Rule2021-27641
Mortgage Servicing Assets
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 23, 2021
Effective
April 1, 2022
Issuing agencies
National Credit Union Administration
Abstract
The NCUA Board (Board) is issuing a final rule to permit federal credit unions (FCUs) to purchase mortgage servicing assets (MSAs), referred to as mortgage servicing rights in the proposed rule, from other federally insured credit unions subject to certain requirements. Under the final rule, FCUs with a CAMEL or CAMELS composite rating of 1 or 2 and a CAMEL or CAMELS Management component rating of 1 or 2, may purchase the mortgage servicing rights of loans that the FCU is otherwise empowered to grant, provided these purchases are made in accordance with the FCU's policies and procedures that address the risk of these investments and servicing practices. The Federal Credit Union Act (the Act) permits FCUs to purchase mortgage servicing assets under their express authority to purchase assets from other credit unions.
Full Text
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<title>Federal Register, Volume 86 Issue 244 (Thursday, December 23, 2021)</title>
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[Federal Register Volume 86, Number 244 (Thursday, December 23, 2021)]
[Rules and Regulations]
[Pages 72810-72818]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-27641]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 703 and 721
RIN 3133-AF26
Mortgage Servicing Assets
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: The NCUA Board (Board) is issuing a final rule to permit
federal credit unions (FCUs) to purchase mortgage servicing assets
(MSAs), referred to as mortgage servicing rights in the proposed rule,
from other federally insured credit unions subject to certain
requirements. Under the final rule, FCUs with a CAMEL or CAMELS
composite rating of 1 or 2 and a CAMEL or CAMELS Management component
rating of 1 or 2, may purchase the mortgage servicing rights of loans
that the FCU is otherwise empowered to grant, provided these purchases
are made in accordance with the FCU's policies and procedures that
address the risk of these investments and servicing practices. The
Federal Credit Union Act (the Act) permits FCUs to purchase mortgage
servicing assets under their express authority to purchase assets from
other credit unions.
DATES: The final rule is effective April 1, 2022.
FOR FURTHER INFORMATION CONTACT: Thomas Fay, Director, Capital Markets;
John G. Nilles, Senior Capital Markets Specialist, Office of
Examination & Insurance, or Ian Marenna, Associate General Counsel;
Chrisanthy Loizos, Senior Trial Attorney, Office of General Counsel, or
Ernestine Ward, Consumer Compliance Policy and Outreach Program
Officer, Office of Consumer Financial Protection, at 1775 Duke Street,
Alexandria, VA 22314 or telephone: (703) 518-6300, (703) 518-6540, or
(703) 518-6524.
SUPPLEMENTARY INFORMATION:
I. Introduction
II. Final Rule
III. Legal Authority
IV. Discussion of Public Comments Received on the Proposed Rule
V. Regulatory Procedures
I. Introduction
A. Background
While the Act provides specific, statutory investment powers for
FCUs,\1\ the Board has adopted regulatory prohibitions against certain
investments and investment activities on the basis of safety and
soundness concerns, including the purchase of mortgage servicing rights
(MSRs) as an investment.\2\ In December 2020, by a vote of 2-1, the
Board approved a notice of proposed rulemaking (NPR) \3\ to amend the
agency's Investment and Deposit Activities Rule (Investment Rule), 12
CFR part 703, to explicitly permit FCUs to purchase MSRs from other
federally insured credit unions (FICUs) based on express statutory
authority that permits 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.'' \4\ The
proposed regulatory text provided the following requirements for this
investment authority:
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\1\ 12 U.S.C. 1757(7), (8), (14), (15).
\2\ 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).
\3\ 85 FR 86867 (Dec. 31, 2020).
\4\ 12 U.S.C. 1757(14).
(1) The underlying mortgage loans of the MSRs are loans the FCU
is empowered to grant; \5\
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\5\ The phrase ``empowered to grant'' refers to an FCU's
authority to make the type of loans permitted by the Act, NCUA
regulations, FCU Bylaws, and an FCU's own internal policies. See
NCUA OGC Op. 04-0713 (Oct. 25, 2004) available at <a href="https://www.ncua.gov/files/legal-opinions/OL2004-0713.pdf">https://www.ncua.gov/files/legal-opinions/OL2004-0713.pdf</a>, 76 FR 81421,
81425 (December 28, 2011).
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(2) The FCU purchases the MSRs within the limitations of the
FCU's board of directors' written purchase policies; and
(3) The FCU's board of directors or investment committee
approves the purchase in advance.
The NPR also included several questions as to whether the rule
should place additional conditions on the authority, such as capital
requirements, concentration limits, or other measures to address
consumer financial protection, compliance risk and liquidity risk.
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 MSRs to another party, or
separate the MSRs from its mortgage loan and transfer either the loan
or the MSRs to another party. The NPR focused on the purchase of MSRs
as assets that are distinct from their underlying mortgage loans. The
Board proposed to permit FCUs to purchase MSRs by removing MSRs from
the list of prohibited investments \6\ in the Investment Rule and
adding the purchase of MSRs from other FICUs to the rule's list of
permissible investments for FCUs.\7\
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\6\ 12 CFR 703.16.
\7\ 12 CFR 703.14.
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Under the current 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.'' \8\ Mortgage loan
servicers, therefore, are intermediaries between borrowers and owners
of the mortgage loans; their servicing functions are subject to a
servicing agreement and consumer protection laws, as applicable.\9\
MSRs, or mortgage servicing assets, a term used interchangeably with
MSRs, are recorded in accordance with Generally Accepted Accounting
Principles (GAAP).\10\
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\8\ 12 CFR 703.2.
\9\ For example, see 12 CFR 1024.17; 12 CFR part 1024, subpart
C; 12 CFR 1026.20, .36, .40-.41.
\10\ See Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 860--Transfer and Servicing of
Financial Assets.
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Mortgage servicing can carry various risks. Servicers are exposed
to liquidity risk if servicing agreements require the servicer to remit
mortgage loan payments to the investors of sold loans even when
borrowers fail to make their monthly payments. There are also
operational risks related to mortgage servicing due to a myriad of
statutes and regulations that protect consumers, which can expose FCUs
to reputational, legal, and compliance risk. The compliance and
reputation risk of a mortgage servicer can be considerable due to the
high touch nature of interactions with consumers and the attendant
legal requirements imposed on mortgage servicers. For example,
depending on the particular servicer and its activities, servicers must
comply with a variety of requirements, including the Real Estate
Settlement Procedures Act (RESPA) and its implementing regulation,
Regulation X; the Truth in Lending Act (TILA) and its implementing
regulation, Regulation Z; as well as amendments to Regulations X and Z
under the Mortgage Servicing Rules promulgated by the Consumer
Financial Protection Bureau, which implement provisions of the Dodd-
Frank Wall Street Reform and Consumer
[[Page 72811]]
Protection Act.\11\ As applicable, servicers must comply with other
federal laws regarding mortgage servicing, including the Servicemembers
Civil Relief Act (SCRA),\12\ the Fair Debt Collection Practices Act,
and Section 5 of the Federal Trade Commission Act, which prohibits
unfair or deceptive acts or practices,\13\ as well as any applicable
state laws regarding servicing.\14\ To be successful, servicers need to
understand the complexities in determining the value of these assets,
and have effective information and compliance management systems,
trained personnel, robust internal controls, as well as appropriate
risk management to properly service the loans.
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\11\ 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. Note however, a
servicer is not a small servicer under Sec. 1026.41(e)(4)(ii)(A) if
it services any mortgage loans for which the servicer or an
affiliate is not the creditor or assignee (that is, for which the
servicer or an affiliate is not the owner or was not the
originator).
\12\ 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.
\13\ Note, under the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, it is unlawful for any provider of consumer
financial products or services or a service provider to engage in
any unfair, deceptive, or abusive act or practice. Dodd-Frank Act,
12 U.S.C. 5536 (a)(1)(B).
\14\ ``State laws that give greater protection to consumers are
not inconsistent with and are not preempted by RESPA or Regulation
X. In addition, nothing in RESPA or Regulation X should be construed
to preempt the entire field of regulation of the practices covered
by RESPA or Regulation X, including the regulations in Subpart C
with respect to mortgage servicers or mortgage servicing.'' 12 CFR
1024.5(c) and Commentary .5(c)(1)-1. See also the preemption of
state law provision in the mortgage servicing transfer rule, which
states ``[p]rovisions of State law, such as those requiring
additional notices to insurance companies or taxing authorities, are
not preempted by section 6 of RESPA or this section, and this
additional information may be added to a notice provided under this
section, if permitted under State law.'' 12 CFR 1024.33(d).
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Although limited by the prohibition in the Investment Rule to
purchase MSRs, FCUs record MSRs under two circumstances. When an FCU
originates a residential mortgage loan and sells the loan to investors
on the secondary market or other purchasers, the FCU may retain the
corresponding servicing rights for various reasons, including
maintaining its servicing relationship with its member. Alternatively,
FCUs can retain MSRs if they later sell residential mortgage loans
purchased from the originating lender.
Similar to other financial institutions involved in residential
lending, FCUs engage in both origination and servicing activities
related to residential lending. As of June 30, 2021, approximately
3,600 FICUs held $449 billion in aggregate outstanding first lien
residential mortgage loans that they originated, commonly referred to
as ``portfolio loans,'' with 2,138, or 59.4 percent, of FCUs accounting
for $223 billion, or 49.7 percent, of the total amount.\15\ An FCU does
not recognize a servicing asset for a portfolio mortgage loan in which
the FCU has retained servicing, because it has not undertaken an
obligation to service the loan for another party.
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\15\ NCUA Call Report Data as of June 30, 2021.
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Credit unions, similar to other lenders involved with mortgage
finance, actively sell residential mortgage loans to investors on the
secondary market. As of June 2021, FICUs collectively sold and serviced
$270 billion of mortgage real estate loans with FCUs accounting for 53
percent of the total balance. In 2020, approximately 1,100 FICUs
collectively sold $120 billion in first lien residential mortgage
loans. Of the total $120 billion sold, 535 FCUs accounted for $58
billion of the total amount sold. Comparatively, approximately 1,100
FICUs collectively sold $63 billion in residential mortgage loans in
2019, with 556 FCUs accounting for $39 billion of the total amount
sold.
B. Summary of the Proposed Rule
The Board proposed to amend NCUA's Investment Rule to permit FCUs
to purchase MSRs from other FICUs. Specifically, the proposed rule
removed the current prohibition on FCUs purchasing MSRs from the
Investment Rule. The Board proposed to amend Sec. 703.14 to explicitly
permit an FCU to purchase MSRs from other FICUs, 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 allowed 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).
Consistent with Sec. 701.23, the proposed rule also required that
FCUs purchase MSRs within the limitations of the FCU's board of
directors' written purchase policies and that the FCU's board of
directors or investment committee approves the purchase in advance.
The proposed rule removed the regulatory text that prohibits the
purchase of MSRs in Sec. 703.16(a) and reserved 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, was
transferred to part 721 as another example of a 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) reflected the existing
authority currently found in Sec. 703.16(a) to provide loan-related
services to members.
In addition, the Board requested comment on the following questions
with the expressed intention that the final rule would incorporate
appropriate safeguards and limitations as informed by the responses the
Board received in response to the NPR.
<bullet> Benefits: How would the proposed rule to permit an FCU to
purchase MSRs from other FICUs benefit an FCU's mortgage loan servicing
operations?
<bullet> Compliance Risk: 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?
<bullet> Capital and CAMEL Requirements: 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?
<bullet> Concentration Risk: 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
[[Page 72812]]
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 25 percent 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?
<bullet> Liquidity Risk: 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?
In addition to the questions listed, the Board also solicited
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 share insurance.
II. Final Rule
The final rule removes the prohibition on FCUs from purchasing MSRs
under the Investment Rule.\16\ The final rule also removes the current
defined term ``mortgage servicing rights'' in the Investment Rule and
replaces it with the term ``mortgage servicing assets.'' For
consistency with part 702, the final rule adopts the same definition
for ``mortgage servicing assets'' that the Board adopted under its
amendments to the risk-based capital (RBC) rule.\17\ Under the RBC
rule, MSAs are defined as ``assets, maintained in accordance with GAAP,
resulting from contracts to service loans secured by real estate (that
have been securitized or owned by others) for which the benefits of
servicing are expected to more than adequately compensate the servicer
for performing the servicing.'' \18\ This alignment in the final rule
does not make substantive definitional changes to terms that are
commonly used interchangeably by industry and regulators, but rather
ensures uniformity and clarity in the regulatory text for compliance
with both the investment and capital rules.\19\
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\16\ The Board did not propose in the NPR to remove any
investment restrictions applicable to federally insured corporate
credit unions under part 704. This final rule, therefore, does not
alter the distinct investment authorities and prohibitions
applicable to corporate credit unions under part 704.
\17\ 80 FR 66626 (Oct. 29, 2015) and 84 FR 68781 (Dec. 17,
2019).
\18\ 12 CFR 702.2 (effective Jan. 1, 2022).
\19\ See Comptroller's Handbook for Mortgage Banking, version 1
Feb. 2014 at p. 64, fn.4; 86 FR 45824, 45846 (Aug. 16, 2021).
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The final rule amends Sec. 703.14 to explicitly permit an FCU to
purchase MSAs from other FICUs, provided:
(1) After the last full examination of the credit union, the FCU
received a composite CAMELS rating of 1 or 2, which also included a
Management rating of 1 or 2; \20\
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\20\ Effective April 1, 2022, the NCUA's supervisory rating
system will change from CAMEL to CAMELS. See 86 FR 59282 (Oct. 27,
2021). CAMEL ratings will be used to determine eligibility for those
credit unions that do not have a CAMELS rating.
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(2) The underlying mortgage loans of the MSAs are loans the FCU
is empowered to grant;
(3) The FCU purchases the MSAs within the limitations of the
FCU's board of directors' written purchase policies; and
(4) The board of directors or the FCU's investment committee
approves the purchase in advance.
The Board notes that under recent amendments to the RBC rule,
complex credit unions with MSAs will also factor the criteria in Sec.
702.104 to calculate their RBC requirements.\21\
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\21\ 80 FR 66626 (Oct. 29, 2015) and 84 FR 68781 (Dec. 17,
2019). On December 16, 2021, the Board approved additional
amendments to 12 CFR 702.104 pertaining to mortgage servicing
assets.
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The final rule removes the current prohibition against MSR
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 addition to paragraph (h) reflects the authority found in
Sec. 703.16(a) to provide loan-related services to members.
III. Legal Authority
Over decades, the NCUA has issued many regulations and opinions
recognizing the authority of an FCU to engage in loan servicing
activities. 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.\22\ FCUs also have the authority
to provide correspondent services, including loan servicing, to other
credit unions under the incidental powers regulation.\23\ 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.'' \24\ During the part 721 rulemaking in 2001, the Board
agreed with commenters that loan servicing and escrow services were
examples of permitted correspondent services.\25\ Furthermore, although
the purchase of MSRs was prohibited under the Investment Rule, the
Board recognized during the incidental powers rulemaking that an FCU
could perform servicing for a member engaged in making mortgage loans
as a financial service to its member:
\22\ 12 CFR 701.23(e); 44 FR 27068 (May 9, 1979).
\23\ 12 CFR 721.3(c).
\24\ 66 FR 40845, 40850 (Aug. 6, 2001).
\25\ Id.; see also NCUA OGC Opinion 09-0430 (August 2009)
available at <a href="https://www.ncua.gov/regulation-supervision/legal-opinions/2009/nonmember-loan-servicing">https://www.ncua.gov/regulation-supervision/legal-opinions/2009/nonmember-loan-servicing</a>.
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``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.'' \26\
\26\ 67 FR 78996, 78998 (Dec. 27, 2002).
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Therefore, the authority to provide mortgage loan servicing as a
financial service to members, under the conditions above, has been in
place since 2003.\27\ FCUs are also permitted to provide mortgage loan
servicing to others as a charitable contribution.\28\ Further, under
the NCUA's Credit Union Service Organization (CUSO) regulation, CUSOs
\29\ are expressly preapproved to provide loan support services,
including loan servicing and debt collection services.\30\
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\27\ 68 FR 32960 (June 3, 2003).
\28\ NCUA OGC Opinion 01-0502 (June 18, 2001) available at
<a href="https://www.ncua.gov/files/legal-opinions/OL2001-0502.pdf">https://www.ncua.gov/files/legal-opinions/OL2001-0502.pdf</a>; 12 CFR
721.3(b)(1).
\29\ 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).
\30\ 12 CFR 712.5(h); 712.3(d)(5)(i)(A).
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The authority for FCUs to purchase MSAs is found in Section107(14)
of the Act, which permits 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.'' \31\
Given that MSAs are financial assets
[[Page 72813]]
that may be sold separately from their underlying mortgage loans, an
FCU has the statutory authority to sell MSAs to, and purchase MSAs
from, another credit union.
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\31\ 12 U.S.C. 1757(14).
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By the plain language of Section 107(14), FCUs may purchase MSAs
only from other credit unions. Contrast the authority to purchase MSAs
``of another credit union'' \32\ to an FCU's express statutory power to
enter loan participation agreements with ``other credit unions, credit
union organizations or financial organizations.'' \33\ Under NCUA's
loan participation rule, subject to certain conditions, an FCU can
purchase a participation interest in a loan from a credit union, credit
union organization, or financial organization, which means any
federally chartered or federally insured financial institution or any
state or federal government agency and its subdivisions.\34\ As such,
the Act makes a greater number of participation partner-types (sellers
of loan participation interests) available to an FCU than is permitted
to the FCU if it is purchasing MSAs.
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\32\ Id.
\33\ 12 U.S.C. 1757(5)(E).
\34\ 12 CFR 701.22(a)-(b).
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Lastly, the Board has engaged in several rulemakings to amend its
RBC rule to, among other changes, include a guardrail for complex
credit unions that purchase MSAs.\35\ The final rule includes a
deduction to the RBC numerator for MSA balances that exceed 25 percent
of the capital numerator with the remaining balance risk-weighted at
250 percent in the RBC denominator. As mentioned in the preamble of the
2015 RBC final rule,\36\ the Board believes the risks of MSAs
contribute to a high level of uncertainty regarding the ability of
credit unions to realize value from these assets. In adopting the
December 2021 amendments to the RBC rule, the Board determined that it
was appropriate to add a risk-based numerator deduction to address the
potential of complex credit unions purchasing MSAs from other
FICUs.\37\
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\35\ 80 FR 66626 (Oct. 29, 2015) and 84 FR 68781 (Dec. 17,
2019). On December 16, 2021, the Board approved additional
amendments to 12 CFR 702.104.
\36\ 80 FR 66683.
\37\ [Insert Federal Register citation to part 702 amendments
approved on December 16, 2021]
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This rulemaking is promulgated pursuant to Section 120(a) of the
Act,\38\ which is a general grant of regulatory authority that
authorizes the Board to prescribe rules and regulations for the
administration of the Act.\39\ In addition, Section 206 of the Act
grants the Board broad authority to take enforcement action against a
FICU or an ``institution-affiliated party'' \40\ that is engaging, 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.\41\ Congress chose not to define ``unsafe or
unsound practices'' in the Act, leaving determinations regarding which
actions are unsafe or unsound to the Board.
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\38\ 12 U.S.C. 1766(a).
\39\ 12 U.S.C. 1751-1795k.
\40\ 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.'').
\41\ 12 U.S.C. 1786.
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IV. Discussion of Public Comments Received on the Proposed Rule
A. Generally
In the NPR, the Board proposed to amend 12 CFR 703.14 to include
the following three prerequisites in order for an FCU to purchase MSRs
from a FICU:
(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 FCU's board of directors or investment committee
approves the purchase in advance.
In response, the Board received eleven comment letters from two
natural person FCUs, eight credit union leagues and trade associations,
and one individual. All but one of the commenters supported the removal
of the regulatorily imposed prohibition in the Investment Rule that
currently prevents FCUs from purchasing MSRs. Several commenters stated
that additional conditions should be considered or included in the
final rule. However, two commenters urged against conditions that would
limit the investment authority, suggesting that FCUs and FICUs should
be solely responsible for managing their risk mitigation due to their
ample experience of servicing their own mortgages, as well as selling
mortgage loans to the government-sponsored enterprises (GSEs).\42\
These commenters stated that the rules should be more expansive to
include purchases of MSRs from parties other than FICUs.
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\42\ GSEs include the Federal Home Loan Banks, Fannie Mae,
Freddie Mac, Farmer Mac, and the Federal Farm Credit System
Corporation.
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One commenter suggested the rulemaking is premature. This commenter
stated that it is paramount for FCUs to understand how MSR purchases
could affect both long- and short-term earnings of an FCU, particularly
if the FCU retains low margin MSRs, as well as the degree of negative
convexity for the MSRs as an investment. This commenter noted that many
assumptions go into deriving the underlying MSR value, requiring
considerable judgment, and that many FCU supervisory personnel may lack
understanding or expertise. The commenter concludes, however, that
these concerns may be mitigated if an FCU applies a prudent retention
strategy backed by organization policy and guidance.
In response to a question in the NPR seeking comment on whether the
proposed rule would benefit an FCU's mortgage loan servicing
operations, many commenters identified benefits to the expanded
investment authority to include the purchase of MSRs. Most commenters
believe that the proposed rule would provide flexibility for FCUs to
operate their mortgage loan business and would provide FICUs another
avenue to sell their MSRs, which could generate a higher selling price
and keep the MSRs within the credit union system. Two commenters stated
that the additional flexibility would allow smaller institutions that
want to grow and sell their mortgages to have more options to sell
while also allowing growth opportunities for the FCUs who purchase
those MSRs. Similarly, another commenter stated that MSRs can
potentially provide an ongoing stream of income to an FCU's bottom
line, given that the FCU understands and prepares for potential risks
involved. Another commenter noted the benefits of mortgage servicing,
which include a more positive member/borrower experience, new cross-
selling opportunities, and additional revenue sources. Two commenters
also found that the rule would encourage more cooperation between
credit unions.
Several commenters stated that the proposed rule will offer FCUs
opportunities to realize economies of scale. One commenter noted that
smaller credit unions may seek to partner with their larger marketplace
colleagues to enter the MSR
[[Page 72814]]
marketplace. A large FCU stated that FCUs that service their own
mortgage loans devote significant resources to meeting the operational
and compliance responsibilities associated with mortgage servicing. If
these fixed costs can be spread over a larger mortgage servicing
portfolio, FCUs will be able to execute their mortgage lending
businesses more effectively. This commenter also noted that, while
mortgage servicing is a complex undertaking, purchasing MSRs will not
add incremental risk for FCUs or the National Credit Union Share
Insurance Fund (NCUSIF) because the risks associated with this new
authority are similar to those already assumed as part of mortgage
lending. Rather than adding risk, MSRs will allow FCUs to better
address the inherent liquidity and interest rate risks posed by
mortgage lending, and such risk mitigation will better protect the
NCUSIF. One commenter stated that in 2019, about $240 billion in real
estate loans were sold outside of the credit union system;
consequently, removing the prohibition will promote safety and
soundness by keeping revenue within the credit union system. Finally,
one commenter commended the agency's timing of the rulemaking as the
elongated pandemic health emergency has resulted in increased deposit
flows rendering additional investment options a welcome tool.
Six commenters explicitly supported the three conditions proposed
for this investment activity, finding the criteria appropriate to an
FCU's purchase of MSRs from FICUs. Two commenters stated that FCUs can
put proper controls in place to adequately mitigate associated risks.
One of these commenters stated that it is prudent to consider certain
safeguards that would apply before an FCU is eligible to purchase MSRs,
depending on the complexity of the FCU's business model and staff
composition.
Two commenters believe the requirements that MSR purchases be made
in accordance with the board of directors' written purchase policies
and receive advance approval by the board or investment committee
should help ensure that MSR purchases are managed and properly vetted
by the FCU. One commenter, however, does not support the requirements
that MSRs be purchased within the limitations set by the board of
directors' written purchase policies and that an FCU's board of
directors or investment committee approve MSR purchases in advance.
This commenter stated that the advance approval condition would only
delay transactions, create more paperwork for the volunteers on board
of directors or investment committees, and likely not have a material
impact on the decision of whether to purchase MSRs.
One commenter expressed concern that, if the underlying mortgage
loans of the MSRs must be loans the FCU is empowered to grant before an
FCU can purchase MSRs, this condition will limit the number of FCUs
that may take advantage of the new investment authority. This commenter
stated that, while the purchase of MSRs will allow FCUs the ability to
market and offer their product and services to prospective members, an
FCU with a ``closed field of membership'' would have a difficult time
purchasing MSRs that fit into their field of membership. This commenter
requests that NCUA clarify how an FCU with, a single-common bond field
of membership, for example, can take advantage of this investment
authority.[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES][RULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT][/
PREAMB][SUPLINF][HED]*[/HED]
The Board believes that FCUs have demonstrated experience
originating and servicing residential mortgage loans, including in the
mitigation of the attendant operational and compliance risks of
mortgage servicing. The Board agrees with the comments in support of
the proposed investment authority, particularly in its benefits to the
credit union system. The opportunity to purchase MSRs provides
flexibility for FCUs to operate their mortgage loan businesses, as well
as providing the opportunity for FICUs to sell their MSRs. As one
commenter noted, a readily available control for FCUs is the use of
third parties to perform valuations of servicing portfolios, not only
to ensure that conformance with GAAP, but also to ensure that an
independent, expert financial analysis is conducted to minimize risk
through timely adjustments. For these reasons, the Board believes
removing the prohibition in the Investment Rule is appropriate and
consistent with safety and soundness.
In addition to the CAMELS rating requirement discussed below, the
final rule adopts the three conditions provided in the NPR as proposed.
To purchase MSAs from a FICU, an FCU must meet the following
requirements:
(1) The underlying mortgage loans of the MSAs are loans the FCU
is empowered to grant;
(2) The FCU purchases the MSAs within the limitations of the
FCU's board of directors' written purchase policies; and
(3) The FCU's board of directors or investment committee
approves the purchase in advance.
The final rule requires that the underlying mortgage loans to any
MSAs purchased by an FCU must meet the same requirements and standards
applicable to mortgage loans that the FCU could originate. This is the
same standard applicable to FCUs when buying certain eligible
obligations under Sec. 701.23(b). Note that the eligible obligations
rule does not require FCUs to purchase the loans of its members under
Sec. 701.23(b)(2), a rule adopted in accordance with Sec. 107(14) of
the Act.\43\ When an FCU uses this authority to buy eligible
obligations, the obligation must be in accordance with the FCU's loan
authority under the Act, NCUA regulations, FCU Bylaws, and the FCU's
internal policies. The loan, however, is not required to be of an
obligation of a member of the FCU or a person within the FCU's field of
membership. Likewise, the authority of an FCU to purchase MSAs from
other FICUs is not limited to loans made to persons in the purchasing
FCU's field of membership. In addition, like Sec. 701.23, the final
rule requires that an FCU purchase MSAs within the limitations of the
FCU's board of directors' written purchase policies and that its board
of directors or investment committee approve of the purchase in
advance.
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\43\ See 77 FR 31981, 31987 (May 31, 2012) and 66 FR 15055,
15059 (March 15, 2001).
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B. Compliance Risk Management
In the NPR, the Board requested comment as to whether FCUs have
effective compliance management systems (CMS) to help them to comply
with the consumer protection-related laws and regulations applicable to
mortgage loan servicers if they purchase MSRs from other FICUs.
A majority of commenters believe that an FCU can effectively manage
its exposure to compliance risk through a comprehensive compliance
program, which typically includes policies, procedures, processes,
monitoring, and an audit function. While two commenters acknowledged
the compliance and legal risks inherent in the acquisition of MSRs,
they asserted FCUs that service mortgages they originated have long
been able to manage these risks as part of their regular course of
business. This includes maintaining expert compliance and legal
personnel on staff, as well as engaging with outside counsel when
necessary. Two commenters noted that FICUs have been selling mortgage
loans to the GSEs for many years. Consequently, their CMS would not
need much expanding to comply with the consumer protections that apply
to the transfer and servicing of mortgage loans. One commenter stated
that, while adjustments to CMS may be warranted
[[Page 72815]]
if an FCU expands its loan servicing operations, changes to comply with
the consumer protections that apply to the transfer and servicing of
mortgage loans will not be significant.
One commenter discussed the use of proper controls related to the
purchase of MSRs and tools that FCUs can leverage to mitigate
associated risks. This commenter stated that one control is for FCUs to
invest in robust mortgage servicing software that is integrated with
other in-house software, including the core system and loan origination
system, to efficiently service mortgage loans. The commenter stated
that the adoption of a comprehensive set of technologies is necessary
for servicers to work efficiently and comply with regulations. The
commenter also stated that, as FCUs consider upgrades to their CMS,
specifically their mortgage lending quality control programs, any final
rule should permit flexibility in examination findings because FCUs may
need to amend existing CMS contracts and enhance staff training.
Similarly, another commenter noted that FCUs will need to consider CMS
upgrades, specifically to their mortgage lending quality control
programs, and should consider the need to closely review custom loan
documents, including promissory notes. FCUs may need to consider
creating or hiring specialized due diligence teams to review loans to
ensure they meet the NCUA's regulations and the FCU's own internal
policies.[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES][RULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT][/
PREAMB][SUPLINF][HED]*[/HED]
Another commenter stated that mortgage servicing operations should
be certified or confirmed through third-party reviews and/or audits.
Further, this commenter asserted that FCUs would need increased due
diligence over third-party vendors that service mortgages and to secure
insurance coverage sufficient to support possible losses. This
commenter agreed that FCUs that decide to purchase MSRs should have
appropriate expertise on staff to avoid problems. The commenter
suggests NCUA may wish to take steps to develop a risk-rating matrix to
measure performance and credit quality of loans in a selected pool.
The Board recognizes that FCUs have experience originating and
servicing mortgage loans and managing their exposure to compliance risk
through their CMS. An FCU that currently services mortgage loans that
it originates is expected to have an effective CMS that addresses
compliance with mortgage servicing laws and regulations, and includes
the following components:
<bullet> Board and senior management oversight,
<bullet> Policies and procedures,
<bullet> Training,
<bullet> Monitoring,
<bullet> Member complaint response, and
<bullet> An audit function.
An effective CMS also promotes compliance with consumer protection-
related laws and regulations and prevents consumer harm. Due to the
existing and extensive consumer protection laws that are specific to
mortgage loan servicing,\44\ including those under Regulation X and
Regulation Z, which are promulgated by the Consumer Financial
Protection Bureau, the Board believes that it is not necessary to
include additional consumer protections in the final Investment
Rule.\45\ However, the NCUA will use the examination process to assess
the effectiveness of an FCU's CMS for compliance with consumer
protection-related laws and regulations that apply to mortgage
servicers, as appropriate.\46\ Further, as appropriate, the NCUA will
employ supervisory tools or take enforcement action to address any CMS
deficiencies related to mortgage servicing that cause consumer harm.
Moreover, the Board notes that any FCUs that currently operate under
the small servicer exceptions to these rules will no longer benefit
from the exemption from certain requirements if they begin to purchase
MSAs from non-affiliate owners of the underlying mortgage loans.\47\
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\44\ Servicers must comply with various laws to the extent that
the law applies to the particular servicer and its activities,
including but not limited to RESPA, 12 U.S.C. 2601, et seq.
(Regulation X), TILA, 15 U.S.C. 1601, et seq. (Regulation Z), the
SCRA, 50 U.S.C; 3901, et seq., the Dodd-Frank Act (UDAAP
provisions), 12 U.S.C. 5536(a)(1)(B), as well as other applicable
Federal and State laws.
\45\ For example, see 12 CFR 1024.17; 12 CFR part 1024, subpart
C; 12 CFR 1026.20, .36, .40-.41.
\46\ For example, see <a href="https://www.ncua.gov/regulation-supervision/manuals-guides/federal-consumer-financial-protection-guide/compliance-management/compliance-management-systems-and-compliance-risk">https://www.ncua.gov/regulation-supervision/manuals-guides/federal-consumer-financial-protection-guide/compliance-management/compliance-management-systems-and-compliance-risk</a>; <a href="https://www.ncua.gov/regulation-supervision/manuals-guides/federal-consumer-financial-protection-guide/compliance-management/lending-regulations/real-estate-settlement-procedures-act-regulation-x">https://www.ncua.gov/regulation-supervision/manuals-guides/federal-consumer-financial-protection-guide/compliance-management/lending-regulations/real-estate-settlement-procedures-act-regulation-x</a>; <a href="https://www.ncua.gov/regulation-supervision/manuals-guides/federal-consumer-financial-protection-guide/compliance-management/lending-regulations/truth-lending-act-regulation-z">https://www.ncua.gov/regulation-supervision/manuals-guides/federal-consumer-financial-protection-guide/compliance-management/lending-regulations/truth-lending-act-regulation-z</a>; <a href="https://www.ncua.gov/regulation-supervision/manuals-guides/federal-consumer-financial-protection-guide/compliance-management/lending-regulations/servicemembers-civil-relief-act-scra">https://www.ncua.gov/regulation-supervision/manuals-guides/federal-consumer-financial-protection-guide/compliance-management/lending-regulations/servicemembers-civil-relief-act-scra</a>.
\47\ See Supplement I to 12 CFR part 1026, Official
Interpretations, 41(e)(4)(iii)--Small Servicer
Determination.[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES][RULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT][/
PREAMB][SUPLINF][HED]*[/HED]
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C. CAMELS Requirement
In the NPR, the Board requested comment as to whether the final
rule should require FCUs to be ``well capitalized'' as defined in part
702, and whether, like the eligible obligations rule, an FCU should be
well capitalized for a minimum of the six quarters preceding its
purchase of MSRs. The Board further asked whether the final rule should
limit eligibility for the authority to purchase MSRs from other FICUs
to FCUs that have a composite CAMEL rating of 1 or 2 with a Management
rating of a 1 or 2 for at least the last two examinations.
Three commenters specifically supported a requirement that an FCU
be well capitalized in order to purchase MSRs from other FICUs. One
commenter stated that not every investment vehicle is appropriate for
all credit unions and additional criteria for an FCU to be eligible to
purchase MSRs is needed, including criteria based on ``net worth'' or
``well capitalized'' as defined by NCUA regulations. Another commenter
stated that, for the safety and soundness of an FCU purchasing MSRs,
capitalization will be a prudent factor and that RBC rules at Tier 1
should apply. The third commenter stated that an FCU should be required
to be ``well capitalized'' in order to purchase MSRs from FICUs and
that capital levels should be sustained for at least six quarters
before MSRs can be purchased from other FICUs.
One commenter opposed eligibility criteria based on a credit
union's capital levels or CAMEL rating. This commenter stated that,
although the safety and soundness of the credit union system is a top
priority, such limitations would potentially hinder credit unions'
ability to grow, make more loans to its members, and better serve their
communities. This commenter also noted that when FCUs are servicing a
loan that they originate, they are not subject to conditions regarding
their capital levels and CAMEL rating, so there is no need for any
eligibility criteria if they were to purchase MSRs from an FICU.
Another commenter also opposed using the CAMEL system as additional
eligibility criteria. This commenter stated that the CAMEL system may
be overly qualitative and could lead to unintended consequences for
non-participating FCUs with a CAMEL 1 or 2 rating. This commenter
suggested that FCUs could possibly suffer reputational harm if they
chose not to participate in MSR purchases because interested parties
might presume the FCU has a CAMEL 3 or 4 rating.
Two commenters stated that the rule should require FCUs to have a
composite CAMEL rating of 1 or 2 and one of these commenters also
supported a requirement that eligible FCUs also have a Management
rating of a 1 or 2 for
[[Page 72816]]
at least the last two examination cycles before they can purchase MSRs.
In order to purchase MSAs from other FICUs, the final rule requires
that an FCU have a composite CAMELS rating of 1 or 2, which must
include a Management component rating of 1 or 2, assigned at the
completion of the FCU's last full examination. Note that the final rule
refers to the CAMELS rating instead of the CAMEL rating referred to in
the preamble of the NPR because, effective April 1, 2022, the NCUA's
supervisory rating system will change from CAMEL to CAMELS by adding
the ``S'' (Sensitivity to Market Risk) component to the existing CAMEL
rating system and redefining the ``L'' (Liquidity Risk) component. The
Board determined that it was beneficial to add the ``S'' component in
order to enhance transparency and allow the NCUA and federally insured
natural person and corporate credit unions to better distinguish
between liquidity risk (``L'') and sensitivity to market risk
(``S'').\48\ The effective date of the final rule, therefore, aligns
with the effective date of the change to the rating system. If the
rating for the last full examination of the credit union predates the
change to the rating system that goes into effect on April 1, 2022,
FCUs that received a composite 1 or 2 CAMEL rating with a Management
component rating of 1 or 2 for their most recent full examination will
qualify to purchase MSAs under the final rule, provided all of the
conditions of the rule are met.
---------------------------------------------------------------------------
\48\ 86 FR 59282 (Oct. 27, 2021).
---------------------------------------------------------------------------
The Board believes the requirement that an FCU have received a
CAMELS composite rating of 1 or 2, with a Management component rating
of 1 or 2, for its most recent full examination is a fundamental
precondition and safeguard for purchasing MSAs. A Management component
rating of 2 ``indicates satisfactory management and board practices
relative to the credit union's size, complexity, and risk profile.''
\49\ For an FCU to achieve at least a CAMEL composite rating of 2, that
FCU will have ``no material supervisory concerns and, as a result, the
supervisory response is informal and limited.'' \50\ An FCU meeting
this requirement of the final rule generally demonstrates an
appropriate level of sound management and operation necessary to
address the attendant financial, operational, and compliance risks
involved with purchasing MSAs and loan servicing activities. For these
reasons, the Board believes that adding the additional classification
requirement of ``well capitalized'' to the final rule would be
redundant.
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\49\ <a href="https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/appendix-ncuas-camel-rating-system-camel">https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/appendix-ncuas-camel-rating-system-camel</a>.
\50\ Id.[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES][RULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT][/
PREAMB][SUPLINF][HED]*[/HED]
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D. Concentration Risk
In the NPR, the Board requested comment as to whether the final
rule should limit the amount of MSRs an FCU can hold to address
concentration risk. Specifically, the Board asked whether any
concentration limits in the final rule should include:
<bullet> A limit on the amount of MSRs held by an FCU using either
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;
<bullet> A limit set at the total amount of MSRs that an FCU may
hold to no more than 25 percent of the FCU's net worth; or
<bullet> A concentration limit based on assets.
The Board also sought feedback from commenters on whether other
standards should apply to address concentration risk.
Five commenters generally supported the Board addressing the
concentration risk of MSRs held by FCUs. One commenter acknowledged
that high concentrations in a particular asset, such as MSRs, can
expose a credit union to undue risk and stated it may be appropriate to
establish in the final rule a limit on the amount of MSRs that an FCU
can hold to address concentration risk. Likewise, another commenter
suggested that concentration risk should be evaluated. One commenter
generally supports a limit on the amount of MSRs held by an FCU based
only on the total amount of MSRs purchased. Further, this commenter
also supported a concentration limit based on the total amount of MSRs
that an FCU may hold using traditional metrics, such as assets. The
commenter, however, opposed a limit on the aggregate amount of MSRs
both purchased from other parties and retained by the FCU after the
sale of the underlying mortgage loans.
Two commenters supported a concentration risk limit in some form to
alleviate risks, possibly using a limit based on a percentage of the
credit union's net worth, similar to NCUA's loan participations
rule.\51\ One of these commenters also offered two additional
suggestions: (1) A limit set as a percentage of total loans under
servicing to total assets, instead of using MSRs as a factor in the
calculation, due to the potential valuation swings with MSR assets, or
(2) as suggested by another commenter, bifurcating the concentration
limitation between mortgages originated with servicing retained, and
purchased loans with MSRs, as another way to separate the risk while
not limiting the FCU's organic mortgage production.
---------------------------------------------------------------------------
\51\ 12 CFR 701.22.
---------------------------------------------------------------------------
One commenter found the suggested cap in the question, to limit the
total amount of MSRs that an FCU may hold to no more than 25 percent of
net worth, as unwarranted. The commenter stated the cap reflects an
arbitrary ``one size fits all'' approach, as opposed to a risk-based
approach addressed by policy and serves to reinforce the long-held myth
that FCUs are subject to a 25 percent aggregate mortgage limit. This
commenter also stated the proposed 25 percent of net worth limit could
have a disproportionate impact on modest sized FCUs.
One commenter opposed any concentration limits in the final MSR
rule. This commenter stated that FCUs and FICUs should be able to set
their own concentration limits internally, if they determine such
limits are necessary after conducting a risk assessment. Further, a
blanket concentration limit for the entire industry fails to account
for the unique circumstances of each FCU and its membership and removes
control over business decisions from credit union management.
The final rule does not include a concentration limit for MSAs.
High concentrations in a particular asset can expose a credit union to
undue risk and, as a general matter, credit union officials and
management have a fiduciary responsibility to identify, measure,
monitor, and control concentration risk.\52\ Furthermore, the NCUA may
review concentration risk as part of its supervisory activities to
determine if an FCU's balance sheet reveals potentially high exposure
related to MSAs. With regard to complex credit unions, however, the
Board has recently taken regulatory action as part of its RBC
rulemaking to prevent the excessive exposure of MSAs, similarly to
rules adopted by the other federal banking agencies.\53\ While non-
complex credit unions are not subject to the RBC provisions addressing
concentration risk, smaller FCUs are less likely to purchase MSAs from
other FICUs and generally present a lower risk to the NCUSIF. As noted,
[[Page 72817]]
the Board believes the agency's supervisory functions can sufficiently
address concerns regarding MSA concentrations.
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\52\ See NCUA Supervisory Letter 08-01, ``Concentration Risk,''
<a href="https://www.ncua.gov/files/letters-credit-unions/LCU2010-03Encl.pdf">https://www.ncua.gov/files/letters-credit-unions/LCU2010-03Encl.pdf</a>.
\53\ 80 FR 66626 and 84 FR 68781. On December 16, 2021, the
Board approved additional amendments to 12 CFR 702.104.
---------------------------------------------------------------------------
E. Liquidity Risk
To address liquidity risk, the Board requested comment as to
whether the rule should limit the amount of months an FCU servicer is
obligated to remit payments to the mortgage loan owner if the borrower
fails to make payments. If so, the Board also asked whether the rule
should specifically limit the amount of months to no more than three to
six months of payments to the mortgage loan owner after a borrower
fails to make payments.
Two commenters did not see a need for the rule to address liquidity
risk as suggested in the NPR. While recognizing that the FCU purchasing
MSRs may face liquidity risks, the commenters stated that an FCU is
aware of these risks when buying MSRs and can perform its own cost-
benefit analysis. One commenter stated that FCUs that have demonstrated
the ability to comply with regulations pertaining to MSRs and to handle
the risk of defaulting borrowers and remitting payments to MSR
shareholders, despite being unable to collect from borrowers, should be
permitted to purchase MSRs without any additional regulatory hurdles.
This commenter suggests such considerations are no different from
normal evaluations of safety and soundness for FCUs of any size or
complexity. The other commenter stated the Board should allow the
purchaser and seller to determine the extent of any liquidity
protection in their agreement instead of imposing a blanket requirement
for all FCUs.
Six commenters offered a range of comments regarding whether the
rule should address liquidity risk. One commenter suggested the Board
further examine whether limiting the number of months an FCU is
obligated to remit payments to the mortgage loan owner when a borrower
defaults would appropriately address any liquidity risk of the
purchasing FCU. Similarly, another commenter stated while MSRs can pose
liquidity risk, those risks should be evaluated, for example, the
number of months an MSR is obligated to remit payments to the mortgage
loan owner if the borrower is delinquent. Likewise, in recognizing the
liquidity risk in servicing arrangements, another commenter stated the
final rule could limit the number of months an FCU is obligated to
remit payments to the mortgage loan owner if the borrower fails to make
payments.[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES][RULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT][/
PREAMB][SUPLINF][HED]*[/HED]
Two commenters explicitly supported a provision in the rule that
establishes 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. One of these commenters also suggested a
standardized agreement could be used between credit unions selling and
purchasing MSRs to enhance transparency between the parties.
One commenter stated that payment remittance on MSRs should follow
the requirements of the GSEs as opposed to other limitations on the
remittance structure. In addition, this commenter stated an FCU should
perform liquidity stress tests within the scope of the organization,
including in relation to MSRs.
The Board believes FCUs that have a CAMELS composite rating of 1 or
2 with a Management rating of 1 or 2, should be capable of managing the
liquidity risk associated with this investment authority. The Board
therefore has not included a provision in the final rule to address
liquidity risk but staff will issue future guidance as appropriate.
F. Application of Rule to Federally Insured State Chartered Unions
(FISCUs)
The NPR also solicited comments on whether the safeguards and
limitations in the final rule should be extended to all FICUs as a
condition for obtaining and maintaining federal share insurance, in
light of the risks associated with MSRs. One commenter, an advocate of
additional guardrails or limitations in the final rule, supports
extending the same safeguards and limitations applicable to FCUs to all
FICUs. Another commenter also specifically supported extending the rule
to all FICUs because the risk to the NCUSIF is the same for FCUs and
FISCUs.
In addition, one commenter strongly recommended that NCUA work with
state regulators to address supervisory concerns regarding MSRs in a
manner that does less harm to the dual chartering system, more
effectively mitigates material risk, and improves oversight while not
unnecessarily burdening credit unions.
The final rule applies only to FCUs by removing the NCUA's previous
prohibition against the purchase of MSRs in its investment regulation.
It is not apparent to the Board that state laws applicable to FISCUs
widely provide for similar investment authority, although most state
regulators can grant parity for state-chartered credit unions so those
institutions may engage in the same activities authorized for FCUs.
Further, to the extent that FISCUs engage in the purchase of MSAs from
other parties, the conditions on these assets under the RBC
requirements in part 702 apply to all complex federally insured credit
unions. The NCUA will monitor this activity in FISCUs and will consider
whether to extend Sec. 703.14(l) to FISCUs under part 741, subpart B,
if necessary. Finally, the Board notes that it is committed to the
agency's continued communications with state regulators to address
supervisory concerns, including those related to MSAs.
V. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act requires the NCUA to prepare an
analysis to describe any significant economic impact a regulation may
have on a substantial number of small entities.\54\ For purposes of
this analysis, the NCUA considers small credit unions to be those
having under $100 million in assets.\55\ The rule imposes no
requirement or costs on small entities and only expands the types of
investments an FCU can make by including MSAs. The conditions in the
final rule for a threshold CAMELS rating and written investment
policies are prerequisites for other investment activities, therefore
the Board does not expect these requirements to entail substantial
regulatory burden. Accordingly, the associated cost is minimal. The
NCUA certifies the rule will not have a significant economic impact on
a substantial number of small credit unions.
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\54\ 30 5 U.S.C. 603(a).
\55\ Interpretive Ruling and Policy Statement 03-2, 68 FR 31949
(May 29, 2003) as amended by Interpretive Ruling and Policy
Statement 13-1, 78 FR 4032 (Jan. 18, 2013).
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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
requirements.\56\ 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 rule does not contain any new
information collection requirements that require approval by OMB under
the PRA. Current recordkeeping requirements are covered under OMB
control number 3133-0133.
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\56\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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C. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
[[Page 72818]]
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 rule 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 this rule 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 rule will not affect family well-
being within the meaning of Section 654 of the Treasury and General
Government Appropriations Act, 1999.\57\
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\57\ Public Law 105-277, 112 Stat. 2681 (1998).
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E. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) generally provides for congressional review of agency
rules.\58\ A reporting requirement is triggered in instances where the
NCUA issues a final rule as defined by Section 551 of the
Administrative Procedure Act. An agency rule, in addition to being
subject to congressional oversight, may also be subject to a delayed
effective date if the rule is a ``major rule.'' The NCUA does not
believe this rule is a ``major rule'' within the meaning of the
relevant sections of SBREFA. As required by SBREFA, the NCUA will
submit this final rule to OMB for it to determine if the final rule is
a ``major rule'' for purposes of SBREFA. The NCUA also will file
appropriate reports with Congress and the Government Accountability
Office so this rule may be reviewed.
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\58\ 5 U.S.C. 551.[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES][RULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT][/
PREAMB][SUPLINF][HED]*[/HED]
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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
16, 2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons discussed above, the NCUA Board amends 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. 703.2 by removing the definition of ``Mortgage servicing
rights'' and adding in its place a definition for ``Mortgage servicing
assets'' to read as follows:
Sec. 703.2 Definitions.
* * * * *
Mortgage servicing assets mean those assets, maintained in
accordance with GAAP, resulting from contracts to service loans secured
by real estate (that have been securitized or owned by others) for
which the benefits of servicing are expected to more than adequately
compensate the servicer for performing the servicing.
* * * * *
0
3. Amend Sec. 703.14 by adding paragraph (m) to read as follows:
Sec. 703.14 Permissible investments.
* * * * *
(m) Mortgage servicing assets. A Federal credit union may purchase
mortgage servicing assets from other federally insured credit unions if
all of the following conditions are met:
(1) The Federal credit union received a composite CAMELS rating of
``1'' or ``2,'' with a Management component rating of a ``1'' or ``2,''
for the last full examination;
(2) The underlying mortgage loans of the mortgage servicing assets
are loans the Federal credit union is empowered to grant;
(3) The Federal credit union purchases the mortgage servicing
assets within the limitations of its board of directors' written
purchase policies; and
(4) The Board of Directors or Investment Committee approves the
purchase.
Sec. 703.16 [AMENDED]
0
4. Amend Sec. 703.16 by removing and reserving paragraph (a).
PART 721--INCIDENTAL POWERS
0
5. The authority citation for part 721 continues to read as follows:
Authority: 12 U.S.C. 1757(17), 1766 and 1789.
0
6. Amend Sec. 721.3 in 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. 2021-27641 Filed 12-22-21; 8:45 am]
BILLING CODE 7535-01-P[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES]
</pre></body>
</html>Indexed from Federal Register on December 23, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.