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Federal Register / Vol. 86, No. 155 / Monday, August 16, 2021 / Proposed Rules
lotter on DSK11XQN23PROD with PROPOSALS2

The Board notes that subordinate tranches, either retained by the securitization sponsor or offered to investors as securities, that are also senior in payment priority to the nonsecurity beneficial interest, are allowed to be risk weighted using the gross-up approach.
Question 18: What are the advantages and disadvantages of relying on the other banking agencies risk-based capital rule for determining whether a credit union has transferred the credit risk associated with a securitization?
Should credit union-issued securitizations be subject to the same capital treatment as bank-issued securitizations? Should there be an option for complex credit unions to use the gross-up approach for risk weighting non-security beneficial interest of a securitization? If so, please provide examples where the gross-up approach would sufficiently capture the risks of a non-security beneficial interest of a securitization.
3. Mortgage Servicing Assets The Board is proposing to amend 702.104b, risk-based capital numerator, to deduct mortgage servicing assets that exceed 25 percent of the sum of the capital elements in 702.104b1, less deductions required under 702.104b2i through iv of this section. Under the 2015 Final Rule, MSAs are 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.110
To determine if a complex credit union would be subject to the MSA
deduction from the risk-based capital numerator in this proposal, the complex credit union would first need to calculate the risk-based capital numerator before the MSA deduction.
This calculation is in the current rule and requires that the complex credit union add all the capital elements of the risk-based capital numerator and subtract all risk-based capital numerator deductions, not including the MSA
deduction. The complex credit union would then determine if its MSA
exposure exceeds 25 percent of the previous calculation. If its MSAs do not exceed 25 percent, then the previous calculation is the risk-based capital numerator. If its MSAs exceed 25
percent, the complex credit union will need to deduct the amount of MSAs that exceed 25 percent of the previous 110 12

CFR 702.2 effective Jan. 1, 2022.

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calculation. All MSA exposures that are not deducted from the risk-based capital numerator are risk weighted at 250
percent.
The current rule does not include a deduction to the risk-based capital numerator for MSAs. The Board chose not to include a deduction for MSA
exposures because, when the 2015 Final Rule was issued, the other banking agencies risk-based capital rule included a complex deduction for MSAs that included other items that were not comparable to the credit union structure. In 2015, the other banking agencies made numerator adjustment based on the collective exposure to MSAs, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, and significant investments in capital of nonconsolidated financial institutions in the form of common stock. As the other banking agencies 2015 approach was not comparable to the credit union capital structure and added significant complexity to their rule, the Board did not include a similar deduction to the 2015 Final Rule.
The Board is now proposing a deduction to the risk-based capital numerator for MSAs that exceed 25
percent of the risk-based capital numerator for two primary reasons.
First, this change will make the NCUAs risk-based capital calculation more consistent with the other banking agencies revised risk-based capital rules as the other banking agencies simplified their MSA calculation post-issuance of the 2015 Final Rule.111 Under the other banking agencies revised risk-based capital rule, banking organizations deduct MSAs that exceed 25 percent of the banking organizations common equity tier 1 capital.112 The Board believes the simplification of the other banking agencies approach easily allows the NCUA to be consistent with the other banking agencies risk-based capital rule. Also, the Board believes it would be important to implement prudential conditions around MSAs if the Board adopts the recent proposed rule to amend parts 703 and 721 to allow FCUs to purchase mortgage servicing rights 113 from other FICUs.114
If adopted, this rule could increase MSA
holdings for complex credit unions. But even if the Board does not adopt the proposed rule on mortgage servicing rights, the other considerations in this 111 84

FR 35234 July 22, 2019.
112 12 CFR 324.22d.
113 The terms mortgage servicing rights and MSAs are used interchangeably.
114 85 FR 86867 Dec. 31, 2020.

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section support the proposed amendment to the 2015 Final Rule.
The Board believes that by including a deduction to the risk-based capital numerator for MSAs in risk-based capital, complex credit unions will be encouraged to avoid excessive exposures in MSAs relative the other risks on their balance sheets. As mentioned in the preamble of the 2015
Final Rule, 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. Therefore, the Board believes it is appropriate to add the proposed riskbased numerator deduction to address the potential of complex credit unions purchasing MSAs from other FICUs.
The Board does not believe the proposed treatment would have an immediate effect on complex credit unions. As of December 31, 2020, the largest concentration in MSAs held by complex credit unions was just under 15 percent of the credit unions net worth. While net worth and the riskbased capital numerator are different calculations, the Board believes the two calculations are similar enough to state, with a high degree of certainty, there are no complex credit unions that would be required to deduct MSAs from the riskbased capital numerator were risk-based capital currently in effect.
Finally, the Board is aware that complex credit unions may believe that deducting exposures of MSAs over 25
percent of their risk-based capital numerator is punitive. However, the Board notes that both the Board and other banking agencies have stated that MSAs have a relatively high level of uncertainty regarding the ability to both value and realize value from these assets.115 The Board also believes including the proposed MSA deduction from the risk-based capital numerator is prudential for potential balance sheets complex credit union may have in the future.
Question 19: What are the advantages and disadvantages of deducting MSAs from the risk-based capital numerator?
Should the Board consider a higher or lower deduction threshold? Why or why not?
4. Supranational Organizations and Multilateral Development Banks The Board is proposing to amend the risk-based capital rule to assign a risk 115 Report to Congress on the Effect of Capital Rules on Mortgage Servicing Assets, Report to the Congress on the Effect of Capital Rules on Mortgage Servicing Assets, June 2016, available at https
www.federalreserve.gov/publications/other-reports/
files/effect-capital-rules-mortgage-servicing-assets201606.pdf.

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