April 23,1999
B. L. McDonnell, President
Navy Federal Credit Union
P.O. Box 3000
Merrifield, Virginia 22119-3000
Dear Mr. McDonnell:
You have requested that this office reconsider
Region II's denial of your request to accept asset-backed securities
as collateral for tri-party repurchase agreements under §703.140
of NCUA's regulations. 12 C.F.R. §703.140. Section 703.140
provides for an investment pilot program that involves permitting
a limited number of federal credit unions (FCUs) to engage in
investment activities that are permissible under the Federal Credit
Union Act (the Act) but prohibited by NCUA regulation. Asset-backed
securities are securities consisting of consumer loans that have
been packaged together. Region II denied the request on the basis
that asset-backed securities are not permitted by the Act and,
therefore, could not be considered under the investment pilot
program. After extensive review and consultation with other NCUA
offices, we have concluded your proposed investment is impermissible
because an FCU does not have the authority to invest in this type
of asset-backed security under the Act.
You have raised several arguments in support
of your request that asset-backed securities be considered for
the investment pilot program. You contend that asset-backed securities
should not be treated differently than the Market Index Certificate
(MIC), a previously approved pilot program investment. The MIC
does not, as you stated, entail the purchase of options by an
FCU on behalf of its members. Rather, the MIC involves an FCU
holding member funds in the form of a share certificate on which
the dividend rate is tied to changes in a market index. To fund
the payment of the dividend to its member, an FCU purchases an
option contract from a third-party. The option contract pays a
return to the FCU using the same formula as that used for the
dividend rate payable to the member. An FCU is matching the member's
certificate with its option contract. Your argument is that the
MIC involves the FCU's investment in an option, that options -
like asset-backed securities - are not referenced in the Act,
and that, therefore, the lack of any specific authority in the
Act for asset-backed securities should not prevent them from being
regarded as permissible investments.
Generally, FCUs may only invest as authorized by the Act. Although not expressly identified in the Act as a permissible investment, we view options
Mr. B.L. McDonnell
Page Two
as a derivative security or a contract that
may be considered within the incidental powers of an FCU when
used to hedge or reduce the FCU's risks associated with otherwise
permissible activities. Also, although NCUA's investment regulation
generally prohibits investment in options, our view is that the
Act would permit an FCU's investment in options where the underlying
investment is permissible under the Act. 12 C.F.R. §703.110(a).
Such investments could be considered for the investment pilot
program. 12 C.F.R. §703.140. The Act does not expressly
authorize FCU investment in asset-backed securities. Further,
we see no basis for concluding that investment in asset-backed
securities is incidental to an FCU's exercise of its express authorities.
In support of your argument that asset-backed
securities are permissible investments, you note the fact that
NCUA recently requested comment on whether it would be appropriate
to permit credit unions to purchase auto loans and credit card
loans to pool and sell in a secondary market. 63 Fed. Reg. 41976
(Aug. 6, 1998). Your contention is that, if it is permissible
for FCUs to purchase such loans to complete a pool for sale to
a secondary market, which pool in turn would be used to create
an asset-backed security, then it must be permissible for FCUs
to invest in the resulting security. First, we note that the
NCUA Board, thus far, has not decided to expand FCUs' authority
to purchase these types of loans for pooling purposes to create
asset-backed securities. 63 Fed. Reg. 70997 (Dec. 23, 1998).
Most importantly, your argument fails because the underlying
legal authorities for the two activities - the authority to purchase
eligible obligations and the authority to make investments - are
different. 12 U.S.C. §§1757(5)(A(i), 1757(13), 1757(17)
(purchase of eligible obligations); 12 U.S.C. §§1757(7),
1757(14)(investment authority). The authority for one activity
does not provide a basis for the other.
It is a basic principle of statutory construction
that, where a statute specifies certain authority, authority not
specified is intended to be excluded. We note that the Act provides
specific statutory authority for a federal credit union to invest
in mortgage-backed securities, but there is no specific corresponding
statutory authority for federal credit unions to invest in asset-backed
securities. 12 U.S.C. §1757(15)(B).
Finally, you contend that asset-backed securities
are permissible investments for banks and corporate credit unions
and could provide benefits for natural person credit unions as
well. The investment authority of banks, whether state or national,
is determined under their own governing statutes which are irrelevant
in determining the investment authority of FCUs. As for corporate
credit unions, our long-standing view is that the FCU Act grants
the NCUA Board the authority
Mr. B.L. McDonnell
Page Three
to regulate corporate credit unions as it deems
appropriate, including the authority to permit activities that
the FCU Act does not authorize for natural person credit unions.
12 U.S.C. §1766(a). Under this authority, the NCUA Board
issued the corporate credit union regulation that specifically
authorizes corporate credit unions to invest in asset-backed securities.
12 C.F.R. §704.5(c)(5).
We apologize for the delay in responding to
your request for our consideration of Region II's decision regarding
your request under the investment pilot program. Your request
has required consultation with other offices regarding several
of the issues you raised.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/MJMcK/SAA:bhs
SSIC 3501
98-0956A
cc: Region II Director