws, as applicable.6 These functions generally include collecting monthly payments and fees, providing recordkeeping, and performing escrow functions. Further, the servicer also works with borrowers to mitigate loss and pursues foreclosure, as authorized. In guidance to examination staff, the Office of the Comptroller of the Currency describes MSRs or mortgage servicing assets (MSAs) as ‘‘complex, intangible assets that arise from owning the rights to service mortgage loans that have been securitized or sold to thirdparty investors. The market value of MSAs is affected by market supply and demand factors. MSA values are economically represented as the discounted present value of estimated future net cash flows over the life of the underlying mortgage loans. MSAs expose servicers to interest rate, price, compliance, and operational risks. The risk of changes in the fair value of MSAs 4 12 U.S.C. 1757(7), (8), (14), (15). FR 32989 (June 18, 1997); 66 FR 54168, 54169 (Oct. 26, 2001); 67 FR 78996, 78997 (Dec. 27, 2002); 12 CFR 703.16(a). 6 For example, see 12 CFR 1024.17; 12 CFR part 1024, subpart C; 12 CFR 1026.20, .36, .40–.41. 5 62 E:\FR\FM\31DEP1.SGM 31DEP1 86868 Federal Register / Vol. 85, No. 251 / Thursday, December 31, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS due to changes in interest rates is normally considered interest rate risk. It could be considered price risk, however, if the bank is actively buying and selling its MSAs. MSAs pose operational risk because the servicing and valuation functions are operations intensive and model dependent.’’ 7 MSRs are generally capitalized at fair value and subsequently accounted for using the amortization or fair value method.8 The fair value of MSRs is the net present value, using a market-based discount rate, of servicing revenue components (servicing fee, float income, ancillary income, etc.) less expenses, adjusted for prepayment speeds. Prepayment speeds in turn are generally highly dependent on prevailing interest rates. However, determining the fair value of MSRs can be a complex exercise given that their market prices are generally not readily observable. Hence, owners of MSRs typically depend on data-driven models, whether proprietary or purchased, and third party expertise to help them value their MSRs. MSRs impact compliance and reputation risk due to the high touch nature of interactions with consumers and the attendant legal requirements imposed on mortgage servicers. For example, depending on the amount and types of mortgage loans serviced,9 servicers must comply with a variety of regulatory requirements that implement the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, including amendments to Regulation Z (implementing the Truth in Lending Act) and Regulation X (implementing the Real Estate Settlement Procedures Act),10 as well as other applicable state 7 Comptroller’s Handbook for Mortgage Banking, version 1 Feb. 2014 at p. 67. 8 See Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 860—Transfer and Servicing of Financial Assets. 9 Small servicers are exempt from numerous requirements that apply to mortgage servicing activities under Regulations X and Z. See, e.g. 12 CFR 1024.17; 12 CFR 1024.37–.41; 12 CFR 1026.41. Generally, to qualify as a small servicer, a servicer must service, together with any affiliates, 5,000 or fewer mortgage loans, for all of which the servicer (or an affiliate) is the creditor or assignee. See 12 CFR 1026.41(e)(4) for full definition. 10 Note that on April 3, 2020, NCUA and the federal banking regulators issued the ‘‘Joint Statement on Supervisory and Enforcement Practices Regarding the Mortgage Servicing Rules in Response to the COVID–19 Emergency and the CARES Act’’ available at https:// files.consumerfinance.gov/f/documents/cfpb_ interagency-statement_mortgage-servicing-rulescovid-19.pdf and the Consumer Financial Protection Bureau (CFPB) issued frequently asked questions regarding its mortgage servicing rules related to the COVID–19 Emergency available at https://files.consumerfinance.gov/f/documents/ cfpb_mortgage-servicing-rules-covid-19_faqs.pdf. See also the CFPB’s interim final rule, ‘‘Treatment VerDate Sep<11>2014 17:54 Dec 30, 2020 Jkt 253001 and federal laws, such as the Servicemembers Civil Relief Act (SCRA),11 the Fair Debt Collection Practices Act,12 and Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices. To be successful, servicers need not only to understand complexities in determining the value of these assets, but should have effective information management systems, trained personnel, robust internal controls, and appropriate risk management to properly service the loans. Over decades, the NCUA has issued many regulations and opinions that have recognized the authority of an FCU to engage in the servicing of loans in varying contexts. Since 1979, an FCU has been permitted ‘‘to service any eligible obligation it purchases or sells in whole or in part’’ under the NCUA’s eligible obligations rule.13 The incidental powers regulation 14 has also long provided that FCUs have the authority to provide correspondent services, including loan servicing, to other credit unions.15 In adopting that regulation, the Board observed: ‘‘Correspondent services are services or functions provided by an FCU to another credit union that the FCU is authorized to perform for its own members or as part of its operation.’’ 16 During the part 721 rulemaking in 2001, the Board agreed with commenters that loan servicing and escrow services were examples of permitted correspondent services.17 Furthermore, although the purchase of MSRs was to be prohibited under the investment rule, the Board recognized during the rulemaking that an FCU could perform servicing for a member engaged in making mortgage loans as a financial service to its member: ‘‘For this activity to be permissible as a financial service to a member, the member must continue to own the loan during the time that the credit union provides servicing. In this context, the NCUA Board concludes that providing mortgage servicing is an appropriate exercise of a credit union’s incidental powers to provide financial service to a member.’’ 18 Therefore, the authority to provide mortgage loan servicing as a financial service to members, under the conditions above, has been in place since 2003.19 FCUs are also permitted to provide mortgage loan servicing to others as a charitable contribution.20 Further, under the NCUA’s Credit Union Service Organization (CUSO) regulation, CUSOs 21 are expressly preapproved to provide loan support services, including loan servicing and debt collection services.22 The Board believes it is appropriate now to remove the prohibition against FCUs from purchasing MSRs as permissible investments while also maintaining safety and soundness. FCUs have long had experience originating and servicing residential mortgage loans. In fact, first lien residential mortgage loans account for over one third of outstanding credit union loans as of September 30, 2020, which is the single largest loan concentration in the system. FCUs accounted for $78 billion of the approximately $154 billion in first lien residential mortgage loans originated by all FICUs in 2019. Comparatively, FCUs accounted for $62 billion of the approximately $117 billion in first lien residential mortgage loans originated by all FICUs in 2018.23 Like many financial institutions involved in residential lending, FCUs engage in both origination and servicing activities related to residential lending. As of September 30, 2020, approximately 3,700 FICUs held $431 billion in aggregate outstanding first lien residential mortgage loans, with 2,166 FCUs accounting for $214 billion of the 18 67 of Certain COVID–19 Related Loss Mitigation Options,’’ 85 FR 39055 (June 30, 2020). 11 For example, the SCRA contains a strict liability provision that requires a court order before foreclosing on a mortgage during a period of military service, and for one year after a period of military service. 50 U.S.C. 3953. 12 Note the CFPB recently issued a final rule implementing the FDCPA to address the activities of debt collectors, as that term is defined in the FDCPA, with a focus on debt collection communications and related practices by debt collectors. See 87 FR 76734 (Nov. 30, 2020). 13 12 CFR 701.23(e); 44 FR 27068 (May 9, 1979). 14 12 CFR part 721. 15 12 CFR 721.3(c). 16 66 FR 40845, 40850 (Aug. 6, 2001). 17 Id.; see also NCUA OGC Opinion 09–0430 (August 2009) available at https://www.ncua.gov/ regulation-supervision/legal-opinions/2009/ nonmember-loan-servicing. PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 FR 78996, 78998 (Dec. 27, 2002). FR 32960 (June 3, 2003). 20 NCUA OGC Opinion 01–0502 (June 18, 2001) available at https://www.ncua.gov/files/legalopinions/OL2001-0502.pdf; 12 CFR 721.3(b)(1). 21 Generally, a CUSO is an entity in which a FICU has an ownership interest or to which a FICU has extended a loan, and that entity is engaged primarily in providing products or services to credit unions or credit union members. A CUSO also includes any entity in which a CUSO has an ownership interest of any amount, if that entity is engaged primarily in providing products or services to credit unions or credit union members. See 12 CFR 712.1(d). 22 12 CFR 712.5(j); see also NCUA OGC Opinion 09–0349 (May 2009) available at https:// www.ncua.gov/regulation-supervision/legalopinions/2009/credit-union-service-organizationcuso-purchase-and-servicing-non-performing-loans. 23 NCUA Call Report Data as of December 31, 2018 and December 31, 2019. 19 68 E:\FR\FM\31DEP1.SGM 31DEP1 khammond on DSKJM1Z7X2PROD with PROPOSALS Federal Register / Vol. 85, No. 251 / Thursday, December 31, 2020 / Proposed Rules outstanding amount.24 These residential mortgage loans are considered ‘‘portfolio’’ mortgage loans because the FICU has not sold its loans and the FICU (or a related CUSO) provides mortgage servicing activities for said loans. There are no associated MSRs with portfolio mortgage loans from an asset and accounting perspective, but the responsibility to service the mortgage loan rests with the portfolio lender. Credit unions, like many other lenders involved with mortgage finance, also actively engage in selling residential mortgage loans to investors on the secondary market or other purchasers. In 2019, approximately 1,100 FICUs collectively sold $63 billion in residential mortgage loans. Five hundred fifty-six (556) FCUs accounted for $39 billion of the $63 billion of mortgage loans sold in 2019. Comparatively, approximately 1,100 FICUs collectively sold $46 billion in residential mortgage loans in 2018, with 553 FCUs accounting for $26 billion of the total amount sold. The NCUA began collecting data on MSRs owned by FICUs in 2003 and has found that the value of MSRs in the credit union system increased from approximately $330 million in 2004 to $1.8 billion in 2019. During this period, the amount of real estate loans sold where servicing was retained increased from $46 billion to $240 billion. As of September 30, 2020, more than 500 FICUs owned $1.9 billion in MSRs. Of this figure, 235 FCUs accounted for $1.1 billion in MSRs.25 The Board recognizes that MSRs have certain inherent attributes that can have an adverse impact on an FCU’s financial condition. Mortgage servicing rights can carry operational risks due to a myriad of statutes and regulations to protect consumers, which can expose FCUs to reputational, legal, and compliance risk. In addition, MSRs can expose servicers to liquidity risk as certain mortgage loans which have been sold to investors require the servicer to remit payments to the investors even if borrowers do not make the monthly mortgage loan payments. The value of MSRs is highly dependent on prevailing interest rates. In a rapidly increasing or decreasing interest rate environment, this can introduce extreme volatility to a credit union’s financial condition as the MSRs are periodically valued for accounting and reporting purposes. An FCU in poor financial condition may not be able to 24 NCUA Call Report Data as of September 30, 2020. 25 NCUA Call Report Data as of September 30, 2020. VerDate Sep<11>2014 17:54 Dec 30, 2020 Jkt 253001 withstand the financial impact of a significant loss due to a write-down in the value of its MSRs. The Board believes that FCUs have demonstrated experience originating and servicing residential mortgage loans. Furthermore, although valuing MSRs can be complex, FCUs have sufficient access to market resources and expertise to help them value MSRs when purchased or retained on an ongoing basis for accounting purposes. For these reasons, the Board believes removing the prohibition in the investment rule is appropriate and consistent with safety and soundness. The proposed rule would provide flexibility for FCUs to operate their mortgage loan business and would also provide FICUs another avenue to sell their MSRs, which could generate a higher selling price and keep the MSRs within the credit union system. II. Legal Authority Section 120(a) of the Federal Credit Union Act 26 authorizes the Board to prescribe rules and regulations for the administration of the statute.27 In addition, section 206 of the Federal Credit Union Act provides the Board with broad authority to take enforcement action against a FICU or an ‘‘institution-affiliated party’’ 28 that is engaging or has engaged, or the Board has reasonable cause to believe that it is about to engage, in an unsafe or unsound practice in conducting the business of such credit union.29 Congress chose not to define ‘‘unsafe or unsound practices’’ in the Federal Credit Union Act, leaving determinations regarding which actions are unsafe or unsound to the Board. The Federal Credit Union Act authorizes an FCU ‘‘to sell all or a part of its assets to another credit union [and] to purchase all or part of the assets of another credit union. . . subject to regulations of the Board.’’ 30 Given that MSRs are financial assets that may be 26 12 U.S.C. 1766(a). U.S.C. 1751–1795k. 28 See 12 U.S.C. 1786(r) (providing: ‘‘For purposes of [the Federal Credit Union Act], the term ‘institution-affiliated party’’ means—(1) any committee member, director, officer, or employee of, or agent for, an insured credit union; (2) any consultant, joint venture partner, and any other person as determined by the Board (by regulation or on a case-by-case basis) who participates in the conduct of the affairs of an insured credit union; and (3) any independent contractor (including any attorney, appraiser, or account) who knowingly or recklessly participates in—(A) any violation of any law or regulation; (B) any breach of fiduciary duty; or (C) any unsafe or unsound practice, which caused or is likely to cause more than a minimal financial loss to, or a significant adverse effect on, the insured credit union.’’). 29 12 U.S.C. 1786. 30 12 U.S.C. 1757(14). 27 12 PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 86869 sold separately from their underlying mortgage loans, an FCU has the statutory authority to sell MSRs to, and purchase MSRs from, another credit union. Further, the Federal Credit Union Act authorizes 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.’’ 31 As such, NCUA’s incidental powers regulation 32 has long provided that FCUs have the authority to provide correspondent services, including loan servicing, to other credit unions.33 Similarly, the eligible obligations rule allows an FCU ‘‘to service any eligible obligation it purchases or sells in whole or in part.’’ 34 III. Summary of the Proposed Rule As set out above, the Board proposes to remove the current prohibition on FCUs purchasing MSRs from the investment rule. The Board is proposing to amend § 703.14 to explicitly permit an FCU to purchase MSRs from other FICUs as an investment, provided: (1) The underlying mortgage loans of the MSRs are loans the FCU is empowered to grant; (2) the FCU purchases the MSRs within the limitations of the FCU’s board of directors’ written purchase policies; and (3) the board of directors or investment committee approves the purchase in advance. To ensure that MSRs purchased by FCUs meet the same requirements and standards applicable to the loans that a buying FCU can make, the proposed rule would allow purchases of MSRs from FICUs only if the underlying mortgage loans from which the MSRs are derived meet the same conditions for loans the FCU is empowered to grant. This is the same standard applicable to FCUs when buying certain eligible obligations under § 701.23(b). The phrase ‘‘empowered to grant’’ refers to an FCU’s authority to make the type of loans permitted by the FCU Act, NCUA regulations, FCU Bylaws, and an FCU’s own internal policies.35 Consistent with § 701.23, the Board is also requiring MSRs be purchased within the limitations of the FCU’s board of directors’ written purchase policies and requiring the FCU’s board of directors or investment committee approves the purchase in advance. 31 12 U.S.C. 1757(17). CFR part 721. 33 12 CFR 721.3(c). 34 12 CFR 701.23(e); 44 FR 27068 (May 9, 1979). 35 NCUA OGC Op. 04–0713 (Oct. 25, 2004) available at https://www.ncua.gov/files/legalopinions/OL2004-0713.pdf, 76 FR 81421, 81425 (December 28, 2011). 32 12 E:\FR\FM\31DEP1.SGM 31DEP1 86870 Federal Register / Vol. 85, No. 251 / Thursday, December 31, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS The proposed rule necessarily removes the current prohibition against MSRs purchases imposed in § 703.16(a) and reserves the paragraph to correspond to the change in § 703.14. The remaining provision in § 703.16(a), which recognizes an FCU’s incidental powers authority to service the loans owned by a member engaged in mortgage lending, is transferred to part 721 as another example of loan-related product. While loan servicing is an incidental powers activity when performed for other credit unions under § 721.3(c) as a correspondent service, the proposed addition to paragraph (h) reflects the existing authority currently found in § 703.16(a) to provide loanrelated services to members. The Board invites comments on all aspects of the proposal 36 and, in addition, requests comment on the following questions. The questions raise issues the Board intends to incorporate in the final rule to ensure appropriate safeguards and limitations, and will consider the comments and supporting information it receives in response to this notice. How would the proposed rule to permit an FCU to purchase MSRs from other FICUs benefit an FCU’s mortgage loan servicing operations? The Board solicits feedback on whether the current prohibition against FCUs purchasing MSRs as financial assets from other mortgage lenders has impacted the ability of FCUs to achieve their strategic objectives. If FCUs purchase volumes of MSRs from different FICUs, are they prepared to ensure they have effective compliance management systems for compliance with the consumer protection-related laws and regulations that apply to mortgage loan servicers? FCUs manage their exposure to compliance risk through a comprehensive compliance program, often referred to as a compliance management system (CMS). An FCU’s CMS includes policies, procedures, processes, monitoring, and an audit function regarding compliance with all applicable laws and regulations, including those that apply to mortgage loan servicing activities. An effective CMS promotes compliance with consumer protection-related laws and regulations and prevents consumer harm. The Board solicits comment on to 36 As noted, many FCUs have considerable experience in managing the servicing of mortgage loans, therefore the Board is not providing the usual 60-day comment period for this proposal which relieves a regulatory prohibition on investments in MSRs as assets. See NCUA Interpretive Ruling and Policy Statement (IRPS) 87–2, as amended by IRPS 03–2 and IRPS 15–1. 80 FR 57512 (Sept. 24, 2015), available at https://www.ncua.gov/files/ publications/irps/IRPS1987-2.pdf. VerDate Sep<11>2014 17:54 Dec 30, 2020 Jkt 253001 what extent FCUs may need to make appropriate adjustments to their CMS if they expand their mortgage loan servicing as provided under the proposed rule, particularly to comply with the consumer protections that apply to the transfer and servicing of mortgage loans, and how the NCUA can best ensure that FCUs purchasing MSRs do so. Should the proposed rule include additional criteria for an FCU to be eligible to purchase MSRs? In particular, should the FCU be required to be ‘‘well capitalized’’ as defined in part 702? If so, similarly to the eligible obligations rule, should it be well capitalized for a minimum of the six quarters preceding its purchase of MSRs? Should the FCU be required to have a composite CAMEL rating of 1 or 2 with a Management rating of a 1 or 2 for at least the last two examination cycles? As detailed in this notice, MSRs carry a variety of risks. As such, the Board is considering certain safeguards that would apply before an FCU is eligible to purchase MSRs, in order to mitigate some of these risks. The Board is considering whether to incorporate one of, or a combination of, these elements in a final rule because it has found these standards to be prudent in other contexts, including the eligible obligations rule and investment rule in relation to investments in derivatives.37 The Board solicits feedback on whether these proposed standards would mitigate risks inherent in the purchase of MSRs and help ensure that FCUs engage in this activity in a safe and sound manner. Should the final rule include a limit on the amount of MSRs an FCU can hold to address concentration risk? Specifically, should a limit on the amount of MSRs held by an FCU be determined using the total amount of MSRs purchased by the FCU or, alternatively, the aggregate amount of MSRs purchased from other parties and MSRs retained after the sale of the underlying mortgage loans by the FCU? Should the rule limit the total amount of MSRs that an FCU may hold to no more than twenty-five percent (25%) of the FCU’s net worth or would another standard, such as a concentration limit based on assets, be more appropriate to address concentration risk? High concentrations in a particular asset can expose a credit union to undue risk. The Board solicits feedback on whether a concentration limit for MSRs would help alleviate risks for FCUs that purchase or originate MSRs. To address the liquidity risk of the purchasing FCU, should the final rule 37 12 PO 00000 CFR 701.23(b)(2), 703.108(a)(1). Frm 00004 Fmt 4702 Sfmt 4702 limit the amount of months an FCU is obligated to remit payments to the mortgage loan owner if the borrower fails to make payments? Specifically, should there be a maximum of three to six months of payments made to the mortgage loan owner when a borrower fails to make payment on the serviced mortgage loan? MSRs can carry liquidity risks if the servicer is required under the mortgage servicing contract to remit payments to owners of the mortgage loans even if the servicer is not receiving mortgage payments from borrowers. The Board solicits feedback on whether there should be a limit on MSRs with certain remittance structures to mitigate liquidity risks to FCUs that purchase MSRs. Finally, the Board solicits comment on whether the safeguards and limitations applicable to FCUs in the final rule should be extended to all FICUs in light of the risks associated with the purchase of MSRs, as a requirement for obtaining and maintaining federal insurance. Regulatory Procedures A. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) generally requires that, in connection with a notice of proposed rulemaking, an agency prepare and make available for public comment an initial regulatory flexibility analysis that describes the impact of a proposed rule on small entities. A regulatory flexibility analysis is not required, however, if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities (defined for purposes of the RFA to include FICUs with assets less than $100 million) and publishes its certification and a short, explanatory statement in the Federal Register together with the rule. The proposed rule provides additional investment authority to FCUs that meet certain eligibility requirements due to the complexity and risk related to the purchase of MSRs. As of March 31, 2020, of the 3,256 credit unions with federal charters, only 17 FCUs with assets of less than $100 million had MSRs on their books. Accordingly, the NCUA certifies that the proposed rule will not have a significant economic impact on a substantial number of small credit unions. B. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in which an agency creates a new or amends existing information collection E:\FR\FM\31DEP1.SGM 31DEP1 Federal Register / Vol. 85, No. 251 / Thursday, December 31, 2020 / Proposed Rules requirements.38 For the purpose of the PRA, an information collection requirement may take the form of a reporting, recordkeeping, or a thirdparty disclosure requirement. The proposed rule does not contain information collection requirements that require approval by OMB under the PRA.39 The proposed rule provides regulatory relief by allowing eligible FCUs to expand their investment authority to include the purchase of MSRs under similar standards applicable to the purchase of eligible obligations and other investments. C. 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, the NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies with the executive order. This rulemaking will not have a substantial direct effect on the states, on the connection between the national government and the states, or on the distribution of power and responsibilities among the various levels of government. The NCUA has determined that this proposal does not constitute a policy that has federalism implications for purposes of the executive order. 1. The authority citation for part 703 is revised to read as follows: ■ Authority: 12 U.S.C. 1757(7), 1757(8), 1757(14) and 1757(15). 2. Amend § 703.14 by adding paragraph (l) to read as follows: ■ § 703.14 Permissible investments. * * * * * (l) Mortgage servicing rights. A Federal credit union may purchase mortgage servicing rights from other federally insured credit unions as an investment if all of the following conditions are met: (1) The underlying mortgage loans of the mortgage servicing rights are loans the Federal credit union is empowered to grant; (2) the Federal credit union purchases the mortgage servicing rights within the limitations of its board of directors’ written purchase policies; and (3) the board of directors or investment committee approves the purchase. § 703.16 [Amended] 2. Amend § 703.16 by removing and reserving paragraph (a). ■ PART 721—INCIDENTAL POWERS D. Assessment of Federal Regulations and Policies on Families 4. The authority citation for part 721 continues to read as follows: ■ The NCUA has determined that this proposed rule will not affect family well-being within the meaning of Section 654 of the Treasury and General Government Appropriations Act, 1999.40 List of Subjects Authority: 12 U.S.C. 1757(17), 1766 and 1789. 5. Amend § 721.3 paragraph (h) by revising the last sentence to read as follows: ■ § 721.3 What categories of activities are preapproved as incidental powers necessary or requisite to carry on a credit union’s business? 12 CFR Part 703 Credit unions, Investments. 12 CFR Part 721 * Credit unions, Functions, Implied powers. khammond on DSKJM1Z7X2PROD with PROPOSALS PART 703—INVESTMENT AND DEPOSIT ACTIVITIES By the National Credit Union Administration Board on December 17, 2020. Melane Conyers-Ausbrooks, Secretary of the Board. For the reasons discussed above, the NCUA Board proposes to amend 12 CFR parts 703 and 721 as follows: * * * * (h) * * * These products or activities may include debt cancellation agreements, debt suspension agreements, letters of credit, leases, and mortgage loan servicing functions for a member as long as the loan is owned by a member. * * * * * [FR Doc. 2020–28278 Filed 12–30–20; 8:45 am] BILLING CODE 7535–01–P 38 44 U.S.C. 3507(d); 5 CFR part 1320. U.S.C. Chap. 35. 40 Public Law 105–277, 112 Stat. 2681 (1998). 39 44 VerDate Sep<11>2014 17:54 Dec 30, 2020 Jkt 253001 PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 86871 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 300 [REG–114615–16] RIN 1545–BP75 User Fee for Estate Tax Closing Letter Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. AGENCY: This document contains proposed regulations establishing a new user fee for authorized persons who wish to request the issuance of IRS Letter 627, also referred to as an estate tax closing letter. The Independent Offices Appropriations Act of 1952 authorizes charging user fees in appropriate circumstances. The proposed regulations affect persons who request an estate tax closing letter. DATES: Written or electronic comments and requests for a public hearing must be received by March 1, 2021. Requests for a public hearing must be submitted as prescribed in the ‘‘Comments and Requests for a Public Hearing’’ section. ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at https:// www.regulations.gov (indicate IRS and REG–114615–16) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The IRS expects to have limited personnel available to process public comments that are submitted on paper through mail. Until further notice, any comments submitted on paper will be considered to the extent practicable. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment submitted electronically, and to the extent practicable on paper, to its public docket. Send paper submissions to: CC:PA:LPD:PR (REG–114615–16), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. FOR FURTHER INFORMATION CONTACT: Concerning submissions of comments and/or requests for a public hearing, Regina Johnson, at (202) 317–5177; concerning cost methodology, Michael Weber, at (202) 803–9738; concerning the proposed regulations, Juli Ro Kim, at (202) 317–6859 (not toll-free numbers). SUPPLEMENTARY INFORMATION: SUMMARY: E:\FR\FM\31DEP1.SGM 31DEP1

Agencies

[Federal Register Volume 85, Number 251 (Thursday, December 31, 2020)]
[Proposed Rules]
[Pages 86867-86871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28278]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 85, No. 251 / Thursday, December 31, 2020 / 
Proposed Rules

[[Page 86867]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 703 and 721

RIN 3133-AF26


Mortgage Servicing Rights

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) proposes to amend its investment 
regulation to permit federal credit unions (FCUs) to purchase mortgage 
servicing rights from other federally insured credit unions under 
certain conditions. Under the proposed rule, eligible FCUs may purchase 
the mortgage servicing rights of loans that the FCU is otherwise 
empowered to grant, provided these investments are consistent with 
safety and soundness and made in accordance with the FCU's policies and 
procedures that address the risk of these investments and servicing 
practices.

DATES: Comments must be received on or before February 1, 2021.

ADDRESSES: You may submit written comments, identified by RIN 3133-
AF26, 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.
     Fax: (703) 518-6319. Include ``[Your Name]--Comments on 
Proposed Rule: Mortgage Servicing Rights'' in the transmittal.
     Mail: Address to Melane Conyers-Ausbrooks, Secretary of 
the Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.
    Public Inspection: You may view all public comments on the Federal 
eRulemaking Portal at https://www.regulations.gov as submitted, except 
for those we cannot post for technical reasons. The NCUA will not edit 
or remove any identifying or contact information from the public 
comments submitted. Due to social distancing measures in effect, the 
usual opportunity to inspect paper copies of comments in the NCUA's law 
library is not currently available. After social distancing measures 
are relaxed, visitors may make an appointment to review paper copies by 
calling (703) 518-6540 or emailing [email protected].

FOR FURTHER INFORMATION CONTACT: Rick Mayfield, Senior Capital Markets 
Specialist; Lou V. Pham, Senior Credit Specialist, Office of 
Examination & Insurance, or Ian Marenna, Associate General Counsel; 
Chrisanthy Loizos, Senior Trial Attorney, Office of General Counsel, at 
1775 Duke Street, Alexandria, VA 22314 or telephone: (703) 518-6300 or 
(703) 581-6540.

SUPPLEMENTARY INFORMATION:

I. Background
II. Legal Authority
III. Summary of the Proposed Rule
IV. Regulatory Procedures

I. Background

    Generally, when a lender originates a mortgage loan, the lender may 
retain the loan and the servicing function for the loan in its 
portfolio, sell the loan along with the mortgage servicing rights to 
another party, or separate the mortgage servicing rights (MSRs) from 
its mortgage loan and transfer only the loan or the MSRs to another 
party. This proposed rulemaking focuses on the purchase of MSRs, as 
assets that are apart from their underlying mortgage loans. The Board 
proposes to permit FCUs to purchase MSRs by removing MSRs from the list 
of prohibited investments \1\ in the Investment and Deposit Activities 
Rule (investment rule) and adding the purchase of MSRs from other 
federally insured credit unions (FICUs) to the rule's list of 
permissible investments for FCUs.\2\ Under the investment rule, MSRs 
are defined as ``a contractual obligation to perform mortgage servicing 
and the right to receive compensation for performing those services. 
Servicing is the administration of a mortgage loan, including 
collecting monthly payments and fees, providing recordkeeping and 
escrow functions, and, if necessary curing defaults and foreclosing.'' 
\3\ While the Federal Credit Union Act specifies the statutory 
investment powers for FCUs,\4\ the NCUA has adopted regulatory 
prohibitions against certain investments and investment activities on 
the basis of safety and soundness concerns, including investments in 
MSRs.\5\
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    \1\ 12 CFR 703.16.
    \2\ 12 CFR 703.14.
    \3\ 12 CFR 703.2.
    \4\ 12 U.S.C. 1757(7), (8), (14), (15).
    \5\ 62 FR 32989 (June 18, 1997); 66 FR 54168, 54169 (Oct. 26, 
2001); 67 FR 78996, 78997 (Dec. 27, 2002); 12 CFR 703.16(a).
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    Mortgage servicing rights can be derived through various processes. 
Because FCUs are currently prohibited from purchasing MSRs by 
regulation, they are primarily derived when an FCU originates a 
residential mortgage loan and sells the loan to investors on the 
secondary market or other purchasers while the retaining the 
corresponding servicing rights. Alternatively, and to a lesser degree, 
FCUs can retain MSRs if they later sell residential mortgage loans that 
they had purchased from the originating lender.
    Mortgage loan servicers function as intermediaries between 
borrowers and owners of the mortgage loans. MSRs entitle the servicer 
to receive compensation from the owner of the mortgage loan in return 
for performing servicing activities for the underlying mortgage loan. 
These servicing functions are subject to a servicing agreement and 
consumer protection laws, as applicable.\6\ These functions generally 
include collecting monthly payments and fees, providing recordkeeping, 
and performing escrow functions. Further, the servicer also works with 
borrowers to mitigate loss and pursues foreclosure, as authorized.
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    \6\ For example, see 12 CFR 1024.17; 12 CFR part 1024, subpart 
C; 12 CFR 1026.20, .36, .40-.41.
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    In guidance to examination staff, the Office of the Comptroller of 
the Currency describes MSRs or mortgage servicing assets (MSAs) as 
``complex, intangible assets that arise from owning the rights to 
service mortgage loans that have been securitized or sold to third-
party investors. The market value of MSAs is affected by market supply 
and demand factors. MSA values are economically represented as the 
discounted present value of estimated future net cash flows over the 
life of the underlying mortgage loans. MSAs expose servicers to 
interest rate, price, compliance, and operational risks. The risk of 
changes in the fair value of MSAs

[[Page 86868]]

due to changes in interest rates is normally considered interest rate 
risk. It could be considered price risk, however, if the bank is 
actively buying and selling its MSAs. MSAs pose operational risk 
because the servicing and valuation functions are operations intensive 
and model dependent.'' \7\
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    \7\ Comptroller's Handbook for Mortgage Banking, version 1 Feb. 
2014 at p. 67.
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    MSRs are generally capitalized at fair value and subsequently 
accounted for using the amortization or fair value method.\8\ The fair 
value of MSRs is the net present value, using a market-based discount 
rate, of servicing revenue components (servicing fee, float income, 
ancillary income, etc.) less expenses, adjusted for prepayment speeds. 
Prepayment speeds in turn are generally highly dependent on prevailing 
interest rates. However, determining the fair value of MSRs can be a 
complex exercise given that their market prices are generally not 
readily observable. Hence, owners of MSRs typically depend on data-
driven models, whether proprietary or purchased, and third party 
expertise to help them value their MSRs.
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    \8\ See Financial Accounting Standards Board (FASB) Accounting 
Standards Codification (ASC) 860--Transfer and Servicing of 
Financial Assets.
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    MSRs impact compliance and reputation risk due to the high touch 
nature of interactions with consumers and the attendant legal 
requirements imposed on mortgage servicers. For example, depending on 
the amount and types of mortgage loans serviced,\9\ servicers must 
comply with a variety of regulatory requirements that implement the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 
including amendments to Regulation Z (implementing the Truth in Lending 
Act) and Regulation X (implementing the Real Estate Settlement 
Procedures Act),\10\ as well as other applicable state and federal 
laws, such as the Servicemembers Civil Relief Act (SCRA),\11\ the Fair 
Debt Collection Practices Act,\12\ and Section 5 of the Federal Trade 
Commission Act, which prohibits unfair or deceptive acts or practices. 
To be successful, servicers need not only to understand complexities in 
determining the value of these assets, but should have effective 
information management systems, trained personnel, robust internal 
controls, and appropriate risk management to properly service the 
loans.
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    \9\ Small servicers are exempt from numerous requirements that 
apply to mortgage servicing activities under Regulations X and Z. 
See, e.g. 12 CFR 1024.17; 12 CFR 1024.37-.41; 12 CFR 1026.41. 
Generally, to qualify as a small servicer, a servicer must service, 
together with any affiliates, 5,000 or fewer mortgage loans, for all 
of which the servicer (or an affiliate) is the creditor or assignee. 
See 12 CFR 1026.41(e)(4) for full definition.
    \10\ Note that on April 3, 2020, NCUA and the federal banking 
regulators issued the ``Joint Statement on Supervisory and 
Enforcement Practices Regarding the Mortgage Servicing Rules in 
Response to the COVID-19 Emergency and the CARES Act'' available at 
https://files.consumerfinance.gov/f/documents/cfpb_interagency-statement_mortgage-servicing-rules-covid-19.pdf and the Consumer 
Financial Protection Bureau (CFPB) issued frequently asked questions 
regarding its mortgage servicing rules related to the COVID-19 
Emergency available at https://files.consumerfinance.gov/f/documents/cfpb_mortgage-servicing-rules-covid-19_faqs.pdf. See also 
the CFPB's interim final rule, ``Treatment of Certain COVID-19 
Related Loss Mitigation Options,'' 85 FR 39055 (June 30, 2020).
    \11\ For example, the SCRA contains a strict liability provision 
that requires a court order before foreclosing on a mortgage during 
a period of military service, and for one year after a period of 
military service. 50 U.S.C. 3953.
    \12\ Note the CFPB recently issued a final rule implementing the 
FDCPA to address the activities of debt collectors, as that term is 
defined in the FDCPA, with a focus on debt collection communications 
and related practices by debt collectors. See 87 FR 76734 (Nov. 30, 
2020).
---------------------------------------------------------------------------

    Over decades, the NCUA has issued many regulations and opinions 
that have recognized the authority of an FCU to engage in the servicing 
of loans in varying contexts. Since 1979, an FCU has been permitted 
``to service any eligible obligation it purchases or sells in whole or 
in part'' under the NCUA's eligible obligations rule.\13\ The 
incidental powers regulation \14\ has also long provided that FCUs have 
the authority to provide correspondent services, including loan 
servicing, to other credit unions.\15\ In adopting that regulation, the 
Board observed: ``Correspondent services are services or functions 
provided by an FCU to another credit union that the FCU is authorized 
to perform for its own members or as part of its operation.'' \16\ 
During the part 721 rulemaking in 2001, the Board agreed with 
commenters that loan servicing and escrow services were examples of 
permitted correspondent services.\17\ Furthermore, although the 
purchase of MSRs was to be prohibited under the investment rule, the 
Board recognized during the rulemaking that an FCU could perform 
servicing for a member engaged in making mortgage loans as a financial 
service to its member: ``For this activity to be permissible as a 
financial service to a member, the member must continue to own the loan 
during the time that the credit union provides servicing. In this 
context, the NCUA Board concludes that providing mortgage servicing is 
an appropriate exercise of a credit union's incidental powers to 
provide financial service to a member.'' \18\ Therefore, the authority 
to provide mortgage loan servicing as a financial service to members, 
under the conditions above, has been in place since 2003.\19\ FCUs are 
also permitted to provide mortgage loan servicing to others as a 
charitable contribution.\20\ Further, under the NCUA's Credit Union 
Service Organization (CUSO) regulation, CUSOs \21\ are expressly 
preapproved to provide loan support services, including loan servicing 
and debt collection services.\22\
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    \13\ 12 CFR 701.23(e); 44 FR 27068 (May 9, 1979).
    \14\ 12 CFR part 721.
    \15\ 12 CFR 721.3(c).
    \16\ 66 FR 40845, 40850 (Aug. 6, 2001).
    \17\ Id.; see also NCUA OGC Opinion 09-0430 (August 2009) 
available at https://www.ncua.gov/regulation-supervision/legal-opinions/2009/nonmember-loan-servicing.
    \18\ 67 FR 78996, 78998 (Dec. 27, 2002).
    \19\ 68 FR 32960 (June 3, 2003).
    \20\ NCUA OGC Opinion 01-0502 (June 18, 2001) available at 
https://www.ncua.gov/files/legal-opinions/OL2001-0502.pdf; 12 CFR 
721.3(b)(1).
    \21\ Generally, a CUSO is an entity in which a FICU has an 
ownership interest or to which a FICU has extended a loan, and that 
entity is engaged primarily in providing products or services to 
credit unions or credit union members. A CUSO also includes any 
entity in which a CUSO has an ownership interest of any amount, if 
that entity is engaged primarily in providing products or services 
to credit unions or credit union members. See 12 CFR 712.1(d).
    \22\ 12 CFR 712.5(j); see also NCUA OGC Opinion 09-0349 (May 
2009) available at https://www.ncua.gov/regulation-supervision/legal-opinions/2009/credit-union-service-organization-cuso-purchase-and-servicing-non-performing-loans.
---------------------------------------------------------------------------

    The Board believes it is appropriate now to remove the prohibition 
against FCUs from purchasing MSRs as permissible investments while also 
maintaining safety and soundness. FCUs have long had experience 
originating and servicing residential mortgage loans. In fact, first 
lien residential mortgage loans account for over one third of 
outstanding credit union loans as of September 30, 2020, which is the 
single largest loan concentration in the system. FCUs accounted for $78 
billion of the approximately $154 billion in first lien residential 
mortgage loans originated by all FICUs in 2019. Comparatively, FCUs 
accounted for $62 billion of the approximately $117 billion in first 
lien residential mortgage loans originated by all FICUs in 2018.\23\
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    \23\ NCUA Call Report Data as of December 31, 2018 and December 
31, 2019.
---------------------------------------------------------------------------

    Like many financial institutions involved in residential lending, 
FCUs engage in both origination and servicing activities related to 
residential lending. As of September 30, 2020, approximately 3,700 
FICUs held $431 billion in aggregate outstanding first lien residential 
mortgage loans, with 2,166 FCUs accounting for $214 billion of the

[[Page 86869]]

outstanding amount.\24\ These residential mortgage loans are considered 
``portfolio'' mortgage loans because the FICU has not sold its loans 
and the FICU (or a related CUSO) provides mortgage servicing activities 
for said loans. There are no associated MSRs with portfolio mortgage 
loans from an asset and accounting perspective, but the responsibility 
to service the mortgage loan rests with the portfolio lender.
---------------------------------------------------------------------------

    \24\ NCUA Call Report Data as of September 30, 2020.
---------------------------------------------------------------------------

    Credit unions, like many other lenders involved with mortgage 
finance, also actively engage in selling residential mortgage loans to 
investors on the secondary market or other purchasers. In 2019, 
approximately 1,100 FICUs collectively sold $63 billion in residential 
mortgage loans. Five hundred fifty-six (556) FCUs accounted for $39 
billion of the $63 billion of mortgage loans sold in 2019. 
Comparatively, approximately 1,100 FICUs collectively sold $46 billion 
in residential mortgage loans in 2018, with 553 FCUs accounting for $26 
billion of the total amount sold.
    The NCUA began collecting data on MSRs owned by FICUs in 2003 and 
has found that the value of MSRs in the credit union system increased 
from approximately $330 million in 2004 to $1.8 billion in 2019. During 
this period, the amount of real estate loans sold where servicing was 
retained increased from $46 billion to $240 billion. As of September 
30, 2020, more than 500 FICUs owned $1.9 billion in MSRs. Of this 
figure, 235 FCUs accounted for $1.1 billion in MSRs.\25\
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    \25\ NCUA Call Report Data as of September 30, 2020.
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    The Board recognizes that MSRs have certain inherent attributes 
that can have an adverse impact on an FCU's financial condition. 
Mortgage servicing rights can carry operational risks due to a myriad 
of statutes and regulations to protect consumers, which can expose FCUs 
to reputational, legal, and compliance risk. In addition, MSRs can 
expose servicers to liquidity risk as certain mortgage loans which have 
been sold to investors require the servicer to remit payments to the 
investors even if borrowers do not make the monthly mortgage loan 
payments. The value of MSRs is highly dependent on prevailing interest 
rates. In a rapidly increasing or decreasing interest rate environment, 
this can introduce extreme volatility to a credit union's financial 
condition as the MSRs are periodically valued for accounting and 
reporting purposes. An FCU in poor financial condition may not be able 
to withstand the financial impact of a significant loss due to a write-
down in the value of its MSRs.
    The Board believes that FCUs have demonstrated experience 
originating and servicing residential mortgage loans. Furthermore, 
although valuing MSRs can be complex, FCUs have sufficient access to 
market resources and expertise to help them value MSRs when purchased 
or retained on an ongoing basis for accounting purposes. For these 
reasons, the Board believes removing the prohibition in the investment 
rule is appropriate and consistent with safety and soundness. The 
proposed rule would provide flexibility for FCUs to operate their 
mortgage loan business and would also provide FICUs another avenue to 
sell their MSRs, which could generate a higher selling price and keep 
the MSRs within the credit union system.

II. Legal Authority

    Section 120(a) of the Federal Credit Union Act \26\ authorizes the 
Board to prescribe rules and regulations for the administration of the 
statute.\27\ In addition, section 206 of the Federal Credit Union Act 
provides the Board with broad authority to take enforcement action 
against a FICU or an ``institution-affiliated party'' \28\ that is 
engaging or has engaged, or the Board has reasonable cause to believe 
that it is about to engage, in an unsafe or unsound practice in 
conducting the business of such credit union.\29\ Congress chose not to 
define ``unsafe or unsound practices'' in the Federal Credit Union Act, 
leaving determinations regarding which actions are unsafe or unsound to 
the Board.
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    \26\ 12 U.S.C. 1766(a).
    \27\ 12 U.S.C. 1751-1795k.
    \28\ See 12 U.S.C. 1786(r) (providing: ``For purposes of [the 
Federal Credit Union Act], the term `institution-affiliated party'' 
means--(1) any committee member, director, officer, or employee of, 
or agent for, an insured credit union; (2) any consultant, joint 
venture partner, and any other person as determined by the Board (by 
regulation or on a case-by-case basis) who participates in the 
conduct of the affairs of an insured credit union; and (3) any 
independent contractor (including any attorney, appraiser, or 
account) who knowingly or recklessly participates in--(A) any 
violation of any law or regulation; (B) any breach of fiduciary 
duty; or (C) any unsafe or unsound practice, which caused or is 
likely to cause more than a minimal financial loss to, or a 
significant adverse effect on, the insured credit union.'').
    \29\ 12 U.S.C. 1786.
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    The Federal Credit Union Act authorizes an FCU ``to sell all or a 
part of its assets to another credit union [and] to purchase all or 
part of the assets of another credit union. . . subject to regulations 
of the Board.'' \30\ Given that MSRs are financial assets that may be 
sold separately from their underlying mortgage loans, an FCU has the 
statutory authority to sell MSRs to, and purchase MSRs from, another 
credit union. Further, the Federal Credit Union Act authorizes 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.'' \31\ As such, NCUA's incidental powers regulation \32\ 
has long provided that FCUs have the authority to provide correspondent 
services, including loan servicing, to other credit unions.\33\ 
Similarly, the eligible obligations rule allows an FCU ``to service any 
eligible obligation it purchases or sells in whole or in part.'' \34\
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    \30\ 12 U.S.C. 1757(14).
    \31\ 12 U.S.C. 1757(17).
    \32\ 12 CFR part 721.
    \33\ 12 CFR 721.3(c).
    \34\ 12 CFR 701.23(e); 44 FR 27068 (May 9, 1979).
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III. Summary of the Proposed Rule

    As set out above, the Board proposes to remove the current 
prohibition on FCUs purchasing MSRs from the investment rule. The Board 
is proposing to amend Sec.  703.14 to explicitly permit an FCU to 
purchase MSRs from other FICUs as an investment, provided: (1) The 
underlying mortgage loans of the MSRs are loans the FCU is empowered to 
grant; (2) the FCU purchases the MSRs within the limitations of the 
FCU's board of directors' written purchase policies; and (3) the board 
of directors or investment committee approves the purchase in advance.
    To ensure that MSRs purchased by FCUs meet the same requirements 
and standards applicable to the loans that a buying FCU can make, the 
proposed rule would allow purchases of MSRs from FICUs only if the 
underlying mortgage loans from which the MSRs are derived meet the same 
conditions for loans the FCU is empowered to grant. This is the same 
standard applicable to FCUs when buying certain eligible obligations 
under Sec.  701.23(b). The phrase ``empowered to grant'' refers to an 
FCU's authority to make the type of loans permitted by the FCU Act, 
NCUA regulations, FCU Bylaws, and an FCU's own internal policies.\35\
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    \35\ NCUA OGC Op. 04-0713 (Oct. 25, 2004) available at https://www.ncua.gov/files/legal-opinions/OL2004-0713.pdf, 76 FR 81421, 
81425 (December 28, 2011).
---------------------------------------------------------------------------

    Consistent with Sec.  701.23, the Board is also requiring MSRs be 
purchased within the limitations of the FCU's board of directors' 
written purchase policies and requiring the FCU's board of directors or 
investment committee approves the purchase in advance.

[[Page 86870]]

    The proposed rule necessarily removes the current prohibition 
against MSRs purchases imposed in Sec.  703.16(a) and reserves the 
paragraph to correspond to the change in Sec.  703.14. The remaining 
provision in Sec.  703.16(a), which recognizes an FCU's incidental 
powers authority to service the loans owned by a member engaged in 
mortgage lending, is transferred to part 721 as another example of 
loan-related product. While loan servicing is an incidental powers 
activity when performed for other credit unions under Sec.  721.3(c) as 
a correspondent service, the proposed addition to paragraph (h) 
reflects the existing authority currently found in Sec.  703.16(a) to 
provide loan-related services to members.
    The Board invites comments on all aspects of the proposal \36\ and, 
in addition, requests comment on the following questions. The questions 
raise issues the Board intends to incorporate in the final rule to 
ensure appropriate safeguards and limitations, and will consider the 
comments and supporting information it receives in response to this 
notice.
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    \36\ As noted, many FCUs have considerable experience in 
managing the servicing of mortgage loans, therefore the Board is not 
providing the usual 60-day comment period for this proposal which 
relieves a regulatory prohibition on investments in MSRs as assets. 
See NCUA Interpretive Ruling and Policy Statement (IRPS) 87-2, as 
amended by IRPS 03-2 and IRPS 15-1. 80 FR 57512 (Sept. 24, 2015), 
available at https://www.ncua.gov/files/publications/irps/IRPS1987-2.pdf.
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    How would the proposed rule to permit an FCU to purchase MSRs from 
other FICUs benefit an FCU's mortgage loan servicing operations? The 
Board solicits feedback on whether the current prohibition against FCUs 
purchasing MSRs as financial assets from other mortgage lenders has 
impacted the ability of FCUs to achieve their strategic objectives.
    If FCUs purchase volumes of MSRs from different FICUs, are they 
prepared to ensure they have effective compliance management systems 
for compliance with the consumer protection-related laws and 
regulations that apply to mortgage loan servicers? FCUs manage their 
exposure to compliance risk through a comprehensive compliance program, 
often referred to as a compliance management system (CMS). An FCU's CMS 
includes policies, procedures, processes, monitoring, and an audit 
function regarding compliance with all applicable laws and regulations, 
including those that apply to mortgage loan servicing activities. An 
effective CMS promotes compliance with consumer protection-related laws 
and regulations and prevents consumer harm. The Board solicits comment 
on to what extent FCUs may need to make appropriate adjustments to 
their CMS if they expand their mortgage loan servicing as provided 
under the proposed rule, particularly to comply with the consumer 
protections that apply to the transfer and servicing of mortgage loans, 
and how the NCUA can best ensure that FCUs purchasing MSRs do so.
    Should the proposed rule include additional criteria for an FCU to 
be eligible to purchase MSRs? In particular, should the FCU be required 
to be ``well capitalized'' as defined in part 702? If so, similarly to 
the eligible obligations rule, should it be well capitalized for a 
minimum of the six quarters preceding its purchase of MSRs? Should the 
FCU be required to have a composite CAMEL rating of 1 or 2 with a 
Management rating of a 1 or 2 for at least the last two examination 
cycles? As detailed in this notice, MSRs carry a variety of risks. As 
such, the Board is considering certain safeguards that would apply 
before an FCU is eligible to purchase MSRs, in order to mitigate some 
of these risks. The Board is considering whether to incorporate one of, 
or a combination of, these elements in a final rule because it has 
found these standards to be prudent in other contexts, including the 
eligible obligations rule and investment rule in relation to 
investments in derivatives.\37\ The Board solicits feedback on whether 
these proposed standards would mitigate risks inherent in the purchase 
of MSRs and help ensure that FCUs engage in this activity in a safe and 
sound manner.
---------------------------------------------------------------------------

    \37\ 12 CFR 701.23(b)(2), 703.108(a)(1).
---------------------------------------------------------------------------

    Should the final rule include a limit on the amount of MSRs an FCU 
can hold to address concentration risk? Specifically, should a limit on 
the amount of MSRs held by an FCU be determined using the total amount 
of MSRs purchased by the FCU or, alternatively, the aggregate amount of 
MSRs purchased from other parties and MSRs retained after the sale of 
the underlying mortgage loans by the FCU? Should the rule limit the 
total amount of MSRs that an FCU may hold to no more than twenty-five 
percent (25%) of the FCU's net worth or would another standard, such as 
a concentration limit based on assets, be more appropriate to address 
concentration risk? High concentrations in a particular asset can 
expose a credit union to undue risk. The Board solicits feedback on 
whether a concentration limit for MSRs would help alleviate risks for 
FCUs that purchase or originate MSRs.
    To address the liquidity risk of the purchasing FCU, should the 
final rule limit the amount of months an FCU is obligated to remit 
payments to the mortgage loan owner if the borrower fails to make 
payments? Specifically, should there be a maximum of three to six 
months of payments made to the mortgage loan owner when a borrower 
fails to make payment on the serviced mortgage loan? MSRs can carry 
liquidity risks if the servicer is required under the mortgage 
servicing contract to remit payments to owners of the mortgage loans 
even if the servicer is not receiving mortgage payments from borrowers. 
The Board solicits feedback on whether there should be a limit on MSRs 
with certain remittance structures to mitigate liquidity risks to FCUs 
that purchase MSRs.
    Finally, the Board solicits comment on whether the safeguards and 
limitations applicable to FCUs in the final rule should be extended to 
all FICUs in light of the risks associated with the purchase of MSRs, 
as a requirement for obtaining and maintaining federal insurance.

Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a notice of proposed rulemaking, an agency prepare and 
make available for public comment an initial regulatory flexibility 
analysis that describes the impact of a proposed rule on small 
entities. A regulatory flexibility analysis is not required, however, 
if the agency certifies that the rule will not have a significant 
economic impact on a substantial number of small entities (defined for 
purposes of the RFA to include FICUs with assets less than $100 
million) and publishes its certification and a short, explanatory 
statement in the Federal Register together with the rule. The proposed 
rule provides additional investment authority to FCUs that meet certain 
eligibility requirements due to the complexity and risk related to the 
purchase of MSRs. As of March 31, 2020, of the 3,256 credit unions with 
federal charters, only 17 FCUs with assets of less than $100 million 
had MSRs on their books. Accordingly, the NCUA certifies that the 
proposed rule will not have a significant economic impact on a 
substantial number of small credit unions.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency creates a new or amends existing information collection

[[Page 86871]]

requirements.\38\ For the purpose of the PRA, an information collection 
requirement may take the form of a reporting, recordkeeping, or a 
third-party disclosure requirement. The proposed rule does not contain 
information collection requirements that require approval by OMB under 
the PRA.\39\ The proposed rule provides regulatory relief by allowing 
eligible FCUs to expand their investment authority to include the 
purchase of MSRs under similar standards applicable to the purchase of 
eligible obligations and other investments.
---------------------------------------------------------------------------

    \38\ 44 U.S.C. 3507(d); 5 CFR part 1320.
    \39\ 44 U.S.C. Chap. 35.
---------------------------------------------------------------------------

C. 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, the NCUA, an 
independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order. This rulemaking will not 
have a substantial direct effect on the states, on the connection 
between the national government and the states, or on the distribution 
of power and responsibilities among the various levels of government. 
The NCUA has determined that this proposal does not constitute a policy 
that has federalism implications for purposes of the executive order.

D. Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this proposed rule will not affect 
family well-being within the meaning of Section 654 of the Treasury and 
General Government Appropriations Act, 1999.\40\
---------------------------------------------------------------------------

    \40\ Public Law 105-277, 112 Stat. 2681 (1998).
---------------------------------------------------------------------------

List of Subjects

12 CFR Part 703

    Credit unions, Investments.

12 CFR Part 721

    Credit unions, Functions, Implied powers.

    By the National Credit Union Administration Board on December 
17, 2020.
Melane Conyers-Ausbrooks,
Secretary of the Board.

    For the reasons discussed above, the NCUA Board proposes to amend 
12 CFR parts 703 and 721 as follows:

PART 703--INVESTMENT AND DEPOSIT ACTIVITIES

0
1. The authority citation for part 703 is revised to read as follows:

    Authority:  12 U.S.C. 1757(7), 1757(8), 1757(14) and 1757(15).

0
2. Amend Sec.  703.14 by adding paragraph (l) to read as follows:


Sec.  703.14   Permissible investments.

* * * * *
    (l) Mortgage servicing rights. A Federal credit union may purchase 
mortgage servicing rights from other federally insured credit unions as 
an investment if all of the following conditions are met:
    (1) The underlying mortgage loans of the mortgage servicing rights 
are loans the Federal credit union is empowered to grant;
    (2) the Federal credit union purchases the mortgage servicing 
rights within the limitations of its board of directors' written 
purchase policies; and
    (3) the board of directors or investment committee approves the 
purchase.


Sec.  703.16  [Amended]

0
2. Amend Sec.  703.16 by removing and reserving paragraph (a).

PART 721--INCIDENTAL POWERS

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

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

0
5. Amend Sec.  721.3 paragraph (h) by revising the last sentence 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?

* * * * *
    (h) * * * These products or activities may include debt 
cancellation agreements, debt suspension agreements, letters of credit, 
leases, and mortgage loan servicing functions for a member as long as 
the loan is owned by a member.
* * * * *
[FR Doc. 2020-28278 Filed 12-30-20; 8:45 am]
BILLING CODE 7535-01-P
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