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Federal Register / Vol. 86, No. 244 / Thursday, December 23, 2021 / Rules and Regulations securitizations issued by credit unions and has decided to amend the 2015
Final Rule to explicitly address credit union issued securitizations.
The proposed rule required credit unions that issue securitizations to use the other banking agencies 2013 capital rules when determining whether assets transferred in connection with a securitization are excluded from riskbased capital. The Board reviewed these standards and found they would be appropriate as applied to credit union securitizations, with the minor differences noted below. Specifically, under the final rule, a credit union must follow the requirements of the applicable provisions of 12 CFR 324.41
when it transfers exposures in connection with a securitization. A
credit union may only exclude the transferred exposures from the calculation of its risk-weighted assets if each condition in 12 CFR 324.41 is satisfied. The conditions for traditional securitizations in 12 CFR 324.41 are as follows adapted for credit unions:
1 The exposures are not reported on the credit unions consolidated balance sheet under GAAP;
2 The credit union has transferred to one or more third parties credit risk associated with the underlying exposures;
3 Any clean-up calls relating to the securitization are eligible clean-up calls a defined term under the other banking agencies 2013 capital rules; 85 and 4 The securitization does not:
i Include one or more underlying exposures in which the borrower is permitted to vary the drawn amount within an agreed limit under a line of credit; and ii Contain an early amortization provision.

A credit union that meets the conditions, but retains any credit risk for the transferred exposures, must hold risk-based capital against the credit risk it retains in connection with the securitization.
The other banking agencies 2013 rule includes conditions for both traditional securitizations and synthetic securitizations.86 The Board believes
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85 Under
the other banking agencies 2013 capital rules, eligible clean-up call means a clean-up call that: 1 Is exercisable solely at the discretion of the originating institution or servicer; 2 is not structured to avoid allocating losses to securitization exposures held by investors or otherwise structured to provide credit enhancement to the securitization; and 3i for a traditional securitization, is only exercisable when 10 percent or less of the principal amount of the underlying exposures or securitization exposures determined as of the inception of the securitization is outstanding; or ii for a synthetic securitization, is only exercisable when 10 percent or less of the principal amount of the reference portfolio of underlying exposures determined as of the inception of the securitization is outstanding.
86 Under the other banking agencies 2013 capital rule, a synthetic securitization means a transaction
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almost all securitizations issued by credit unions would be traditional securitizations and subject to the conditions in 12 CFR 324.41a. The Board does not believe that credit unions are likely to engage in synthetic securitizations; however, if a credit union issues a synthetic securitization, it is subject to the conditions in 12 CFR
324.41b.
The Board also notes that 12 CFR
324.41c includes explicit due diligence requirements for banking organizations investments in securitizations. The Board is not currently adopting these requirements.
The final rule only references 12 CFR
324.41 to incorporate the factors a credit union must consider when excluding assets transferred in connection with a securitization from risk-weighted assets.
The Board intends to use its supervisory authority to monitor securitizations for safety and soundness purposes and is not currently adopting any new regulatory requirements for such transactions.
The other banking agencies 2013
capital rule has an explicit treatment for any gain-on-sale in connection with a securitization exposure and any creditenhancing interest only strips CEIOs retained by a banking organization that do not qualify as a gain-on-sale. Any gain-on-sale in connection with a securitization exposure is deducted from a banking organizations common equity tier 1 capital.87 CEIOs that do not qualify as a gain-on-sale are given a 1,250 percent risk weight.88 The other banking agencies provided punitive treatments for these exposures because of historical supervisory concerns with the subjectivity involved in valuations of gains-on-sale and CEIOs. And though the treatments for gains-on-sale and CEIOs can increase an originating banking organizations risk-based capital requirement following a securitization, the other banking agencies believe that such anomalies are in which: 1 All or a portion of the credit risk of one or more underlying exposures is retained or transferred to one or more third parties through the use of one or more credit derivatives or guarantees other than a guarantee that transfers only the credit risk of an individual retail exposure; 2 The credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority; 3 Performance of the securitization exposures depends upon the performance of the underlying exposures; and 4
All or substantially all of the underlying exposures are financial exposures such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgagebacked securities, other debt securities, or equity securities. See, 12 CFR 324.2.
87 See, 12 CFR 324.22a4 and 12 CFR
324.42a1.
88 See, 12 CFR 324.42a1.

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rare where a securitization transfers significant credit risk to third parties.
The 2015 Final Rule does not include specific treatments for gain-on-sales or CEIOs because, as discussed previously, in 2015 credit unions had not issued any securitizations. Under the 2015
Final Rule, however, most CEIOs would still receive a 1,250 percent risk weight because they constitute a subordinated tranche, but the 2015 Final Rule permits a credit union to use the gross-up approach as an alternative. The Board believes that credit union-issued securitizations should be given a similar capital treatment under the 2015 Final Rule as under the other banking agencies risk-based capital rule.
Thus, the final rule includes a specific risk weight for certain exposures associated with securitization activities.
While the Board believes the capital treatment for credit union-issued securitizations should be akin to bankissued securitizations, the final rule is slightly different than the other banking agencies 2013 risk-based capital rule for simplicity. Under the final rule, the gain-on-sale amount from a securitization transaction, generally the CEIO, will be included in the numerator in calculating a credit unions net worth. This is a different approach than the other banking agencies rule, which excludes gains-on-sale in calculating a banks common equity tier 1 capital.
Instead, the Board has chosen to address the risks associated with a gain-on-sale amount by requiring that a 1,250
percent risk weighting be applied to retained non-security beneficial interests.
One commenter specifically supported the securitization framework, which generally references the capital rule of the other banking agencies.
Another commenter questioned why the Board did not adopt the entirety of the other banking agencies framework and recommended granting complex credit unions the option to use the gross-up approach for risk weighting nonsecurity beneficial interest of a securitization. The commenter stated that this would ensure that credit unions have at least the same flexibility as non-advanced approaches banks. The other banking agencies do not permit the use of the gross-up approach for a securitization gain-on-sale, and require the full deduction of the gain-on-sale from the tier 1 capital numerator.89
Further, the Board believes its approach is simpler and provides a more conservative overall risk weight. The Board believes this approach is warranted given the limited 89 12

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CFR 324.22a4.

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