Compliance Blog

Written by JiJi Bahhur, Regulatory Compliance Counsel

In December 2012, NCUA issued a final rule to remove reference to credit ratings in regulations and substitute other standards of creditworthiness that are considered appropriate.  As a result, revisions to NCUA’s investment regulations – Parts 703, 704, 709 and 742 of NCUA’s Rules and Regulations – took effect on June 11, 2013. 

The final credit ratings rule has prompted some confusion among credit union officials.  To assist with this matter, NCUA has issued natural person credit union guidance – Letter to Credit Unions 13-CU-05 – to clarify NCUA’s expectations regarding issues of creditworthiness and due diligence.  As an enclosure to 13-CU-05, NCUA has provided Supervisory Letter 13-03, which provides the new investment guidance NCUA has shared with its examiners.  The Supervisory Letter will provide your credit union with the key elements of the due diligence process and how to evaluate the risks associated with its investment purchases. 

Although the natural person guidance comes after the passing of the effective date (better late than never), I found it to be very well-organized and full of information that could be of great help to credit unions.  It starts off with what credit unions are subject to the guidance and then addresses why credit ratings have been removed from the regulations. It goes on to provide regulatory expectations for credit unions and considers factors involved in a creditworthiness determination without sole reliance on credit ratings.  The guidance then outlines key factors to consider in analysis for specific security types, counterparty agreements and credit risk and provides additional guidance for structured securities analysis.  And last, the guidance clarifies situations whereby investment positions are grandfathered. 

I also wanted to bring to your attention other credit ratings guidance that may be of use. First, NCUA released Corporate Credit Union Letter 2013-01, but of more interest to natural person credit unions may be NCUA’s Town Hall Webinar on Thursday, July 18, at 3 p.m. EDT.   The webinar will include several updates and guidance, including guidance on credit ratings and risk management.  Registration is free and available here.  And the last piece of guidance I want to mention is a NAFCU article on credit ratings and the impact on credit union investment activities (available with Member log-in).