The National Credit Union Administration has made another decision that is sure to aggravate the banking industry.
The agency’s lawyers have drafted a “safe harbor” opinion that paves the way for credit unions to securitize and sell loans. The seven-page opinion, announced Friday at the June meeting of the NCUA’s governing board, needs no proposal or comment period.
As a result, credit unions can begin securitizing assets immediately, Lara Rodriguez, the NCUA’s deputy general counsel, told the board during the meeting, though she said it would be “prudent to wait” about four months until specific guidelines are issued.
By opening a clear path for securitization, the NCUA is making it possible for credit unions to securitize and sell homogeneous assets such as mortgages, auto loans and the guaranteed portion of Small Business Administration loans. Such sales would free up capital for additional lending.
The opinion stems from a June 2014 notice concerning proposed regulation to “clarify” credit unions’ authority to securitize loans. The NCUA followed with a 26-page draft regulation in September 2016. After studying the issue, the agency’s lawyers determined that individual credit unions already had the right to securitize assets, Rodriguez said.
NCUA lawyers noted that credit unions already have had the ability to issue Ginnie Mae securities since 1982. The lawyers contend that such authority, combined with a general mandate to make loans and investments and take deposits, made it logical to conclude that securitizing assets is also allowed.
“Congress's record of steadily expanding the range of expressly granted powers, combined with the legislative history encouraging NCUA to meet the needs of FCUs and their members, justify, if not require, a broad and ambulatory view of the business for which FCUs are incorporated,” Michael McKenna, the NCUA’s general counsel, wrote in the opinion.
The authorization applies to roughly 3,600 federal credit unions, though several states have so-called wild-card legislation that allows them to automatically adopt any powers granted to federal institutions.
It may not take too long for larger credit unions to get into securitization, said Keith Leggett, a retired American Bankers Association economist who blogs frequently on credit union issues.
Indeed, when the NCUA unveiled its proposed regulation last year, then-Chairman Debbie Matz said securitization would be “an effective tool for larger institutions.” She noted at that time that larger institutions already had the “scale and expertise to offer sophisticated innovations.”
Banks, already upset about the NCUA’s efforts to expand member business lending and field-of-membership rules, might find it tough to counter the agency’s opinion because credit unions can argue that securitization is a necessary safety and soundness tool. Still, bankers will likely point to the move as another sign that the distinctions between banks and credit unions have grown increasingly blurred.
“What I think this shows is that the credit union industry is maturing,” Leggett said.
The securitization opinion comes on top of months of heightened tension between credit unions and banks. Banking trade groups have sued the NCUA twice in recent months, challenging the agency’s stances on member business lending and field of membership.
The Independent Community Bankers of America’s lawsuit targeting member business lending was dismissed earlier this year. A lawsuit from the American Bankers Association challenging field of membership is winding its way through U.S. District Court.
Banker groups are also on record strongly opposing another plan to issue regulation that would permit credit unions to issue alternative capital.
Banking groups are keeping quiet on securitization — for now. The ABA declined a request for comment and the ICBA did not immediately respond to requests for comment. Credit union groups, meanwhile, have strongly supported the move.