Thursday, March 31, 2011

Dodd Frank's Risk Retention Requirement Silent on Credit Unions

This week six federal agencies are issuing a proposed rule implementing the risk retention requirement of the Dodd Frank Act (section 941), which requires issuers of securitized loans to retain a 5 percent interest in the risk of loss. The proposed rule provides an exemption for qualified residential mortgages.

According to advocates of the risk retention requirement, if a lender has "skin in the game," the loans will be underwritten more conservatively and will perform better; because the lender is retaining some credit risk.

Noticeable in its absence is the National Credit Union Administration (NCUA). The Dodd Frank Act did not include credit unions under its risk retention requirement; but it should also be noted that credit unions were not specifically excluded.

Section 941 of the Dodd Frank Act is just silent when it comes to credit unions.

This raises a relevant policy question -- should credit unions be subject to this risk retention requirement?

Data from the NCUA shows a substantial expansion in real estate loans sold but serviced by credit unions. According to NCUA, outstanding real estate loans sold but serviced by federally-insured credit unions has almost doubled between 2006 and 2010 to $108.4 billion at the end of 2010.

Moreover, for the last two years more than half of the first mortgage real estate loans granted by credit unions were sold in the secondary market. Credit unions reported that 54.08 percent and 52.24 percent of their first mortgage real estate loans granted in 2009 and 2010 were sold, respectively.

In 2010, 5 credit unions sold over $1 billion in first mortgages in the secondary market. The credit union that sold the most mortgages in the secondary market was Kinecta FCU in Manhattan Beach (CA), followed by Navy Federal in Vienna (VA).

The table below shows the 50 credit unions that sold the most first mortgages in the secondary market during 2010. (click on image to enlarge)


  1. If a credit union (or bank for that matter) sells mortgages (or first trust deed loans here in California) to Freddie/Fannie, they are not subject to this rule.

    Also, credit unions have a 10 percent retention requirement on loan participations. Maybe 10 percent should be the threshold for the for-profit banking and financial service firms?

  2. Regardless of what the NCUA does or does not do concerning the Dodd-Frank risk retention requirements or QRM, these other agencies' actions will define the secondary market and securitization. It is hard to imagine that the credit unions could operate outside of these broader markets unless they plan to hold everything in-portfolio.



The content is provided for educational purposes only, with the understanding that neither the authors, contributors, nor the publishers of this site are engaged in rendering legal, accounting or other expert or professional services. If legal or other expert assistance is required, the services of a competent professional should be sought.

Comments appearing in response to articles appearing on this site do not necessarily reflect the views of the ABA. ABA makes no representations regarding the truth or accuracy of commentary or opinions that may be posted in response to the articles that appear on this website.

The inclusion herein of any link to a website, either in the text of an article or in a comment, does not denote any approval, sponsorship, or endorsement by the ABA, and ABA is not responsible for the content or opinions expressed on those linked websites or related commentary. This content is not licensed to third parties sites and is not affiliated with any third party site. Any reference to the author or this content on any third party site on the Internet is not authorized by the ABA.

It is the policy of the American Bankers Association to comply fully with all antitrust laws. Certain discussions should be considered off-limits, including those that contain competitively sensitive data such as price and cost information, or statements that could be construed as reflecting an attempt or desire to control or influence a particular market or markets. Future pricing or other prospective competitive information should never be shared.