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Federal Register / Vol. 86, No. 244 / Thursday, December 23, 2021 / Rules and Regulations
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 FCUs 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 NCUAs 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.
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 unions 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 48 86

FR 59282 Oct. 27, 2021.
49 https www.ncua.gov/regulation-supervision/
letters-credit-unions-other-guidance/appendixncuas-camel-rating-system-camel.
50 Id.

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reasons, the Board believes that adding the additional classification requirement of well capitalized to the final rule would be redundant.
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 FCUs 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 unions net worth, similar to NCUAs 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
51 12

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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 FCUs organic mortgage production.
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 riskbased 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 FCUs 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, 52 See NCUA Supervisory Letter 0801, 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.

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