Upon adoption of the proposed rule, securitizations will allow federal credit unions to make loans and then sell or transfer such loans to a special purpose entity; the funds generated from such sales can then be made available for more loans to members.

Additionally, securitizations may be used to reduce a credit union's interest rate risk by converting its loans—fixed-rate assets—into cash. And the sale of these loans can accelerate the originating credit union's receipt of cash from its assets as securitization permits the originating credit union to receive the discounted present value of the loans more immediately than waiting for those loans to mature.

The proposed rule limits federal credit unions to securitizing only those loans it has originated. To securitize assets, a sponsoring credit union must create an issuing entity, commonly known as a special purpose entity or special purpose vehicle, to purchase and hold the assets collateralizing the asset-backed security.

The special purpose entity created by the sponsoring credit union for securitizations must be “bankruptcy remote” from the credit union, meaning the special purpose entity's assets are isolated from any creditors of the credit union should the credit union become insolvent. A special purpose CUSO might address this regulatory requirement.

The proposed rule establishes the following seven minimum requirements for securitizations:

i Compliance with all federal and state laws and regulations, including registration, disclosure, reporting, and other legal requirements.

ii Risk management. Credit unions must have in place independent risk management controls to ensure proper policies and operating procedures, including appropriate risk limits, are in place.

iii An annual audit of its financial statements performed in accordance with generally accepted auditing standards (GAAP) by an independent auditor.

iv The credit union's board of directors must have a general understanding of the risks and benefits of its securitization activities.

v Senior management responsible for a credit union's securitizations must possess sufficient expertise to oversee those activities, and select and oversee the various third parties engaged to support the securitization.

vi The credit union's board must approve an asset securitization policy that includes or addresses, at a minimum, the following items:

• A statement of the business purpose for engaging in securitization activities, including scope and level of acceptable risk;
• Governance of securitization activities;
• Written and consistently applied accounting methodology;
• Regulatory reporting requirements;
• Valuation methods;
• Management reporting process; and
• Exposure limits and requirements for both aggregate and individual transaction monitoring.

vii Effective internal controls.

Undoubtedly, the benefits of securitizations for credit unions are many, but the transactions can be quite complex, and they invariably involve numerous parties and extensive legal documentation. But these transactions have been going on for years. I don't think it will take long for credit unions to grow comfortable with them.

Andy Keeney is co-chair of the Kaufman & Canoles Credit Union Team in Norfolk, Va. CONTACT: [email protected] or (757) 624-3153.