On June 11, the NCUA published a Supervisory Letter explaining how a credit union needs to fulfill its responsibility to make an independent determination about risks associated with investments, without the sole reliance on Nationally Recognized Statistical Rating Organizations such as Fitch, Standard & Poor’s and Moody’s. For federal credit unions, the final rule applies as to the permissibility of an investment. For federally insured credit unions, the rule is applicable to the establishment of a safety and soundness of investments purchased by the credit union.
FCUs are expected to consider a number of different factors when determining the creditworthiness of an investment. The use of credit ratings by NRSROs are permitted only as a supplement, and should not be the sole basis for a suitability determination. According to the Supervisory Letter, “the depth of due diligence should be a function of the security’s credit quality, the complexity of the structure and the size of the investment.” The letter also provides a table and further guidance for various types of investment instruments, along with the key factors to consider and elements of the credit analysis. Additional guidance is also provided for assessing the creditworthiness of structured securities, such as Collateralized Mortgage Obligations.
Since the Dodd-Frank Act mandated the removal of references to NRSRO ratings from federal regulations, the NCUA is using this opportunity to reiterate the importance of having a sound due diligence process to manage investment credit risk within the credit union. The Supervisory Letter is intended to help credit unions understand the examiner’s focus on specific elements of a sound due diligence process. With the information contained in this letter, credit unions should also use this as an opportunity to update their policies and procedures as necessary to comply with the guidance.