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Compliance: CUNA Clarifies Credit Rating Question
WASHINGTON (3/27/13)--Are credit unions still allowed to rely on credit ratings as they determine the acceptability of a given investment? Yes, Credit Union National Association Senior Vice President for Compliance Kathy Thompson said in a new CUNA CompBlog question and answer post.

In the post, Thompson clarified that credit unions are permitted to use credit ratings as one of many ways to determine the "investment grade" of a security.

As of June 11, the National Credit Union Administration will substitute "investment grade" wherever a specific credit rating appears in Section 703 of its regulations.

"This means that the credit union is required to analyze and be comfortable in concluding that the risk of default by the issuer is low and timely repayment of principal and interest is expected. The regulations suggest a list of eight factors a credit union may consider in its analysis. Although NCUA can't rely on a credit rating, there is nothing that prohibits a credit union from using credit ratings in its analysis," Thompson wrote.

The NCUA's Section 703 regulation on investments only applies to federal credit unions, Thompson noted. However, she added, if a federally insured state chartered credit union holds an investment not permissible for a federal credit union, it may be subject to special reserving on that investment.

"In Section 741.3, the NCUA points out that if a federally insured state chartered credit union relies upon a ratings-based investment permissible under state law, that credit union should go through the same 'investment grade' analysis that a federal credit union is now required to do," Thompson explained.

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