704.6.—Credit risk management.
(a) Policies.
A corporate credit union must operate according to a credit risk management policy that is commensurate with the investment risks and activities it undertakes. The policy must address at a minimum:
(3)
Maximum credit limits with each obligor and transaction counterparty, set as a percentage of capital. In addition to addressing deposits and securities, limits with transaction counterparties must address aggregate exposures of all transactions including, but not limited to, repurchase agreements, securities lending, and forward settlement of purchases or sales of investments; and
(4)
Concentrations of credit risk (e.g., originator of receivables, servicer of receivables, insurer, industry type, sector type, geographic, collateral type, and tranche priority).
(b) Exemption.
The limitations and requirements of this section do not apply to certain assets, whether or not considered investments under this part, including fixed assets, individual loans and loan participation interests, investments in CUSOs, investments that are issued or fully guaranteed as to principal and interest by the U.S. government or its agencies or its sponsored enterprises (other than mortgage backed-securities), investments that are fully insured or guaranteed (including accumulated dividends and interest) by the NCUSIF or the Federal Deposit Insurance Corporation, and settlement funds in federally insured depository institutions.
(c) Issuer concentration limits—
(1)
General rule. The aggregate of all investments in any single obligor is limited to 25 percent of capital or $5 million, whichever is greater.
(i)
Investments in one obligor where the remaining maturity of all obligations is less than 30 days are limited to 50 percent of capital;
(ii)
Investments in credit card master trust asset-backed securities are limited to 50 percent of capital in any single obligor;
(iii)
Aggregate investments in repurchase and securities lending agreements with any one counterparty are limited to 200 percent of capital;
(iv)
Investments in non-money market registered investment companies are limited to of 50 percent of capital in any single obligor;
(v)
Investments in money market registered investment companies are limited to 100 percent of capital in any single obligor; and
(3)
For purposes of measurement, each new credit transaction must be evaluated in terms of the corporate credit union's capital at the time of the transaction. An investment that fails a requirement of this section because of a subsequent reduction in capital will be deemed non-conforming. A corporate credit union is required to exercise reasonable efforts to bring nonconforming investments into conformity within 90 calendar days. Investments that remain nonconforming for 90 calendar days will be deemed to fail a requirement of this section and the corporate credit union will have to comply with § 704.10.
(d) Sector concentration limits.
(1)
A corporate credit union must establish sector limits that do not exceed the following maximums:
(i)
Mortgage-backed securities (Inclusive of commercial mortgage-backed securities)—the lower of 1000 percent of capital or 50 percent of assets;
(ii)
Commercial mortgage-backed securities—the lower of 300 percent of capital or 15 percent of assets;
(iii)
FFELP student loan asset-backed securities—the lower of 1000 percent of capital or 50 percent of assets;
(iv)
Private student loan asset-backed securities—the lower of 500 percent of capital or 25 percent of assets;
(v)
Auto loan/lease asset-backed securities—the lower of 500 percent of capital or 25 percent of assets;
(vi)
Credit card asset-backed securities—the lower of 500 percent of capital or 25 percent of assets;
(vii)
Other asset-backed securities not listed in paragraphs (ii) through (vi)—the lower of 500 percent of capital or 25 percent of assets;
(2)
Registered investment companies—A corporate credit union must limit its investment in registered investment companies to the lower of 1000 percent of capital or 50 percent of assets. In addition to applying the limit in this paragraph (d)(2), a corporate credit union must also include the underlying assets in each registered investment company in the relevant sectors described in paragraph (d)(1) of this section when calculating those sector limits.
(3)
A corporate credit union will limit its aggregate holdings in any investments not described in paragraphs (d)(1) or (d)(2) of this section to the lower of 100 percent of capital or 5 percent of assets. The NCUA may approve a higher percentage in appropriate cases.
(4)
Investments in other federally insured credit unions, deposits and federal funds investments in other federally insured depository institutions, and investment repurchase agreements are excluded from the concentration limits in paragraphs (d)(1), (d)(2), and (d)(3) of this section.
(e) Corporate debt obligation subsector limits.
In addition to the limitations in paragraph (d)(1)(viii) of this section, a corporate credit union must not exceed the lower of 200 percent of capital or 10 percent of assets in any single North American Industry Classification System (NAICS) industry sector. If the corporation does not have a readily ascertainable NAICS classification, a corporate credit union will use its reasonable judgment in assigning such a classification. NCUA may direct, however, that the corporate change the classification.
(f) Credit ratings.—
(1)
All investments, other than in another depository institution, must have an applicable credit rating from at least one NRSRO. At a minimum, 90 percent of all such investments, by book value, must have a rating by at least two NRSROs. Corporate credit unions may use either public or nonpublic NRSRO ratings to satisfy this requirement.
(2)
At the time of purchase, investments with long-term ratings must be rated no lower than AA- (or equivalent) by every NRSRO that provides a publicly available long-term rating on that investment, and investments with short-term ratings must be rated no lower than A-1 (or equivalent) by every NRSRO that provides a publicly available short-term rating on that investment. If the corporate credit union obtains a nonpublic NRSRO rating, that rating must also be no lower than AA-, or A-1, for long-term and short-term ratings, respectively.
(3)
All rating(s) relied upon to meet the requirements of this part must be identified at the time of purchase and must be monitored for as long as the corporate owns the investment. Corporate credit unions must identify and monitor any new post-purchase NRSRO ratings on investments they hold.
(i)
An NRSRO that rates the investment downgrades that rating, after purchase, below the minimum rating requirements of this part; or
(ii)
The investment is part of an asset class or group of investments that exceeds the sector or obligor concentration limits of this section.
(g) Reporting and documentation.
(1)
At least annually, a written evaluation of each credit limit with each obligor or transaction counterparty must be prepared and formally approved by the board or an appropriate committee. At least monthly, the board or an appropriate committee must receive an investment watch list of existing and/or potential credit problems and summary credit exposure reports, which demonstrate compliance with the corporate credit union's risk management policies.
(ii)
Disclosure documents, if any, for all instruments held in portfolio. Documents for an instrument that has been sold must be retained until completion of the next NCUA examination; and
(iii)
The latest available financial reports, industry analyses, internal and external analyst evaluations, and rating agency information sufficient to support each approved credit limit.
2. At 75 FR 71528, Nov. 24, 2010, § 704.6 was amended by revising paragraph (b), effective Jan. 18, 2011. For the convenience of the user, the revised text is set forth as follows: