CUNA Regulatory Comment Call

July 27, 2006

Proposed Rule on Investment Repurchase Transactions


Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at and to Senior Assistant General Counsel Jeff Bloch at; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6032, if you would like a copy of the proposed rule, or you may access it on the Internet at the following address:


The Secondary Mortgage Market Enhancement Act of 1984 (SMEA) authorized federally-chartered financial institutions to make investments in mortgage-backed securities and amended the Federal Credit Union Act (FCUA) to authorize these investments for FCUs. NCUA issued a rule in 1988 to implement this authority but limited it by requiring that these transactions be governed by NCUA’s eligible obligations rule. The result was that FCUs could only purchase the mortgage notes of their members or those needed to complete a pool of loans to be sold on the secondary market.


The proposed rule will continue to permit the purchase of mortgage notes, but would also allow the purchase of mortgage notes of nonmembers. Nonmember purchases will only be permitted when the purchases are part of investment repurchase transactions and the underlying instrument consists of first-lien mortgage notes. Investment repurchase transactions using mortgage loans are typically short-term transactions with a counterparty for purposes of facilitating the securitization of the loan before it is sold on the secondary market. The mortgage notes must be in the form of a trust receipt or participation certificate to show that the seller is the owner of the loans.

FCUs must also comply with the current requirements regarding investments and repurchase transactions. These include the requirement that FCUs investing in mortgage note repurchase transactions maintain adequate margins that reflect a risk assessment of the mortgage notes and the term of the transaction. In addition, FCUs must establish an investment policy that includes the characteristics of the investments the FCU may make, a risk management plan, a description of who has investment authority and the extent of that authority, as well as other investment management information. FCUs must also ensure that those with investment authority are qualified by education or experience to assess the risk characteristics of these investments.

The proposal rule will also require that these investment repurchase agreements be subject to the following safety and soundness conditions:


  1. By what means can the party investing in mortgage note repurchase agreements easily identify the underlying loans, and is it necessary to require more than a tri-party custodial arrangement to accomplish this? If so, what additional requirements should be identified?

  2. What minimum underwriting criteria, if any, should the rule address?

  3. What requirements, if any, should the rule address regarding the quality of the mortgage notes and their monitoring?

  4. The proposed minimum long-term credit rating for the counterparty is higher than has been previously including in Part 703 regarding investments for municipal securities. Given that the mortgage note repurchase transactions are typically short-term, should NCUA consider excluding long-term credit requirements for counterparties in mortgage note repurchase transactions?

  5. What effect will permitting investment repurchase transactions using mortgage notes have on the safety and soundness of FCUs, the feasibility of the proposed standards for risk management, and the ability of FCUs to manage these investments safely?

  6. Other comments?

Eric Richard • General Counsel • (202) 508-6742 •
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 •
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 •
Lilly Thomas • Assistant General Counsel • (202) 508-6733 •
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 •