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Federal Register / Vol. 86, No. 244 / Thursday, December 23, 2021 / Rules and Regulations 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.
By the plain language of Section 10714, FCUs may purchase MSAs only from other credit unions. Contrast the authority to purchase MSAs of another credit union 32 to an FCUs express statutory power to enter loan participation agreements with other credit unions, credit union organizations or financial organizations. 33 Under NCUAs 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.
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
This rulemaking is promulgated pursuant to Section 120a 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, 32 Id.
33 12

U.S.C. 17575E.
CFR 701.22ab.
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
38 12 U.S.C. 1766a.
39 12 U.S.C. 17511795k.

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Section 206 of the Act grants the Board broad authority to take enforcement action against a FICU or an institutionaffiliated 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.
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 FCUs board of directors written purchase policies; and 3 The FCUs 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 40 See 12 U.S.C. 1786r providing: For purposes of the Federal Credit Union Act, the term institution-affiliated party means1 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 inA 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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enterprises GSEs.42 These commenters stated that the rules should be more expansive to include purchases of MSRs from parties other than FICUs.
One commenter suggested the rulemaking is premature. This commenter stated that it is paramount for FCUs to understand how MSR
purchases could affect both longand 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 FCUs 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 FCUs 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
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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