A proposed rule that would allow credit unions to securitize consumer loans needs some fine tuning, according to the industry’s trade group.
The National Association of Federal Credit Unions (NAFCU) published a letter Monday saying that it strongly supports the National Credit Union Administration’s proposed rule on securitization. However the trade group believes that the regulator shouldn’t make the regulation “overburdensome” with the inclusion of “unnecessary provisions related to investors at the expense of ensuring that credit unions may serve the best interests of their members through the use of securitizations.”
The NAFCU believes other federal regulatory bodies, such as the Securities and Exchange Commission, already protect investor interest.
The rule, proposed in June, would allow credit unions to securitize only the consumer loans, including residential real estate loans, automobile loans, and credit cards loans, that they have originated.
NAFCU wants the rule expanded to allow a credit union to securitize any loan originated by any federal credit union or its credit union service organizations (these are the corporate entities owned by federal credit unions). “Forcing credit unions to securitize only the loans they themselves originate represents a significant barrier to entry and will greatly reduce access to the secondary market and the benefits the rule could prove to credit union members nationwide,” the letter states.
By expanding the rule to credit union service organizations, NAFCU believes that credit unions would be able to better achieve the critical mass required to execute a successful securitization.
The trade group is also concerned that the proposed rule requires credit unions to retain at least 25% of the residual interests in securitization. The letter states that this fixed rate does not “reflect the potential for credit unions to structure securitizations and enforce underwriting standards to ensure that residual and retained interests do not pose a serious risk.”
The NCUA wants to the 25% threshold replaced with a sliding scale linked to the amount of risk associated with a given residual or retained interest.
NAFCU also wants credit unions to be allowed to invest in derivatives, which is proscribed as the rule is proposed. The trade association also wants the rule expanded to allow credit unions “to apply forward hedges to loans that credit unions intend to include in securitization transactions.”