Compliance Question of the Week

What are permissible investments for my credit union?

Oregon state chartered credit unions may invest in:

  1. Securities, obligations or other instruments of or issued by or fully guaranteed as to principal and interest by the United States or an agency of the United States or in a trust or trusts established directly or collectively in the securities, obligations or instruments described in this subsection.
  2. Obligations of a state of the United States, the agencies or instrumentalities of the federal government, the District of Columbia, the Commonwealth of Puerto Rico and the several territories organized by Congress, or a political subdivision of a state, district, commonwealth or territory identified in this subsection.
  3. Certificates of deposit or passbook type accounts issued by a state or national bank, mutual savings bank or savings and loan association.
  4. Loans to or in shares or deposits of other credit unions.
  5. Stocks, membership units or other ownership interests in, or loans to, a corporation, limited liability company or mutual association in an amount not to exceed five percent of assets if:
    • The ownership, membership or loan, as applicable, is primarily confined to credit unions or organizations of credit unions; and
    • The purposes for which the corporation, limited liability company or mutual association is organized are primarily to service or otherwise assist credit union operations.
  6. Shares of a credit union cooperative society organized under the laws of this state or of the laws of the United States in a total amount not exceeding one percent of the shares, deposits and surplus of the credit union.
  7. Loans to a national or state credit union association or corporation of which the credit union is a member, except that the loans must be limited to not more than five percent of the assets of the credit union.
  8. Other investments the Director of the Department of Consumer and Business Services approves by rule or order.

Washington state chartered credit unions may invest in:

  1. Loans held by credit unions, out-of-state credit unions, or federal credit unions; loans to members held by other lenders; and loans to nonmembers held by other lenders, with the approval of the director;
  2. Bonds, securities, or other investments that are fully guaranteed as to principal and interest by the United States government, and general obligations of this state and its political subdivisions;
  3. Obligations issued by corporations designated under 31 U.S.C. Sec. 9101, or obligations, participations or other instruments issued and guaranteed by the federal national mortgage association, federal home loan mortgage corporation, government national mortgage association, or other government-sponsored enterprise;
  4. Participations or obligations which have been subjected by one or more government agencies to a trust or trusts for which an executive department, agency, or instrumentality of the United States has been named to act as trustee;
  5. Share or deposit accounts of other financial institutions, the accounts of which are federally insured or insured or guaranteed by another insurer or guarantor approved by the director. The shares and deposits made by a credit union under this subsection may exceed the insurance or guarantee limits established by the organization insuring or guaranteeing the institution into which the shares or deposits are made;
  6. Common trust or mutual funds whose investment portfolios consist of securities issued or guaranteed by the federal government or an agency of the government;
  7. Up to five percent of the capital of the credit union, in debt or equity issued by an organization owned by the Washington credit union league;
  8. Shares, stocks, loans, or other obligations of organizations whose primary purpose is to strengthen, advance, or provide services to the credit union industry or credit union members. A credit union may in the aggregate invest an amount not to exceed one percent of its assets in organizations under this subsection. In addition, a credit union may in the aggregate lend an amount not to exceed one percent of its assets to organizations under this subsection. These limits do not apply to investments in, and loans to, an organization:
    • That is wholly owned by one or more credit unions or federal or out-of-state credit unions; and
    • Whose activities are limited exclusively to those authorized by this chapter for a credit union;
  9. Loans to credit unions, out-of-state credit unions, or federal credit unions. The aggregate of loans issued under this subsection is limited to twenty-five percent of the total shares and deposits of the lending credit union;
  10. Key person insurance policies, the proceeds of which inure exclusively to the benefit of the credit union; or
  11. Other investments approved by the director upon written application.

Federally chartered credit unions may invest in:

  1. Variable rate investment. A Federal credit union may invest in a variable rate investment, as long as the index is tied to domestic interest rates and not, for example, to foreign currencies, foreign interest rates, or domestic or foreign commodity prices, equity prices, or inflation rates. For purposes of this part, the U.S. dollar-denominated London Interbank Offered Rate (LIBOR) is a domestic interest rate.
  2. Corporate credit union shares or deposits. A Federal credit union may purchase shares or deposits in a corporate credit union, except where the NCUA Board has notified it that the corporate credit union is not operating in compliance with part 704 of this chapter. A Federal credit union’s aggregate amount of perpetual and nonperpetual capital, as defined in part 704 of this chapter, in one corporate credit union is limited to two percent of the federal credit union’s assets measured at the time of investment or adjustment. A Federal credit union’s aggregate amount of contributed capital in all corporate credit unions is limited to four percent of assets measured at the time of investment or adjustment.
  3. Registered investment company. A Federal credit union may invest in a registered investment company or collective investment fund, as long as the prospectus of the company or fund restricts the investment portfolio to investments and investment transactions that are permissible for Federal credit unions.
  4. Collateralized mortgage obligation/real estate mortgage investment conduit. A Federal credit union may invest in a fixed or variable rate collateralized mortgage obligation/real estate mortgage investment conduit.
  5. Municipal security. A Federal credit union may purchase and hold a municipal security, as defined in Section 107(7)(K) of the Act, only if a nationally-recognized statistical rating organization has rated it in one of the four highest rating categories.
  6. Instruments issued by institutions described in Section 107(8) of the Act.A Federal credit union may invest in the following instruments issued by an institution described in Section 107(8) of the Act:
    • Yankee dollar deposits;
    • Eurodollar deposits;
    • Banker’s acceptances;
    • Deposit notes; and
    • Bank notes with original weighted average maturities of less than 5 years.
  7. European financial options contract.A Federal credit union may purchase a European financial options contract or a series of European financial options contracts only to fund the payment of dividends on member share certificates where the dividend rate is tied to an equity index provided:
    • The option and dividend rate are based on a domestic equity index;
    • Proceeds from the options are used only to fund dividends on the equity-linked share certificates;
    • Dividends on the share certificates are derived solely from the change in the domestic equity index over a specified period;
    • The options’ expiration dates are no later than the maturity date of the share certificate.
    • The certificate may be redeemed prior to the maturity date only upon the member’s death or termination of the corresponding option;
    • The total costs associated with the purchase of the option is known by the Federal credit union prior to effecting the transaction;
    • The options are purchased at the same time the certificate is issued to the member.
    • The counterparty to the transaction is a domestic counterparty and has been approved by the Federal credit union’s board of directors;
    • The counterparty to the transaction:
      • Has a long-term, senior, unsecured debt rating from a nationally-recognized statistical rating organization of AA− (or equivalent) or better at the time of the transaction, and the contract between the counterparty and the Federal credit union specifies that if the long-term, senior, unsecured debt rating declines below AA− (or equivalent) then the counterparty agrees to post collateral with an independent party in an amount fully securing the value of the option; or
      • Posts collateral with an independent party in an amount fully securing the value of the option if the counterparty does not have a long-term, senior unsecured debt rating from a nationally-recognized statistical rating organization.
    • Any collateral posted by the counterparty is a permissible investment for Federal credit unions and is valued daily by an independent third party along with the value of the option;
    • The aggregate amount of equity-linked member share certificates does not exceed the credit union’s net worth;
    • The terms of the share certificate include a guarantee that there can be no loss of principal to the member regardless of changes in the value of the option unless the certificate is redeemed prior to maturity; and
    • The Federal credit union provides its board of directors with a monthly report detailing at a minimum:
      • The dollar amount of outstanding equity-linked share certificates;
      • Their maturities; and
      • The fair value of the options as determined by an independent third party.
  8. Mortgage note repurchase transactions.A federal credit union may invest in securities that are offered and sold pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C. 77d(5), only as a part of an investment repurchase agreement under § 703.13(c), subject to the following conditions:
    • The aggregate of the investments with any one counterparty is limited to 25 percent of the credit union’s net worth and 100 percent of its net worth with all counterparties;
    • At the time a federal credit union purchases the securities, the counterparty, or a party fully guaranteeing the transaction, must have outstanding debt with a long-term rating no lower than A−or its equivalent and outstanding debt with a short-term rating, if any, no lower than A-1 or its equivalent;
    • The federal credit union must obtain a daily assessment of the market value of the securities under § 703.13(c)(1) using an independent qualified agent;
    • The mortgage note repurchase transaction is limited to a maximum term of 90 days;
    • All mortgage note repurchase transactions will be conducted under tri-party custodial agreements; and
    • A federal credit union must obtain an undivided interest in the securities.
  9. Zero-coupon investments. A federal credit union may only purchase a zero-coupon investment with a maturity date that is no greater than 10 years from the related settlement date, unless authorized under § 703.20 or otherwise provided in this paragraph. A federal credit union that received a composite CAMEL rating of “1” or “2” for the last two full examinations and maintained a net worth classification of “well capitalized” under part 702 of this chapter for the six (6) immediately preceding quarters or, if subject to a risk-based net worth (RBNW) requirement under part 702 of this chapter, has remained “well capitalized” for the six immediately preceding quarters after applying the applicable RBNW requirement, may purchase a zero-coupon investment with a maturity date that is no greater than 30 years from the related settlement date.
  10. Commercial mortgage related security (CMRS).A federal credit union may purchase a CMRS permitted by Section 107(7)(E) of the Act; and, pursuant to Section 107(15)(B) of the Act, a CMRS of an issuer other than a government-sponsored enterprise enumerated in Section 107(7)(E) of the Act, provided.
    • The CMRS is rated in one of the two highest rating categories by at least one nationally-recognized statistical rating organization;
    • The CMRS meets the definition of mortgage related security as defined in 15 U.S.C. 78c(a)(41) and the definition of commercial mortgage related security as defined in § 703.2 of this part;
    • The CMRS’s underlying pool of loans contains more than 50 loans with no one loan representing more than 10 percent of the pool; and
    • The aggregate amount of private label CMRS purchased by the federal credit union does not exceed 25 percent of its net worth, unless authorized under § 703.20 or as otherwise provided in this subparagraph. A federal credit union that has received a composite CAMEL rating of “1” or “2” for the last two full examinations and maintained a net worth classification of “well capitalized” under part 702 of this chapter for the six immediately preceding quarters or, if subject to a risk-based net worth (RBNW) requirement under part 702 of this chapter, has remained “well capitalized” for the six immediately preceding quarters after applying the applicable RBNW requirement, may hold private label CMRS in an aggregate amount not to exceed 50 percent of its net worth.

Related Links

ORS 723.602
RCW 31.12.436
12 CFR 703.14

Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

Posted in Compliance, Compliance News, Federal.