Credit unions are heeding NCUA's call and asking the federal regulator to allow them to invest in a broader range of instruments.
Comments submitted to NCUA on its advanced notice of proposed rulemaking (ANPR) to reform the agency's natural-person credit union investment rules suggest that credit unions see many opportunities to maintain yields without threatening safety and soundness. NCUA is collecting public comments on the ANPR until Jan. 24.
Commentaries called on the agency to allow investments in such non-traditional instruments as asset-backed securities, interest-rate caps and floors, stripped mortgage-backed securities, index-linked equities, and purchase mortgage servicing rights.
The current investment regulation, which limits credit unions' investments to government or agency securities, is "unduly restrictive," wrote Edward Marr, chief investment officer for ESL FCU, Rochester, N.Y. Marr suggested that credit unions with a proven track record managing risk should be allowed to broaden their investment options to buy instruments, such as options, that are approved by the Federal CU Act.
Meantime, lawmakers last week were poised to give NCUA greater authority to expand credit unions' investment powers outside the FCU Act with staff at the House Financial Services Committee giving preliminary approval to including a measure in a regulatory relief bill giving the NCUA board that power.
Navy FCU President Brian McDonnell suggested that all healthy credit unions qualified to participate in NCUA's Reg-Flex program be automatically qualified to engage in expanded investment authority, such as options, swaps and other financial derivatives. McDonnell also recommended that NCUA expand the list of permissible investments to include index-linked options, such as those tied to the Federal Funds Rate, Prime Rate, or London Interbank Rate, or LIBOR, that could be tied to products offered to members.
Several commentaries suggested that asset-backed securities be approved for natural-person credit unions, as it has been for corporates. John LaRosa, president of Police and Fire FCU, Philadelphia, said he would like his credit union to be able to invest in credit card- or auto loan-backed securities in order to diversify the prepayment characteristics of his portfolio, of which currently consists of a majority of real estate loans and mortgage-backed securities.
LaRosa also urged NCUA to allow the use of certain financial derivatives, such as interest rate caps or floors, to help credit unions hedge against interest rate risk.
Frank Berrish, president of Visions FCU, Endicott, N.Y., suggested the federal regulator allow investments in stripped mortgage-backed securities, which is currently prohibited. "This would allow for more flexibility in purchasing mutual funds and for hedging activities," he wrote. Berrish went even further and called on NCUA to permit investments based on a credit union's ability to manage interest rate risk.
The $1.8-billion Alaska USA FCU called on NCUA to amend its rules to allow credit unions to buy and sell mortgage servicing rights, just like banks and thrifts do. NCUA recently turned down its request to purchase mortgage servicing, because the practice does not fit into the agency's investment rules. CEO William Eckhardt said AUSAFCU has invested in systems that have provided it with excess servicing capacity and that they would like to sell some of that capacity, suggesting NCUA allow the purchase of mortgage servicing rights through its recently passed incidental powers rule.
Several credit union investment houses asked the agency to pause before making it too difficult to provide CD brokerage and safekeeping services, a response to several widely reported abuses by CD brokers over the past few years. Many of those incidents, agreed the brokers, could have been avoided if credit unions had performed the proper due diligence on the brokers.