[Federal Register Volume 86, Number 244 (Thursday, December 23, 2021)]
[Rules and Regulations]
[Pages 72810-72818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-27641]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 703 and 721

RIN 3133-AF26


Mortgage Servicing Assets

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (Board) is issuing a final rule to permit 
federal credit unions (FCUs) to purchase mortgage servicing assets 
(MSAs), referred to as mortgage servicing rights in the proposed rule, 
from other federally insured credit unions subject to certain 
requirements. Under the final rule, FCUs with a CAMEL or CAMELS 
composite rating of 1 or 2 and a CAMEL or CAMELS Management component 
rating of 1 or 2, may purchase the mortgage servicing rights of loans 
that the FCU is otherwise empowered to grant, provided these purchases 
are made in accordance with the FCU's policies and procedures that 
address the risk of these investments and servicing practices. The 
Federal Credit Union Act (the Act) permits FCUs to purchase mortgage 
servicing assets under their express authority to purchase assets from 
other credit unions.

DATES: The final rule is effective April 1, 2022.

FOR FURTHER INFORMATION CONTACT: Thomas Fay, Director, Capital Markets; 
John G. Nilles, Senior Capital Markets Specialist, Office of 
Examination & Insurance, or Ian Marenna, Associate General Counsel; 
Chrisanthy Loizos, Senior Trial Attorney, Office of General Counsel, or 
Ernestine Ward, Consumer Compliance Policy and Outreach Program 
Officer, Office of Consumer Financial Protection, at 1775 Duke Street, 
Alexandria, VA 22314 or telephone: (703) 518-6300, (703) 518-6540, or 
(703) 518-6524.

SUPPLEMENTARY INFORMATION:

I. Introduction
II. Final Rule
III. Legal Authority
IV. Discussion of Public Comments Received on the Proposed Rule
V. Regulatory Procedures

I. Introduction

A. Background

    While the Act provides specific, statutory investment powers for 
FCUs,\1\ the Board has adopted regulatory prohibitions against certain 
investments and investment activities on the basis of safety and 
soundness concerns, including the purchase of mortgage servicing rights 
(MSRs) as an investment.\2\ In December 2020, by a vote of 2-1, the 
Board approved a notice of proposed rulemaking (NPR) \3\ to amend the 
agency's Investment and Deposit Activities Rule (Investment Rule), 12 
CFR part 703, to explicitly permit FCUs to purchase MSRs from other 
federally insured credit unions (FICUs) based on express statutory 
authority that permits an FCU ``to sell all or a part of its assets to 
another credit union [and] to purchase all or part of the assets of 
another credit union. . .subject to regulations of the Board.'' \4\ The 
proposed regulatory text provided the following requirements for this 
investment authority:
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    \1\ 12 U.S.C. 1757(7), (8), (14), (15).
    \2\ 62 FR 32989 (June 18, 1997); 66 FR 54168, 54169 (Oct. 26, 
2001); 67 FR 78996, 78997 (Dec. 27, 2002); 12 CFR 703.16(a).
    \3\ 85 FR 86867 (Dec. 31, 2020).
    \4\ 12 U.S.C. 1757(14).

    (1) The underlying mortgage loans of the MSRs are loans the FCU 
is empowered to grant; \5\
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    \5\ The phrase ``empowered to grant'' refers to an FCU's 
authority to make the type of loans permitted by the Act, NCUA 
regulations, FCU Bylaws, and an FCU's own internal policies. See 
NCUA OGC Op. 04-0713 (Oct. 25, 2004) available at https://www.ncua.gov/files/legal-opinions/OL2004-0713.pdf, 76 FR 81421, 
81425 (December 28, 2011).
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    (2) The FCU purchases the MSRs within the limitations of the 
FCU's board of directors' written purchase policies; and
    (3) The FCU's board of directors or investment committee 
approves the purchase in advance.

    The NPR also included several questions as to whether the rule 
should place additional conditions on the authority, such as capital 
requirements, concentration limits, or other measures to address 
consumer financial protection, compliance risk and liquidity risk.
    Generally, when a lender originates a mortgage loan, the lender may 
retain the loan and the servicing function for the loan in its 
portfolio, sell the loan along with the MSRs to another party, or 
separate the MSRs from its mortgage loan and transfer either the loan 
or the MSRs to another party. The NPR focused on the purchase of MSRs 
as assets that are distinct from their underlying mortgage loans. The 
Board proposed to permit FCUs to purchase MSRs by removing MSRs from 
the list of prohibited investments \6\ in the Investment Rule and 
adding the purchase of MSRs from other FICUs to the rule's list of 
permissible investments for FCUs.\7\
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    \6\ 12 CFR 703.16.
    \7\ 12 CFR 703.14.
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    Under the current Investment Rule, MSRs are defined as ``a 
contractual obligation to perform mortgage servicing and the right to 
receive compensation for performing those services. Servicing is the 
administration of a mortgage loan, including collecting monthly 
payments and fees, providing recordkeeping and escrow functions, and, 
if necessary, curing defaults and foreclosing.'' \8\ Mortgage loan 
servicers, therefore, are intermediaries between borrowers and owners 
of the mortgage loans; their servicing functions are subject to a 
servicing agreement and consumer protection laws, as applicable.\9\ 
MSRs, or mortgage servicing assets, a term used interchangeably with 
MSRs, are recorded in accordance with Generally Accepted Accounting 
Principles (GAAP).\10\
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    \8\ 12 CFR 703.2.
    \9\ For example, see 12 CFR 1024.17; 12 CFR part 1024, subpart 
C; 12 CFR 1026.20, .36, .40-.41.
    \10\ See Financial Accounting Standards Board (FASB) Accounting 
Standards Codification (ASC) 860--Transfer and Servicing of 
Financial Assets.
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    Mortgage servicing can carry various risks. Servicers are exposed 
to liquidity risk if servicing agreements require the servicer to remit 
mortgage loan payments to the investors of sold loans even when 
borrowers fail to make their monthly payments. There are also 
operational risks related to mortgage servicing due to a myriad of 
statutes and regulations that protect consumers, which can expose FCUs 
to reputational, legal, and compliance risk. The compliance and 
reputation risk of a mortgage servicer can be considerable due to the 
high touch nature of interactions with consumers and the attendant 
legal requirements imposed on mortgage servicers. For example, 
depending on the particular servicer and its activities, servicers must 
comply with a variety of requirements, including the Real Estate 
Settlement Procedures Act (RESPA) and its implementing regulation, 
Regulation X; the Truth in Lending Act (TILA) and its implementing 
regulation, Regulation Z; as well as amendments to Regulations X and Z 
under the Mortgage Servicing Rules promulgated by the Consumer 
Financial Protection Bureau, which implement provisions of the Dodd-
Frank Wall Street Reform and Consumer

[[Page 72811]]

Protection Act.\11\ As applicable, servicers must comply with other 
federal laws regarding mortgage servicing, including the Servicemembers 
Civil Relief Act (SCRA),\12\ the Fair Debt Collection Practices Act, 
and Section 5 of the Federal Trade Commission Act, which prohibits 
unfair or deceptive acts or practices,\13\ as well as any applicable 
state laws regarding servicing.\14\ To be successful, servicers need to 
understand the complexities in determining the value of these assets, 
and have effective information and compliance management systems, 
trained personnel, robust internal controls, as well as appropriate 
risk management to properly service the loans.
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    \11\ Small servicers are exempt from numerous requirements that 
apply to mortgage servicing activities under Regulations X and Z. 
See, e.g. 12 CFR 1024.17; 12 CFR 1024.37-.41; 12 CFR 1026.41. 
Generally, to qualify as a small servicer, a servicer must service, 
together with any affiliates, 5,000 or fewer mortgage loans, for all 
of which the servicer (or an affiliate) is the creditor or assignee. 
See 12 CFR 1026.41(e)(4) for full definition. Note however, a 
servicer is not a small servicer under Sec.  1026.41(e)(4)(ii)(A) if 
it services any mortgage loans for which the servicer or an 
affiliate is not the creditor or assignee (that is, for which the 
servicer or an affiliate is not the owner or was not the 
originator).
    \12\ For example, the SCRA contains a strict liability provision 
that requires a court order before foreclosing on a mortgage during 
a period of military service, and for one year after a period of 
military service. 50 U.S.C. 3953.
    \13\ Note, under the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010, it is unlawful for any provider of consumer 
financial products or services or a service provider to engage in 
any unfair, deceptive, or abusive act or practice. Dodd-Frank Act, 
12 U.S.C. 5536 (a)(1)(B).
    \14\ ``State laws that give greater protection to consumers are 
not inconsistent with and are not preempted by RESPA or Regulation 
X. In addition, nothing in RESPA or Regulation X should be construed 
to preempt the entire field of regulation of the practices covered 
by RESPA or Regulation X, including the regulations in Subpart C 
with respect to mortgage servicers or mortgage servicing.'' 12 CFR 
1024.5(c) and Commentary .5(c)(1)-1. See also the preemption of 
state law provision in the mortgage servicing transfer rule, which 
states ``[p]rovisions of State law, such as those requiring 
additional notices to insurance companies or taxing authorities, are 
not preempted by section 6 of RESPA or this section, and this 
additional information may be added to a notice provided under this 
section, if permitted under State law.'' 12 CFR 1024.33(d).
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    Although limited by the prohibition in the Investment Rule to 
purchase MSRs, FCUs record MSRs under two circumstances. When an FCU 
originates a residential mortgage loan and sells the loan to investors 
on the secondary market or other purchasers, the FCU may retain the 
corresponding servicing rights for various reasons, including 
maintaining its servicing relationship with its member. Alternatively, 
FCUs can retain MSRs if they later sell residential mortgage loans 
purchased from the originating lender.
    Similar to other financial institutions involved in residential 
lending, FCUs engage in both origination and servicing activities 
related to residential lending. As of June 30, 2021, approximately 
3,600 FICUs held $449 billion in aggregate outstanding first lien 
residential mortgage loans that they originated, commonly referred to 
as ``portfolio loans,'' with 2,138, or 59.4 percent, of FCUs accounting 
for $223 billion, or 49.7 percent, of the total amount.\15\ An FCU does 
not recognize a servicing asset for a portfolio mortgage loan in which 
the FCU has retained servicing, because it has not undertaken an 
obligation to service the loan for another party.
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    \15\ NCUA Call Report Data as of June 30, 2021.
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    Credit unions, similar to other lenders involved with mortgage 
finance, actively sell residential mortgage loans to investors on the 
secondary market. As of June 2021, FICUs collectively sold and serviced 
$270 billion of mortgage real estate loans with FCUs accounting for 53 
percent of the total balance. In 2020, approximately 1,100 FICUs 
collectively sold $120 billion in first lien residential mortgage 
loans. Of the total $120 billion sold, 535 FCUs accounted for $58 
billion of the total amount sold. Comparatively, approximately 1,100 
FICUs collectively sold $63 billion in residential mortgage loans in 
2019, with 556 FCUs accounting for $39 billion of the total amount 
sold.

B. Summary of the Proposed Rule

    The Board proposed to amend NCUA's Investment Rule to permit FCUs 
to purchase MSRs from other FICUs. Specifically, the proposed rule 
removed the current prohibition on FCUs purchasing MSRs from the 
Investment Rule. The Board proposed to amend Sec.  703.14 to explicitly 
permit an FCU to purchase MSRs from other FICUs, provided:

    (1) The underlying mortgage loans of the MSRs are loans the FCU 
is empowered to grant;
    (2) The FCU purchases the MSRs within the limitations of the 
FCU's board of directors' written purchase policies; and
    (3) The board of directors or investment committee approves the 
purchase in advance.

    To ensure that MSRs purchased by FCUs meet the same requirements 
and standards applicable to the loans that a buying FCU can make, the 
proposed rule allowed purchases of MSRs from FICUs only if the 
underlying mortgage loans from which the MSRs are derived meet the same 
conditions for loans the FCU is empowered to grant. This is the same 
standard applicable to FCUs when buying certain eligible obligations 
under Sec.  701.23(b).
    Consistent with Sec.  701.23, the proposed rule also required that 
FCUs purchase MSRs within the limitations of the FCU's board of 
directors' written purchase policies and that the FCU's board of 
directors or investment committee approves the purchase in advance.
    The proposed rule removed the regulatory text that prohibits the 
purchase of MSRs in Sec.  703.16(a) and reserved the paragraph to 
correspond to the change in Sec.  703.14. The remaining provision in 
Sec.  703.16(a), which recognizes an FCU's incidental powers authority 
to service the loans owned by a member engaged in mortgage lending, was 
transferred to part 721 as another example of a loan-related product. 
While loan servicing is an incidental powers activity when performed 
for other credit unions under Sec.  721.3(c) as a correspondent 
service, the proposed addition to paragraph (h) reflected the existing 
authority currently found in Sec.  703.16(a) to provide loan-related 
services to members.
    In addition, the Board requested comment on the following questions 
with the expressed intention that the final rule would incorporate 
appropriate safeguards and limitations as informed by the responses the 
Board received in response to the NPR.
     Benefits: How would the proposed rule to permit an FCU to 
purchase MSRs from other FICUs benefit an FCU's mortgage loan servicing 
operations?
     Compliance Risk: If FCUs purchase volumes of MSRs from 
different FICUs, are they prepared to ensure they have effective 
compliance management systems for compliance with the consumer 
protection-related laws and regulations that apply to mortgage loan 
servicers?
     Capital and CAMEL Requirements: Should the proposed rule 
include additional criteria for an FCU to be eligible to purchase MSRs? 
In particular, should the FCU be required to be ``well capitalized'' as 
defined in part 702? If so, similarly to the eligible obligations rule, 
should it be well capitalized for a minimum of the six quarters 
preceding its purchase of MSRs? Should the FCU be required to have a 
composite CAMEL rating of 1 or 2 with a Management rating of a 1 or 2 
for at least the last two examination cycles?
     Concentration Risk: Should the final rule include a limit 
on the amount of MSRs an FCU can hold to address concentration risk? 
Specifically, should a limit on the amount of MSRs held by

[[Page 72812]]

an FCU be determined using the total amount of MSRs purchased by the 
FCU or, alternatively, the aggregate amount of MSRs purchased from 
other parties and MSRs retained after the sale of the underlying 
mortgage loans by the FCU? Should the rule limit the total amount of 
MSRs that an FCU may hold to no more than 25 percent of the FCU's net 
worth or would another standard, such as a concentration limit based on 
assets, be more appropriate to address concentration risk?
     Liquidity Risk: To address the liquidity risk of the 
purchasing FCU, should the final rule limit the amount of months an FCU 
is obligated to remit payments to the mortgage loan owner if the 
borrower fails to make payments? Specifically, should there be a 
maximum of three to six months of payments made to the mortgage loan 
owner when a borrower fails to make payment on the serviced mortgage 
loan?
    In addition to the questions listed, the Board also solicited 
comment on whether the safeguards and limitations applicable to FCUs in 
the final rule should be extended to all FICUs in light of the risks 
associated with the purchase of MSRs, as a requirement for obtaining 
and maintaining federal share insurance.

II. Final Rule

    The final rule removes the prohibition on FCUs from purchasing MSRs 
under the Investment Rule.\16\ The final rule also removes the current 
defined term ``mortgage servicing rights'' in the Investment Rule and 
replaces it with the term ``mortgage servicing assets.'' For 
consistency with part 702, the final rule adopts the same definition 
for ``mortgage servicing assets'' that the Board adopted under its 
amendments to the risk-based capital (RBC) rule.\17\ Under the RBC 
rule, MSAs are defined as ``assets, maintained in accordance with GAAP, 
resulting from contracts to service loans secured by real estate (that 
have been securitized or owned by others) for which the benefits of 
servicing are expected to more than adequately compensate the servicer 
for performing the servicing.'' \18\ This alignment in the final rule 
does not make substantive definitional changes to terms that are 
commonly used interchangeably by industry and regulators, but rather 
ensures uniformity and clarity in the regulatory text for compliance 
with both the investment and capital rules.\19\
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    \16\ The Board did not propose in the NPR to remove any 
investment restrictions applicable to federally insured corporate 
credit unions under part 704. This final rule, therefore, does not 
alter the distinct investment authorities and prohibitions 
applicable to corporate credit unions under part 704.
    \17\ 80 FR 66626 (Oct. 29, 2015) and 84 FR 68781 (Dec. 17, 
2019).
    \18\ 12 CFR 702.2 (effective Jan. 1, 2022).
    \19\ See Comptroller's Handbook for Mortgage Banking, version 1 
Feb. 2014 at p. 64, fn.4; 86 FR 45824, 45846 (Aug. 16, 2021).
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    The final rule amends Sec.  703.14 to explicitly permit an FCU to 
purchase MSAs from other FICUs, provided:

    (1) After the last full examination of the credit union, the FCU 
received a composite CAMELS rating of 1 or 2, which also included a 
Management rating of 1 or 2; \20\
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    \20\ Effective April 1, 2022, the NCUA's supervisory rating 
system will change from CAMEL to CAMELS. See 86 FR 59282 (Oct. 27, 
2021). CAMEL ratings will be used to determine eligibility for those 
credit unions that do not have a CAMELS rating.
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    (2) The underlying mortgage loans of the MSAs are loans the FCU 
is empowered to grant;
    (3) The FCU purchases the MSAs within the limitations of the 
FCU's board of directors' written purchase policies; and
    (4) The board of directors or the FCU's investment committee 
approves the purchase in advance.

    The Board notes that under recent amendments to the RBC rule, 
complex credit unions with MSAs will also factor the criteria in Sec.  
702.104 to calculate their RBC requirements.\21\
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    \21\ 80 FR 66626 (Oct. 29, 2015) and 84 FR 68781 (Dec. 17, 
2019). On December 16, 2021, the Board approved additional 
amendments to 12 CFR 702.104 pertaining to mortgage servicing 
assets.
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    The final rule removes the current prohibition against MSR 
purchases imposed in Sec.  703.16(a) and reserves the paragraph to 
correspond to the change in Sec.  703.14. The remaining provision in 
Sec.  703.16(a), which recognizes an FCU's incidental powers authority 
to service the loans owned by a member engaged in mortgage lending, is 
transferred to part 721 as another example of loan-related product. 
While loan servicing is an incidental powers activity when performed 
for other credit unions under Sec.  721.3(c) as a correspondent 
service, the addition to paragraph (h) reflects the authority found in 
Sec.  703.16(a) to provide loan-related services to members.

III. Legal Authority

    Over decades, the NCUA has issued many regulations and opinions 
recognizing the authority of an FCU to engage in loan servicing 
activities. Since 1979, an FCU has been permitted ``to service any 
eligible obligation it purchases or sells in whole or in part'' under 
the NCUA's eligible obligations rule.\22\ FCUs also have the authority 
to provide correspondent services, including loan servicing, to other 
credit unions under the incidental powers regulation.\23\ In adopting 
that regulation, the Board observed: ``Correspondent services are 
services or functions provided by an FCU to another credit union that 
the FCU is authorized to perform for its own members or as part of its 
operation.'' \24\ During the part 721 rulemaking in 2001, the Board 
agreed with commenters that loan servicing and escrow services were 
examples of permitted correspondent services.\25\ Furthermore, although 
the purchase of MSRs was prohibited under the Investment Rule, the 
Board recognized during the incidental powers rulemaking that an FCU 
could perform servicing for a member engaged in making mortgage loans 
as a financial service to its member:

    \22\ 12 CFR 701.23(e); 44 FR 27068 (May 9, 1979).
    \23\ 12 CFR 721.3(c).
    \24\ 66 FR 40845, 40850 (Aug. 6, 2001).
    \25\ Id.; see also NCUA OGC Opinion 09-0430 (August 2009) 
available at https://www.ncua.gov/regulation-supervision/legal-opinions/2009/nonmember-loan-servicing.
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    ``For this activity to be permissible as a financial service to 
a member, the member must continue to own the loan during the time 
that the credit union provides servicing. In this context, the NCUA 
Board concludes that providing mortgage servicing is an appropriate 
exercise of a credit union's incidental powers to provide financial 
service to a member.'' \26\

    \26\ 67 FR 78996, 78998 (Dec. 27, 2002).
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    Therefore, the authority to provide mortgage loan servicing as a 
financial service to members, under the conditions above, has been in 
place since 2003.\27\ FCUs are also permitted to provide mortgage loan 
servicing to others as a charitable contribution.\28\ Further, under 
the NCUA's Credit Union Service Organization (CUSO) regulation, CUSOs 
\29\ are expressly preapproved to provide loan support services, 
including loan servicing and debt collection services.\30\
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    \27\ 68 FR 32960 (June 3, 2003).
    \28\ NCUA OGC Opinion 01-0502 (June 18, 2001) available at 
https://www.ncua.gov/files/legal-opinions/OL2001-0502.pdf; 12 CFR 
721.3(b)(1).
    \29\ Generally, a CUSO is an entity in which a FICU has an 
ownership interest or to which a FICU has extended a loan, and that 
entity is engaged primarily in providing products or services to 
credit unions or credit union members. A CUSO also includes any 
entity in which a CUSO has an ownership interest of any amount, if 
that entity is engaged primarily in providing products or services 
to credit unions or credit union members. See 12 CFR 712.1(d).
    \30\ 12 CFR 712.5(h); 712.3(d)(5)(i)(A).
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    The authority for FCUs to purchase MSAs is found in Section107(14) 
of the Act, which permits an FCU ``to sell all or a part of its assets 
to another credit union [and] to purchase all or part of the assets of 
another credit union . . . subject to regulations of the Board.'' \31\ 
Given that MSAs are financial assets

[[Page 72813]]

that may be sold separately from their underlying mortgage loans, an 
FCU has the statutory authority to sell MSAs to, and purchase MSAs 
from, another credit union.
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    \31\ 12 U.S.C. 1757(14).
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    By the plain language of Section 107(14), FCUs may purchase MSAs 
only from other credit unions. Contrast the authority to purchase MSAs 
``of another credit union'' \32\ to an FCU's express statutory power to 
enter loan participation agreements with ``other credit unions, credit 
union organizations or financial organizations.'' \33\ Under NCUA's 
loan participation rule, subject to certain conditions, an FCU can 
purchase a participation interest in a loan from a credit union, credit 
union organization, or financial organization, which means any 
federally chartered or federally insured financial institution or any 
state or federal government agency and its subdivisions.\34\ As such, 
the Act makes a greater number of participation partner-types (sellers 
of loan participation interests) available to an FCU than is permitted 
to the FCU if it is purchasing MSAs.
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    \32\ Id.
    \33\ 12 U.S.C. 1757(5)(E).
    \34\ 12 CFR 701.22(a)-(b).
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    Lastly, the Board has engaged in several rulemakings to amend its 
RBC rule to, among other changes, include a guardrail for complex 
credit unions that purchase MSAs.\35\ The final rule includes a 
deduction to the RBC numerator for MSA balances that exceed 25 percent 
of the capital numerator with the remaining balance risk-weighted at 
250 percent in the RBC denominator. As mentioned in the preamble of the 
2015 RBC final rule,\36\ the Board believes the risks of MSAs 
contribute to a high level of uncertainty regarding the ability of 
credit unions to realize value from these assets. In adopting the 
December 2021 amendments to the RBC rule, the Board determined that it 
was appropriate to add a risk-based numerator deduction to address the 
potential of complex credit unions purchasing MSAs from other 
FICUs.\37\
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    \35\ 80 FR 66626 (Oct. 29, 2015) and 84 FR 68781 (Dec. 17, 
2019). On December 16, 2021, the Board approved additional 
amendments to 12 CFR 702.104.
    \36\ 80 FR 66683.
    \37\ [Insert Federal Register citation to part 702 amendments 
approved on December 16, 2021]
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    This rulemaking is promulgated pursuant to Section 120(a) of the 
Act,\38\ which is a general grant of regulatory authority that 
authorizes the Board to prescribe rules and regulations for the 
administration of the Act.\39\ In addition, Section 206 of the Act 
grants the Board broad authority to take enforcement action against a 
FICU or an ``institution-affiliated party'' \40\ that is engaging, has 
engaged, or the Board has reasonable cause to believe that it is about 
to engage, in an unsafe or unsound practice in conducting the business 
of such credit union.\41\ Congress chose not to define ``unsafe or 
unsound practices'' in the Act, leaving determinations regarding which 
actions are unsafe or unsound to the Board.
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    \38\ 12 U.S.C. 1766(a).
    \39\ 12 U.S.C. 1751-1795k.
    \40\ See 12 U.S.C. 1786(r) (providing: ``For purposes of [the 
Federal Credit Union Act], the term `institution-affiliated party'' 
means--(1) any committee member, director, officer, or employee of, 
or agent for, an insured credit union; (2) any consultant, joint 
venture partner, and any other person as determined by the Board (by 
regulation or on a case-by-case basis) who participates in the 
conduct of the affairs of an insured credit union; and (3) any 
independent contractor (including any attorney, appraiser, or 
account) who knowingly or recklessly participates in--(A) any 
violation of any law or regulation; (B) any breach of fiduciary 
duty; or (C) any unsafe or unsound practice, which caused or is 
likely to cause more than a minimal financial loss to, or a 
significant adverse effect on, the insured credit union.'').
    \41\ 12 U.S.C. 1786.
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IV. Discussion of Public Comments Received on the Proposed Rule

A. Generally

    In the NPR, the Board proposed to amend 12 CFR 703.14 to include 
the following three prerequisites in order for an FCU to purchase MSRs 
from a FICU:

    (1) The underlying mortgage loans of the MSRs are loans the FCU 
is empowered to grant;
    (2) The FCU purchases the MSRs within the limitations of the 
FCU's board of directors' written purchase policies; and
    (3) The FCU's board of directors or investment committee 
approves the purchase in advance.

    In response, the Board received eleven comment letters from two 
natural person FCUs, eight credit union leagues and trade associations, 
and one individual. All but one of the commenters supported the removal 
of the regulatorily imposed prohibition in the Investment Rule that 
currently prevents FCUs from purchasing MSRs. Several commenters stated 
that additional conditions should be considered or included in the 
final rule. However, two commenters urged against conditions that would 
limit the investment authority, suggesting that FCUs and FICUs should 
be solely responsible for managing their risk mitigation due to their 
ample experience of servicing their own mortgages, as well as selling 
mortgage loans to the government-sponsored enterprises (GSEs).\42\ 
These commenters stated that the rules should be more expansive to 
include purchases of MSRs from parties other than FICUs.
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    \42\ GSEs include the Federal Home Loan Banks, Fannie Mae, 
Freddie Mac, Farmer Mac, and the Federal Farm Credit System 
Corporation.
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    One commenter suggested the rulemaking is premature. This commenter 
stated that it is paramount for FCUs to understand how MSR purchases 
could affect both long- and short-term earnings of an FCU, particularly 
if the FCU retains low margin MSRs, as well as the degree of negative 
convexity for the MSRs as an investment. This commenter noted that many 
assumptions go into deriving the underlying MSR value, requiring 
considerable judgment, and that many FCU supervisory personnel may lack 
understanding or expertise. The commenter concludes, however, that 
these concerns may be mitigated if an FCU applies a prudent retention 
strategy backed by organization policy and guidance.
    In response to a question in the NPR seeking comment on whether the 
proposed rule would benefit an FCU's mortgage loan servicing 
operations, many commenters identified benefits to the expanded 
investment authority to include the purchase of MSRs. Most commenters 
believe that the proposed rule would provide flexibility for FCUs to 
operate their mortgage loan business and would provide FICUs another 
avenue to sell their MSRs, which could generate a higher selling price 
and keep the MSRs within the credit union system. Two commenters stated 
that the additional flexibility would allow smaller institutions that 
want to grow and sell their mortgages to have more options to sell 
while also allowing growth opportunities for the FCUs who purchase 
those MSRs. Similarly, another commenter stated that MSRs can 
potentially provide an ongoing stream of income to an FCU's bottom 
line, given that the FCU understands and prepares for potential risks 
involved. Another commenter noted the benefits of mortgage servicing, 
which include a more positive member/borrower experience, new cross-
selling opportunities, and additional revenue sources. Two commenters 
also found that the rule would encourage more cooperation between 
credit unions.
    Several commenters stated that the proposed rule will offer FCUs 
opportunities to realize economies of scale. One commenter noted that 
smaller credit unions may seek to partner with their larger marketplace 
colleagues to enter the MSR

[[Page 72814]]

marketplace. A large FCU stated that FCUs that service their own 
mortgage loans devote significant resources to meeting the operational 
and compliance responsibilities associated with mortgage servicing. If 
these fixed costs can be spread over a larger mortgage servicing 
portfolio, FCUs will be able to execute their mortgage lending 
businesses more effectively. This commenter also noted that, while 
mortgage servicing is a complex undertaking, purchasing MSRs will not 
add incremental risk for FCUs or the National Credit Union Share 
Insurance Fund (NCUSIF) because the risks associated with this new 
authority are similar to those already assumed as part of mortgage 
lending. Rather than adding risk, MSRs will allow FCUs to better 
address the inherent liquidity and interest rate risks posed by 
mortgage lending, and such risk mitigation will better protect the 
NCUSIF. One commenter stated that in 2019, about $240 billion in real 
estate loans were sold outside of the credit union system; 
consequently, removing the prohibition will promote safety and 
soundness by keeping revenue within the credit union system. Finally, 
one commenter commended the agency's timing of the rulemaking as the 
elongated pandemic health emergency has resulted in increased deposit 
flows rendering additional investment options a welcome tool.
    Six commenters explicitly supported the three conditions proposed 
for this investment activity, finding the criteria appropriate to an 
FCU's purchase of MSRs from FICUs. Two commenters stated that FCUs can 
put proper controls in place to adequately mitigate associated risks. 
One of these commenters stated that it is prudent to consider certain 
safeguards that would apply before an FCU is eligible to purchase MSRs, 
depending on the complexity of the FCU's business model and staff 
composition.
    Two commenters believe the requirements that MSR purchases be made 
in accordance with the board of directors' written purchase policies 
and receive advance approval by the board or investment committee 
should help ensure that MSR purchases are managed and properly vetted 
by the FCU. One commenter, however, does not support the requirements 
that MSRs be purchased within the limitations set by the board of 
directors' written purchase policies and that an FCU's board of 
directors or investment committee approve MSR purchases in advance. 
This commenter stated that the advance approval condition would only 
delay transactions, create more paperwork for the volunteers on board 
of directors or investment committees, and likely not have a material 
impact on the decision of whether to purchase MSRs.
    One commenter expressed concern that, if the underlying mortgage 
loans of the MSRs must be loans the FCU is empowered to grant before an 
FCU can purchase MSRs, this condition will limit the number of FCUs 
that may take advantage of the new investment authority. This commenter 
stated that, while the purchase of MSRs will allow FCUs the ability to 
market and offer their product and services to prospective members, an 
FCU with a ``closed field of membership'' would have a difficult time 
purchasing MSRs that fit into their field of membership. This commenter 
requests that NCUA clarify how an FCU with, a single-common bond field 
of membership, for example, can take advantage of this investment 
authority.[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES][RULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT][/
PREAMB][SUPLINF][HED]*[/HED]
    The Board believes that FCUs have demonstrated experience 
originating and servicing residential mortgage loans, including in the 
mitigation of the attendant operational and compliance risks of 
mortgage servicing. The Board agrees with the comments in support of 
the proposed investment authority, particularly in its benefits to the 
credit union system. The opportunity to purchase MSRs provides 
flexibility for FCUs to operate their mortgage loan businesses, as well 
as providing the opportunity for FICUs to sell their MSRs. As one 
commenter noted, a readily available control for FCUs is the use of 
third parties to perform valuations of servicing portfolios, not only 
to ensure that conformance with GAAP, but also to ensure that an 
independent, expert financial analysis is conducted to minimize risk 
through timely adjustments. For these reasons, the Board believes 
removing the prohibition in the Investment Rule is appropriate and 
consistent with safety and soundness.
    In addition to the CAMELS rating requirement discussed below, the 
final rule adopts the three conditions provided in the NPR as proposed. 
To purchase MSAs from a FICU, an FCU must meet the following 
requirements:

    (1) The underlying mortgage loans of the MSAs are loans the FCU 
is empowered to grant;
    (2) The FCU purchases the MSAs within the limitations of the 
FCU's board of directors' written purchase policies; and
    (3) The FCU's board of directors or investment committee 
approves the purchase in advance.

    The final rule requires that the underlying mortgage loans to any 
MSAs purchased by an FCU must meet the same requirements and standards 
applicable to mortgage loans that the FCU could originate. This is the 
same standard applicable to FCUs when buying certain eligible 
obligations under Sec.  701.23(b). Note that the eligible obligations 
rule does not require FCUs to purchase the loans of its members under 
Sec.  701.23(b)(2), a rule adopted in accordance with Sec.  107(14) of 
the Act.\43\ When an FCU uses this authority to buy eligible 
obligations, the obligation must be in accordance with the FCU's loan 
authority under the Act, NCUA regulations, FCU Bylaws, and the FCU's 
internal policies. The loan, however, is not required to be of an 
obligation of a member of the FCU or a person within the FCU's field of 
membership. Likewise, the authority of an FCU to purchase MSAs from 
other FICUs is not limited to loans made to persons in the purchasing 
FCU's field of membership. In addition, like Sec.  701.23, the final 
rule requires that an FCU purchase MSAs within the limitations of the 
FCU's board of directors' written purchase policies and that its board 
of directors or investment committee approve of the purchase in 
advance.
---------------------------------------------------------------------------

    \43\ See 77 FR 31981, 31987 (May 31, 2012) and 66 FR 15055, 
15059 (March 15, 2001).
---------------------------------------------------------------------------

B. Compliance Risk Management

    In the NPR, the Board requested comment as to whether FCUs have 
effective compliance management systems (CMS) to help them to comply 
with the consumer protection-related laws and regulations applicable to 
mortgage loan servicers if they purchase MSRs from other FICUs.
    A majority of commenters believe that an FCU can effectively manage 
its exposure to compliance risk through a comprehensive compliance 
program, which typically includes policies, procedures, processes, 
monitoring, and an audit function. While two commenters acknowledged 
the compliance and legal risks inherent in the acquisition of MSRs, 
they asserted FCUs that service mortgages they originated have long 
been able to manage these risks as part of their regular course of 
business. This includes maintaining expert compliance and legal 
personnel on staff, as well as engaging with outside counsel when 
necessary. Two commenters noted that FICUs have been selling mortgage 
loans to the GSEs for many years. Consequently, their CMS would not 
need much expanding to comply with the consumer protections that apply 
to the transfer and servicing of mortgage loans. One commenter stated 
that, while adjustments to CMS may be warranted

[[Page 72815]]

if an FCU expands its loan servicing operations, changes to comply with 
the consumer protections that apply to the transfer and servicing of 
mortgage loans will not be significant.
    One commenter discussed the use of proper controls related to the 
purchase of MSRs and tools that FCUs can leverage to mitigate 
associated risks. This commenter stated that one control is for FCUs to 
invest in robust mortgage servicing software that is integrated with 
other in-house software, including the core system and loan origination 
system, to efficiently service mortgage loans. The commenter stated 
that the adoption of a comprehensive set of technologies is necessary 
for servicers to work efficiently and comply with regulations. The 
commenter also stated that, as FCUs consider upgrades to their CMS, 
specifically their mortgage lending quality control programs, any final 
rule should permit flexibility in examination findings because FCUs may 
need to amend existing CMS contracts and enhance staff training. 
Similarly, another commenter noted that FCUs will need to consider CMS 
upgrades, specifically to their mortgage lending quality control 
programs, and should consider the need to closely review custom loan 
documents, including promissory notes. FCUs may need to consider 
creating or hiring specialized due diligence teams to review loans to 
ensure they meet the NCUA's regulations and the FCU's own internal 
policies.[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES][RULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT][/
PREAMB][SUPLINF][HED]*[/HED]
    Another commenter stated that mortgage servicing operations should 
be certified or confirmed through third-party reviews and/or audits. 
Further, this commenter asserted that FCUs would need increased due 
diligence over third-party vendors that service mortgages and to secure 
insurance coverage sufficient to support possible losses. This 
commenter agreed that FCUs that decide to purchase MSRs should have 
appropriate expertise on staff to avoid problems. The commenter 
suggests NCUA may wish to take steps to develop a risk-rating matrix to 
measure performance and credit quality of loans in a selected pool.
    The Board recognizes that FCUs have experience originating and 
servicing mortgage loans and managing their exposure to compliance risk 
through their CMS. An FCU that currently services mortgage loans that 
it originates is expected to have an effective CMS that addresses 
compliance with mortgage servicing laws and regulations, and includes 
the following components:
     Board and senior management oversight,
     Policies and procedures,
     Training,
     Monitoring,
     Member complaint response, and
     An audit function.
    An effective CMS also promotes compliance with consumer protection-
related laws and regulations and prevents consumer harm. Due to the 
existing and extensive consumer protection laws that are specific to 
mortgage loan servicing,\44\ including those under Regulation X and 
Regulation Z, which are promulgated by the Consumer Financial 
Protection Bureau, the Board believes that it is not necessary to 
include additional consumer protections in the final Investment 
Rule.\45\ However, the NCUA will use the examination process to assess 
the effectiveness of an FCU's CMS for compliance with consumer 
protection-related laws and regulations that apply to mortgage 
servicers, as appropriate.\46\ Further, as appropriate, the NCUA will 
employ supervisory tools or take enforcement action to address any CMS 
deficiencies related to mortgage servicing that cause consumer harm. 
Moreover, the Board notes that any FCUs that currently operate under 
the small servicer exceptions to these rules will no longer benefit 
from the exemption from certain requirements if they begin to purchase 
MSAs from non-affiliate owners of the underlying mortgage loans.\47\
---------------------------------------------------------------------------

    \44\ Servicers must comply with various laws to the extent that 
the law applies to the particular servicer and its activities, 
including but not limited to RESPA, 12 U.S.C. 2601, et seq. 
(Regulation X), TILA, 15 U.S.C. 1601, et seq. (Regulation Z), the 
SCRA, 50 U.S.C; 3901, et seq., the Dodd-Frank Act (UDAAP 
provisions), 12 U.S.C. 5536(a)(1)(B), as well as other applicable 
Federal and State laws.
    \45\ For example, see 12 CFR 1024.17; 12 CFR part 1024, subpart 
C; 12 CFR 1026.20, .36, .40-.41.
    \46\ For example, see https://www.ncua.gov/regulation-supervision/manuals-guides/federal-consumer-financial-protection-guide/compliance-management/compliance-management-systems-and-compliance-risk; https://www.ncua.gov/regulation-supervision/manuals-guides/federal-consumer-financial-protection-guide/compliance-management/lending-regulations/real-estate-settlement-procedures-act-regulation-x; https://www.ncua.gov/regulation-supervision/manuals-guides/federal-consumer-financial-protection-guide/compliance-management/lending-regulations/truth-lending-act-regulation-z; https://www.ncua.gov/regulation-supervision/manuals-guides/federal-consumer-financial-protection-guide/compliance-management/lending-regulations/servicemembers-civil-relief-act-scra.
    \47\ See Supplement I to 12 CFR part 1026, Official 
Interpretations, 41(e)(4)(iii)--Small Servicer 
Determination.[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES][RULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT][/
PREAMB][SUPLINF][HED]*[/HED]
---------------------------------------------------------------------------

C. CAMELS Requirement

    In the NPR, the Board requested comment as to whether the final 
rule should require FCUs to be ``well capitalized'' as defined in part 
702, and whether, like the eligible obligations rule, an FCU should be 
well capitalized for a minimum of the six quarters preceding its 
purchase of MSRs. The Board further asked whether the final rule should 
limit eligibility for the authority to purchase MSRs from other FICUs 
to FCUs that have a composite CAMEL rating of 1 or 2 with a Management 
rating of a 1 or 2 for at least the last two examinations.
    Three commenters specifically supported a requirement that an FCU 
be well capitalized in order to purchase MSRs from other FICUs. One 
commenter stated that not every investment vehicle is appropriate for 
all credit unions and additional criteria for an FCU to be eligible to 
purchase MSRs is needed, including criteria based on ``net worth'' or 
``well capitalized'' as defined by NCUA regulations. Another commenter 
stated that, for the safety and soundness of an FCU purchasing MSRs, 
capitalization will be a prudent factor and that RBC rules at Tier 1 
should apply. The third commenter stated that an FCU should be required 
to be ``well capitalized'' in order to purchase MSRs from FICUs and 
that capital levels should be sustained for at least six quarters 
before MSRs can be purchased from other FICUs.
    One commenter opposed eligibility criteria based on a credit 
union's capital levels or CAMEL rating. This commenter stated that, 
although the safety and soundness of the credit union system is a top 
priority, such limitations would potentially hinder credit unions' 
ability to grow, make more loans to its members, and better serve their 
communities. This commenter also noted that when FCUs are servicing a 
loan that they originate, they are not subject to conditions regarding 
their capital levels and CAMEL rating, so there is no need for any 
eligibility criteria if they were to purchase MSRs from an FICU. 
Another commenter also opposed using the CAMEL system as additional 
eligibility criteria. This commenter stated that the CAMEL system may 
be overly qualitative and could lead to unintended consequences for 
non-participating FCUs with a CAMEL 1 or 2 rating. This commenter 
suggested that FCUs could possibly suffer reputational harm if they 
chose not to participate in MSR purchases because interested parties 
might presume the FCU has a CAMEL 3 or 4 rating.
    Two commenters stated that the rule should require FCUs to have a 
composite CAMEL rating of 1 or 2 and one of these commenters also 
supported a requirement that eligible FCUs also have a Management 
rating of a 1 or 2 for

[[Page 72816]]

at least the last two examination cycles before they can purchase MSRs.
    In order to purchase MSAs from other FICUs, the final rule requires 
that an FCU have a composite CAMELS rating of 1 or 2, which must 
include a Management component rating of 1 or 2, assigned at the 
completion of the FCU's last full examination. Note that the final rule 
refers to the CAMELS rating instead of the CAMEL rating referred to in 
the preamble of the NPR because, effective April 1, 2022, the NCUA's 
supervisory rating system will change from CAMEL to CAMELS by adding 
the ``S'' (Sensitivity to Market Risk) component to the existing CAMEL 
rating system and redefining the ``L'' (Liquidity Risk) component. The 
Board determined that it was beneficial to add the ``S'' component in 
order to enhance transparency and allow the NCUA and federally insured 
natural person and corporate credit unions to better distinguish 
between liquidity risk (``L'') and sensitivity to market risk 
(``S'').\48\ The effective date of the final rule, therefore, aligns 
with the effective date of the change to the rating system. If the 
rating for the last full examination of the credit union predates the 
change to the rating system that goes into effect on April 1, 2022, 
FCUs that received a composite 1 or 2 CAMEL rating with a Management 
component rating of 1 or 2 for their most recent full examination will 
qualify to purchase MSAs under the final rule, provided all of the 
conditions of the rule are met.
---------------------------------------------------------------------------

    \48\ 86 FR 59282 (Oct. 27, 2021).
---------------------------------------------------------------------------

    The Board believes the requirement that an FCU have received a 
CAMELS composite rating of 1 or 2, with a Management component rating 
of 1 or 2, for its most recent full examination is a fundamental 
precondition and safeguard for purchasing MSAs. A Management component 
rating of 2 ``indicates satisfactory management and board practices 
relative to the credit union's size, complexity, and risk profile.'' 
\49\ For an FCU to achieve at least a CAMEL composite rating of 2, that 
FCU will have ``no material supervisory concerns and, as a result, the 
supervisory response is informal and limited.'' \50\ An FCU meeting 
this requirement of the final rule generally demonstrates an 
appropriate level of sound management and operation necessary to 
address the attendant financial, operational, and compliance risks 
involved with purchasing MSAs and loan servicing activities. For these 
reasons, the Board believes that adding the additional classification 
requirement of ``well capitalized'' to the final rule would be 
redundant.
---------------------------------------------------------------------------

    \49\ https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/appendix-ncuas-camel-rating-system-camel.
    \50\ Id.[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES][RULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT][/
PREAMB][SUPLINF][HED]*[/HED]
---------------------------------------------------------------------------

D. Concentration Risk

    In the NPR, the Board requested comment as to whether the final 
rule should limit the amount of MSRs an FCU can hold to address 
concentration risk. Specifically, the Board asked whether any 
concentration limits in the final rule should include:
     A limit on the amount of MSRs held by an FCU using either 
the total amount of MSRs purchased by the FCU or, alternatively, the 
aggregate amount of MSRs purchased from other parties and MSRs retained 
after the sale of the underlying mortgage loans by the FCU;
     A limit set at the total amount of MSRs that an FCU may 
hold to no more than 25 percent of the FCU's net worth; or
     A concentration limit based on assets.
    The Board also sought feedback from commenters on whether other 
standards should apply to address concentration risk.
    Five commenters generally supported the Board addressing the 
concentration risk of MSRs held by FCUs. One commenter acknowledged 
that high concentrations in a particular asset, such as MSRs, can 
expose a credit union to undue risk and stated it may be appropriate to 
establish in the final rule a limit on the amount of MSRs that an FCU 
can hold to address concentration risk. Likewise, another commenter 
suggested that concentration risk should be evaluated. One commenter 
generally supports a limit on the amount of MSRs held by an FCU based 
only on the total amount of MSRs purchased. Further, this commenter 
also supported a concentration limit based on the total amount of MSRs 
that an FCU may hold using traditional metrics, such as assets. The 
commenter, however, opposed a limit on the aggregate amount of MSRs 
both purchased from other parties and retained by the FCU after the 
sale of the underlying mortgage loans.
    Two commenters supported a concentration risk limit in some form to 
alleviate risks, possibly using a limit based on a percentage of the 
credit union's net worth, similar to NCUA's loan participations 
rule.\51\ One of these commenters also offered two additional 
suggestions: (1) A limit set as a percentage of total loans under 
servicing to total assets, instead of using MSRs as a factor in the 
calculation, due to the potential valuation swings with MSR assets, or 
(2) as suggested by another commenter, bifurcating the concentration 
limitation between mortgages originated with servicing retained, and 
purchased loans with MSRs, as another way to separate the risk while 
not limiting the FCU's organic mortgage production.
---------------------------------------------------------------------------

    \51\ 12 CFR 701.22.
---------------------------------------------------------------------------

    One commenter found the suggested cap in the question, to limit the 
total amount of MSRs that an FCU may hold to no more than 25 percent of 
net worth, as unwarranted. The commenter stated the cap reflects an 
arbitrary ``one size fits all'' approach, as opposed to a risk-based 
approach addressed by policy and serves to reinforce the long-held myth 
that FCUs are subject to a 25 percent aggregate mortgage limit. This 
commenter also stated the proposed 25 percent of net worth limit could 
have a disproportionate impact on modest sized FCUs.
    One commenter opposed any concentration limits in the final MSR 
rule. This commenter stated that FCUs and FICUs should be able to set 
their own concentration limits internally, if they determine such 
limits are necessary after conducting a risk assessment. Further, a 
blanket concentration limit for the entire industry fails to account 
for the unique circumstances of each FCU and its membership and removes 
control over business decisions from credit union management.
    The final rule does not include a concentration limit for MSAs. 
High concentrations in a particular asset can expose a credit union to 
undue risk and, as a general matter, credit union officials and 
management have a fiduciary responsibility to identify, measure, 
monitor, and control concentration risk.\52\ Furthermore, the NCUA may 
review concentration risk as part of its supervisory activities to 
determine if an FCU's balance sheet reveals potentially high exposure 
related to MSAs. With regard to complex credit unions, however, the 
Board has recently taken regulatory action as part of its RBC 
rulemaking to prevent the excessive exposure of MSAs, similarly to 
rules adopted by the other federal banking agencies.\53\ While non-
complex credit unions are not subject to the RBC provisions addressing 
concentration risk, smaller FCUs are less likely to purchase MSAs from 
other FICUs and generally present a lower risk to the NCUSIF. As noted,

[[Page 72817]]

the Board believes the agency's supervisory functions can sufficiently 
address concerns regarding MSA concentrations.
---------------------------------------------------------------------------

    \52\ See NCUA Supervisory Letter 08-01, ``Concentration Risk,'' 
https://www.ncua.gov/files/letters-credit-unions/LCU2010-03Encl.pdf.
    \53\ 80 FR 66626 and 84 FR 68781. On December 16, 2021, the 
Board approved additional amendments to 12 CFR 702.104.
---------------------------------------------------------------------------

E. Liquidity Risk

    To address liquidity risk, the Board requested comment as to 
whether the rule should limit the amount of months an FCU servicer is 
obligated to remit payments to the mortgage loan owner if the borrower 
fails to make payments. If so, the Board also asked whether the rule 
should specifically limit the amount of months to no more than three to 
six months of payments to the mortgage loan owner after a borrower 
fails to make payments.
    Two commenters did not see a need for the rule to address liquidity 
risk as suggested in the NPR. While recognizing that the FCU purchasing 
MSRs may face liquidity risks, the commenters stated that an FCU is 
aware of these risks when buying MSRs and can perform its own cost-
benefit analysis. One commenter stated that FCUs that have demonstrated 
the ability to comply with regulations pertaining to MSRs and to handle 
the risk of defaulting borrowers and remitting payments to MSR 
shareholders, despite being unable to collect from borrowers, should be 
permitted to purchase MSRs without any additional regulatory hurdles. 
This commenter suggests such considerations are no different from 
normal evaluations of safety and soundness for FCUs of any size or 
complexity. The other commenter stated the Board should allow the 
purchaser and seller to determine the extent of any liquidity 
protection in their agreement instead of imposing a blanket requirement 
for all FCUs.
    Six commenters offered a range of comments regarding whether the 
rule should address liquidity risk. One commenter suggested the Board 
further examine whether limiting the number of months an FCU is 
obligated to remit payments to the mortgage loan owner when a borrower 
defaults would appropriately address any liquidity risk of the 
purchasing FCU. Similarly, another commenter stated while MSRs can pose 
liquidity risk, those risks should be evaluated, for example, the 
number of months an MSR is obligated to remit payments to the mortgage 
loan owner if the borrower is delinquent. Likewise, in recognizing the 
liquidity risk in servicing arrangements, another commenter stated the 
final rule could limit the number of months an FCU is obligated to 
remit payments to the mortgage loan owner if the borrower fails to make 
payments.[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES][RULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT][/
PREAMB][SUPLINF][HED]*[/HED]
    Two commenters explicitly supported a provision in the rule that 
establishes a maximum of three to six months of payments made to the 
mortgage loan owner when a borrower fails to make payment on the 
serviced mortgage. One of these commenters also suggested a 
standardized agreement could be used between credit unions selling and 
purchasing MSRs to enhance transparency between the parties.
    One commenter stated that payment remittance on MSRs should follow 
the requirements of the GSEs as opposed to other limitations on the 
remittance structure. In addition, this commenter stated an FCU should 
perform liquidity stress tests within the scope of the organization, 
including in relation to MSRs.
    The Board believes FCUs that have a CAMELS composite rating of 1 or 
2 with a Management rating of 1 or 2, should be capable of managing the 
liquidity risk associated with this investment authority. The Board 
therefore has not included a provision in the final rule to address 
liquidity risk but staff will issue future guidance as appropriate.

F. Application of Rule to Federally Insured State Chartered Unions 
(FISCUs)

    The NPR also solicited comments on whether the safeguards and 
limitations in the final rule should be extended to all FICUs as a 
condition for obtaining and maintaining federal share insurance, in 
light of the risks associated with MSRs. One commenter, an advocate of 
additional guardrails or limitations in the final rule, supports 
extending the same safeguards and limitations applicable to FCUs to all 
FICUs. Another commenter also specifically supported extending the rule 
to all FICUs because the risk to the NCUSIF is the same for FCUs and 
FISCUs.
    In addition, one commenter strongly recommended that NCUA work with 
state regulators to address supervisory concerns regarding MSRs in a 
manner that does less harm to the dual chartering system, more 
effectively mitigates material risk, and improves oversight while not 
unnecessarily burdening credit unions.
    The final rule applies only to FCUs by removing the NCUA's previous 
prohibition against the purchase of MSRs in its investment regulation. 
It is not apparent to the Board that state laws applicable to FISCUs 
widely provide for similar investment authority, although most state 
regulators can grant parity for state-chartered credit unions so those 
institutions may engage in the same activities authorized for FCUs. 
Further, to the extent that FISCUs engage in the purchase of MSAs from 
other parties, the conditions on these assets under the RBC 
requirements in part 702 apply to all complex federally insured credit 
unions. The NCUA will monitor this activity in FISCUs and will consider 
whether to extend Sec.  703.14(l) to FISCUs under part 741, subpart B, 
if necessary. Finally, the Board notes that it is committed to the 
agency's continued communications with state regulators to address 
supervisory concerns, including those related to MSAs.

V. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires the NCUA to prepare an 
analysis to describe any significant economic impact a regulation may 
have on a substantial number of small entities.\54\ For purposes of 
this analysis, the NCUA considers small credit unions to be those 
having under $100 million in assets.\55\ The rule imposes no 
requirement or costs on small entities and only expands the types of 
investments an FCU can make by including MSAs. The conditions in the 
final rule for a threshold CAMELS rating and written investment 
policies are prerequisites for other investment activities, therefore 
the Board does not expect these requirements to entail substantial 
regulatory burden. Accordingly, the associated cost is minimal. The 
NCUA certifies the rule will not have a significant economic impact on 
a substantial number of small credit unions.
---------------------------------------------------------------------------

    \54\ 30 5 U.S.C. 603(a).
    \55\ Interpretive Ruling and Policy Statement 03-2, 68 FR 31949 
(May 29, 2003) as amended by Interpretive Ruling and Policy 
Statement 13-1, 78 FR 4032 (Jan. 18, 2013).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency creates a new or amends existing information collection 
requirements.\56\ For the purpose of the PRA, an information collection 
requirement may take the form of a reporting, recordkeeping, or a 
third-party disclosure requirement. The rule does not contain any new 
information collection requirements that require approval by OMB under 
the PRA. Current recordkeeping requirements are covered under OMB 
control number 3133-0133.
---------------------------------------------------------------------------

    \56\ 44 U.S.C. 3507(d); 5 CFR part 1320.
---------------------------------------------------------------------------

C. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to

[[Page 72818]]

consider the impact of their actions on state and local interests. In 
adherence to fundamental federalism principles, the NCUA, an 
independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order. This rule will not have 
a substantial direct effect on the states, on the connection between 
the National Government and the states, or on the distribution of power 
and responsibilities among the various levels of government. The NCUA 
has determined this rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

D. Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this rule will not affect family well-
being within the meaning of Section 654 of the Treasury and General 
Government Appropriations Act, 1999.\57\
---------------------------------------------------------------------------

    \57\ Public Law 105-277, 112 Stat. 2681 (1998).
---------------------------------------------------------------------------

E. Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA) generally provides for congressional review of agency 
rules.\58\ A reporting requirement is triggered in instances where the 
NCUA issues a final rule as defined by Section 551 of the 
Administrative Procedure Act. An agency rule, in addition to being 
subject to congressional oversight, may also be subject to a delayed 
effective date if the rule is a ``major rule.'' The NCUA does not 
believe this rule is a ``major rule'' within the meaning of the 
relevant sections of SBREFA. As required by SBREFA, the NCUA will 
submit this final rule to OMB for it to determine if the final rule is 
a ``major rule'' for purposes of SBREFA. The NCUA also will file 
appropriate reports with Congress and the Government Accountability 
Office so this rule may be reviewed.
---------------------------------------------------------------------------

    \58\ 5 U.S.C. 551.[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
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List of Subjects

12 CFR Part 703

    Credit unions, investments.

12 CFR Part 721

    Credit unions, functions, implied powers.

    By the National Credit Union Administration Board on December 
16, 2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.

    For the reasons discussed above, the NCUA Board amends 12 CFR parts 
703 and 721 as follows:

PART 703--INVESTMENT AND DEPOSIT ACTIVITIES

0
1. The authority citation for part 703 is revised to read as follows:

    Authority:  12 U.S.C. 1757(7), 1757(8), 1757(14) and 1757(15).


0
2. Amend Sec.  703.2 by removing the definition of ``Mortgage servicing 
rights'' and adding in its place a definition for ``Mortgage servicing 
assets'' to read as follows:


Sec.  703.2   Definitions.

* * * * *
    Mortgage servicing assets mean those assets, maintained in 
accordance with GAAP, resulting from contracts to service loans secured 
by real estate (that have been securitized or owned by others) for 
which the benefits of servicing are expected to more than adequately 
compensate the servicer for performing the servicing.
* * * * *


0
3. Amend Sec.  703.14 by adding paragraph (m) to read as follows:


Sec.  703.14   Permissible investments.

* * * * *
    (m) Mortgage servicing assets. A Federal credit union may purchase 
mortgage servicing assets from other federally insured credit unions if 
all of the following conditions are met:
    (1) The Federal credit union received a composite CAMELS rating of 
``1'' or ``2,'' with a Management component rating of a ``1'' or ``2,'' 
for the last full examination;
    (2) The underlying mortgage loans of the mortgage servicing assets 
are loans the Federal credit union is empowered to grant;
    (3) The Federal credit union purchases the mortgage servicing 
assets within the limitations of its board of directors' written 
purchase policies; and
    (4) The Board of Directors or Investment Committee approves the 
purchase.


Sec.  703.16  [AMENDED]

0
4. Amend Sec.  703.16 by removing and reserving paragraph (a).

PART 721--INCIDENTAL POWERS

0
5. The authority citation for part 721 continues to read as follows:

    Authority: 12 U.S.C. 1757(17), 1766 and 1789.


0
6. Amend Sec.  721.3 in paragraph (h) by revising the last sentence to 
read as follows:


Sec.  721.3   What categories of activities are preapproved as 
incidental powers necessary or requisite to carry on a credit union's 
business?

* * * * *
    (h) * * * These products or activities may include debt 
cancellation agreements, debt suspension agreements, letters of credit, 
leases, and mortgage loan servicing functions for a member as long as 
the loan is owned by a member.
* * * * *

[FR Doc. 2021-27641 Filed 12-22-21; 8:45 am]
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