The staffs of the Office of the Comptroller of the Currency (OCC), the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the U.S. Securities & Exchange Commission (SEC), the Federal Housing Finance Agency (FHFA), and the U.S. Department of Housing & Urban Development (HUD) have announced that the agencies are considering for approval a notice of proposed rulemaking that addresses section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. All of the agencies participating in this joint rulemaking process are expected to consider the rule and a detailed announcement will be made when this process is complete. If approved, the agencies will publish in the Federal Register a notice of proposed rulemaking for public comment.
Section 941 requires the agencies to prescribe rules to require that a securitizer retain an economic interest in a material portion of the credit risk for any asset that it transfers, sells, or conveys to a third party. The chairperson of the Financial Stability Oversight Council is tasked with coordinating this rulemaking effort.
The proposal includes a section covering ways that the agencies also must implement the statutory exemption from the risk retention requirements for “qualified residential mortgages” (QRMs) with underwriting and product features that historical loan performance data indicate result in a lower risk of default. The proposal mandates that securities backed entirely by QRMs are not subject to any risk retention requirement.
The Dodd-Frank Act states that a bank must keep a minimum of a five percent threshold for risk on mortgage securities. However, Dodd-Frank grants an exception for QRMs while leaving regulators to decide what that meant.
"The rule before the Board today proposes new standards for retention of credit risk to help ensure that securitizers will hold 'skin in the game,' which will align their interests with those of bondholders," said Sheila Bair, chairman of the FDIC. "This will encourage better underwriting by assuring that originators and securitizers can not escape the consequences of their own lending practices."
Click here to read "Risk Retention Proposed Rule: Background and Summary."
