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ALM First Loan Fund Investment Pilot Program Requirements and Conditions

NATIONAL CREDIT UNION ADMINISTRATION

Investment Pilot Program

AGENCY: National Credit Union Administration (NCUA)

ACTION: Investment Pilot Program Requirements and Conditions

General

ALM First Financial Advisors (ALM First) applied, as a third party, for approval to establish an investment pilot program for federal credit unions (FCUs) pursuant to 12 CFR § 703.19(c). The NCUA Board approved ALM First’s request on December 17, 2024. In accordance with the NCUA Board’s approval, the pilot program is subject to the requirements and conditions set forth in this document. ALM First, all Funds, and all Investing FCUs, as defined herein, are subject to these requirements and conditions. Such requirements and conditions may only be amended by application to the NCUA Board and approval from the same.

While the NCUA Board has approved ALM First’s request for an investment pilot program, the NCUA Board, the NCUA, nor any employee or office thereof does not endorse ALM First or warrant the safety, soundness, or advisability of the investments created under this pilot program.

Definitions

The following definitions have the meaning set forth in this section and, unless otherwise noted, apply only to this document:

  1. Investing FCU means an FCU, as defined under the Federal Credit Union Act, that invests in any Fund(s) issued under this pilot program, irrespective of the method of investment (direct investment or purchase from another investor).
  2. Fund, Funds, or Fund(s) means a non-registered investment fund or series of funds consisting of only Permissible Consumer Loans and Overnight Investments, both defined herein; each Fund is owned on a pro rata basis by the investors of that Fund.
  3. Overnight Investments means investments with a maturity on the next business day, cash, and non-term deposits that are permissible investments for FCUs, under the Federal Credit Union Act and NCUA’s regulations.
  4. Clean-up Call Provision means a provision where a Fund has the right, but not obligation, to redeem the outstanding balance of the Fund when such outstanding balance is below a predetermined percentage of the original balance of the Fund.
  5. Initial Funding means the date on which a Fund receives the first investment from an investor.
  6. Permissible Consumer Loan means consumer loans1 of federally insured credit unions that FCUs are empowered to grant under the Federal Credit Union Act and the NCUA’s regulations, including, but not limited to, loans without prepayment penalties.2 To be eligible for inclusion in a Fund, a loan must meet this definition at the time the Fund is created. If subsequent to the establishment of a Fund, the NCUA’s regulations or the Federal Credit Union Act are amended, such that a loan included in the established Fund is no longer of the type that FCUs are empowered to grant, such loan shall be grandfathered and may continue to be included as part of the Fund.
  7. Investment Contract means the contract, agreement, or other document that evidences the investment in a Fund and establishes, at a minimum, the rights and responsibilities of the investor and a Fund.
  8. Loan Originator means the entity with which the borrower initially or originally contracts for a loan with. In the case of indirect loans, the loan originator is the entity that makes the final underwriting decision regarding making the loan, provided that the loan is assigned to the entity that made the final underwriting decision very soon after the inception of the obligation to extend credit.

Requirements and Conditions for the Fund(s) Sponsor/Advisor (ALM First)

  1. FCU Investor Restrictions. ALM First may only sell an investment in a Fund(s) to an FCU if the FCU meets the following conditions at the time of purchase:
    1. The FCU is Well Capitalized (as defined under part 702 of the NCUA’s regulations) as of its most recent Call Report;3
    2. The FCU is a Complex Credit Union (as defined under part 702 of the NCUA’s regulations) as of its most recent Call Report;4
    3. The investment would not cause the Investing FCU to exceed, at the time of purchase, an aggregate investment, in all Funds under this pilot program, of 50 percent of the Investing FCU’s net worth as reported on its most recent Call Report; and
    4. The investment would not cause the Investing FCU to exceed, at the time of purchase, an exposure to any discrete Fund of 15 percent of the Investing FCU’s net worth as reported on its most recent Call Report.
  2. Other Requirements. In addition to the foregoing, ALM First must:
    1. Comply with all applicable state and federal laws and regulations related to the Fund(s);
    2. Be a Securities and Exchange Commission (SEC) registered investment advisor;
    3. Have, at the time of the Initial Funding, at least $10 billion in regulatory assets,5 as that term is defined by the SEC, under management as reported on SEC Form ADV; and
    4. Permit the NCUA full access to the premises, books, and records of or related to the Fund(s) for purposes of inspection and review. This would include allowing the NCUA to perform a joint examination with the SEC, if requested by the SEC or the NCUA.

Requirements and Conditions for the Fund(s)

  1. Investments by the Fund(s):
    1. The Fund(s) may only invest in Permissible Consumer Loans and Overnight Investments;
    2. Each discrete Fund must complete its purchase of Permissible Consumer Loans within the following time limits:
      1. Six months from the Fund’s Initial Funding date—this limit applies to the first two discrete Funds.
      2. Three months from the Fund’s Initial Funding date—this limit applies to any Funds established after the first two discrete Funds discussed in the preceding subsection.
    3. The Fund(s) may only purchase Permissible Consumer Loans that are:
      1. Fully amortizing and have stated maturities of 10 years or less;
      2. Have a fixed interest rate less than or equal to the permissible FCU loan interest rate ceiling at the loan origination date, as set by the FCU Act or by the NCUA Board, and for floating or adjustable rate loans the terms of the loan must cap the rate at no greater than the permissible FCU loan interest rate ceiling as set by the FCU Act or by the NCUA Board in effect at the loan origination date.6 If the NCUA Board lowers the permissible FCU loan interest rate ceiling after the Fund is established, any loans held by the Fund that were in compliance with the preceding sentence as of the loan purchase date shall be grandfathered and may continue to be included as part of the Fund.
    4. No party may resell any Permissible Consumer Loan held by a Fund, except if the Fund exercises a Clean-up Call Provision no greater than five percent of the original balance of the Fund.
  2. Due diligence:
    1. The Fund(s) must conduct due diligence on the seller of the loans and other counterparties, including Loan Originator, to the transaction prior to purchase;
    2. The Fund(s) must ensure the loans to be purchased and held by the Fund comply, in all material respects, with applicable laws and regulations, including consumer financial protection laws and regulations; and
    3. The Fund(s) must perform a legal review of agreements or contracts that are needed to ensure that the legal and business interests of the Fund(s) are protected against undue risk.

Required Investment Documents

At a minimum, the Fund(s) or ALM First as the Fund Sponsor must:

  1. Comply with all applicable federal and state securities laws relating to the issuance of a prospectus, offering document, or similar materials.
  2. Before a federally insured credit union invests in a Fund, provide each prospective investing credit union with an offering document(s) that meets all state and federal requirements and, at a minimum, includes the following:
    1. Underwriting characteristics of the loans to be purchased and held by the Fund that are securing the investments being offered by the same (for example, loan characteristics should, at a minimum, include loan types, credit scores, debt-to-income, and loan-to-values, as applicable);
    2. A description of the Fund’s due diligence process and how the underwriting of the loans to be purchased and held by the Fund will be consistent with all applicable laws and regulations, including consumer financial protection laws and regulations;
    3. The following disclaimer, displayed on the cover page in prominent type or in another manner:

      THE NATIONAL CREDIT UNION ADMINISTRATION HAS NOT PASSED UPON THE MERITS OF OR GIVEN ITS ENDORSEMENT OF INVESTMENTS IN ANY FUND OFFERED OR THE TERMS OF THE OFFERING OR PASSED ON THE ACCURACY OR COMPLETENESS OF ANY OFFERING DOCUMENT OR OTHER MATERIALS USED IN CONNECTION WITH THE OFFER, ISSUANCE, AND SALE OF THE INVESTMENT IN A FUND. FURTHER, THE NATIONAL CREDIT UNION ADMINISTRATION HAS NOT PASSED ON THE ADVISABILITY, SAFETY AND SOUNDNESS, OR SUITABILITY OF AN INVESTMENT IN A FUND. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

      ANY FEDERALLY INSURED CREDIT UNION CONSIDERING INVESTING IN A FUND MUST MAKE ITS OWN DETERMINATION ABOUT THE SUITABILITY AND ASSOCIATED RISKS OF ANY SUCH INVESTMENT, INCLUDING BUT NOT LIMITED TO ENSURING IT CONDUCTS AND DOCUMENTS APPROPRIATE PRE-PURCHASE DUE DILIGENCE, CONSULTS WITH LEGAL COUNSEL AS WARRANTED, SATISFIES ANY REQUIREMENTS OF THE INVESTING CREDIT UNION’S INVESTMENT POLICY AND PORTFOLIO MANAGEMENT PROCEDURES, COMPLIES WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR THE INVESTMENT, AND SATISFIES APPLICABLE RECORDS RETENTION REQUIREMENTS. FAILURE TO CONDUCT ADEQUATE PREPURCHASE DUE DILIGENCE MAY SUBJECT AN INVESTING FEDERALLY INSURED CREDIT UNION TO ADMINISTRATIVE ACTIONS AS DETERMINED BY THE NATIONAL CREDIT UNION ADMINISTRATION IN ACCORDANCE WITH ALL APPLICABLE LAWS AND REGULATIONS.
    4. Circumstances and conditions under which the loan servicer can be replaced; and
    5. Management and other fees.
  3. Enter into an Investment Contract, as defined in this document, with each investor in a Fund. Every Investment Contract must, at a minimum:
    1. Comply with all applicable federal and state laws;
    2. Include a requirement that any resales or transfers of a Fund to an Investing FCU must include a covenant that obligates the seller or transferor of the investment to provide the Investing FCU with a copy of these requirements and conditions; and
    3. Include the following disclaimer in prominent type:

      THE NATIONAL CREDIT UNION ADMINISTRATION HAS NOT PASSED UPON THE MERITS OF OR GIVEN ITS ENDORSEMENT OF INVESTMENTS IN ANY FUND OFFERED OR THE TERMS OF THE OFFERING OR PASSED ON THE ACCURACY OR COMPLETENESS OF ANY OFFERING DOCUMENT OR OTHER MATERIALS USED IN CONNECTION WITH THE OFFER, ISSUANCE, AND SALE OF THE INVESTMENT IN A FUND, INCLUDING, BUT NOT LIMITED TO THE TERMS AND CONDITIONS CONTAINED IN THIS DOCUMENT. FURTHER, THE NATIONAL CREDIT UNION ADMINISTRATION HAS NOT PASSED ON THE ADVISABILITY, SAFETY AND SOUNDNESS, OR SUITABILITY OF AN INVESTMENT IN A FUND. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

      ANY FEDERALLY INSURED CREDIT UNION INVESTING IN A FUND MUST MAKE ITS OWN DETERMINATION ABOUT THE SUITABILITY AND ASSOCIATED RISKS OF ANY SUCH INVESTMENT, INCLUDING BUT NOT LIMITED TO ENSURING IT CONDUCTS AND DOCUMENTS APPROPRIATE PREPURCHASE DUE DILIGENCE, CONSULTS WITH LEGAL COUNSEL AS WARRANTED, SATISFIES ANY REQUIREMENTS OF THE INVESTING CREDIT UNION’S INVESTMENT POLICY AND PORTFOLIO MANAGEMENT PROCEDURES, COMPLIES WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR THE INVESTMENT, AND SATISFIES APPLICABLE RECORDS RETENTION REQUIREMENTS. FAILURE TO CONDUCT ADEQUATE PRE-PURCHASE DUE DILIGENCE MAY SUBJECT AN INVESTING FEDERALLY INSURED CREDIT UNION TO ADMINISTRATIVE ACTIONS AS DETERMINED BY THE NATIONAL CREDIT UNION ADMINISTRATION IN ACCORDANCE WITH ALL APPLICABLE LAWS AND REGULATIONS.
  4. Provide each federally insured credit union investing in a Fund or Fund(s) a monthly update for each discrete Fund the federally insured credit union has an investment in, which contains the following information:
    1. A summary of all assets held by the Fund that must include, at a minimum:
      1. Number of loans;
      2. Average coupon;
      3. Weighted average maturity;
      4. Weighted average original credit score;
      5. Delinquency, default, and charge-off information;
      6. Monthly pro-rata principal payments;
      7. The unpaid principal balance of the outstanding loans; and
      8. The weighted average loan-to-value based on original collateral values for collateralized loans.
    2. Additionally, if requested by the investing federally insured credit union, ALM First will provide the same detailed loan-level data (without personally identifiable information);
    3. The outstanding balance and current value of each of the Fund’s holdings;
    4. The aggregate outstanding balance and current value of the federally insured credit union’s investment in each Fund it has an investment in;
    5. A sensitivity analysis for changes in valuation for changes in interest rates under +/- 100, 200, and 300 basis point changes in prevailing rates; and
    6. An internal rate of return at the payoff/maturity of the Fund.

Required Reporting from ALM First

  1. ALM First must provide the NCUA’s Office of Examination and Insurance the following information for each discrete Fund:
    1. Any documentation related to the establishment of that Fund within 30 days of the Initial Funding of a Fund;
    2. A list of federally insured credit union investors in that Fund within 30 days of the Initial Funding of a Fund;
    3. A list of the investing federally insured credit unions and the dollar amount of each Fund investment at the end of each calendar quarter; and
    4. Independent of number 3, a list of sale or purchase transactions of each discrete Fund to or from federally insured credit union investors.

Investment Pilot Program Limits and Termination

  1. The investment pilot program shall have the following limits:
    1. The aggregate number of Investing FCUs participating in this investment pilot program may not exceed 30 in total over the life of this investment pilot program (this limit does not apply to non-FCUs); and
    2. The total amount outstanding in all issuances made by the Funds may never exceed $10 billion, irrespective of the classification of the investors as FCUs or non-FCUs.
  2. Termination. This investment pilot program will automatically terminate in five years from the first issuance by any discrete Fund or seven years from the NCUA Board’s approval of this pilot program, whichever is sooner. ALM First is responsible for providing notice to the NCUA of the date of the first issuance under this pilot program. The NCUA may, at its election, provide written notification to ALM First of the termination of this pilot program. Failure by the NCUA to provide such notice, however, does not extend, delay, or otherwise impact the termination of the pilot program or the rights, responsibilities, and actions described in this section.
    1. Termination of this pilot program prohibits ALM First from making any additional issuances, as described herein, to FCUs.
    2. Upon termination of this pilot program:
      1. FCUs may continue to hold any investments purchased under the pilot program until maturity, unless otherwise directed by the NCUA;
      2. ALM First may continue to take all necessary actions associated with FCUs holding such investments; and
      3. ALM First may continue to make issuances to non-FCUs.
  3. Reservation of Authority. Nothing contained herein shall impair the NCUA’s legal or administrative remedies as set forth in the Federal Credit Union Act. The NCUA Board, or other office of the NCUA with delegated authority, may terminate this pilot program at any time. Failure by any party to abide by the requirements and conditions set forth in this document may result in administrative actions against Investing FCUs, including, but not limited to, divesture of any investments purchased under this pilot program.

Investment Pilot Program Modifications

ALM First may request modifications to the above investment pilot program requirements and conditions. If such modification is requested, ALM First must submit an application in accordance with NCUA regulation § 703.19(c). Applications and requests for modification are subject to approval by the NCUA Board.

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