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Credit Unions and Student Loan Investments

By Emily Moré Hollis, CFA Partner 

StudentLoansAlthough credit unions may issue student loans to their members, NCUA regulation is somewhat confusing on whether or not credit unions can invest in securities that are backed by student loans. To ensure permissibility, the focus should be on the issuer, not necessarily on the loans that are backing the security or the security’s structure. In other words, if the issuer is permissible, the security is permissible irrespective of whether the underlying loans are student loans or whether the structure is an asset-backed security (ABS)[1]. It took a little digging for us to figure this out, and after dialogue with the NCUA, we were able to solidify an opinion. So, let me explain.

According to section 703.14(e) of the NCUA regulations, “federally chartered credit unions may purchase and hold a municipal security, as defined in section 107(7)(K) of the Act, only if it conducts and documents an analysis that reasonably concludes the security is at least investment grade. The Federal credit union must also limit its aggregate municipal securities holdings to no more than 75 percent of the Federal credit union’s net worth and limit its holdings of municipal securities issued by any single issuer to no more than 25 percent of the Federal credit union’s net worth.”

Section 107(7)(K) of the Federal Credit Union Act permits credit unions to invest their funds in “obligations of, or issued by, any State or political subdivision thereof (including any agency, corporation, or instrumentality of a State or political subdivision), except that no credit union may invest more than 10 per centum of its unimpaired capital and surplus in the obligations of any one issuer (exclusive of general obligations of the issuer).”

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