Six federal agencies have issued a notice revising a proposed rule requiring sponsors of securitization transactions to retain risk in those transactions. The new proposal revises a proposed rule the agencies issued in 2011 to implement the risk retention requirement in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
This proposal is being issued jointly by the Board of Governors of the Federal Reserve System, the U.S. Department of Housing & Urban Development (HUD), the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency (FHFA), the Office of the Comptroller of the Currency (OCC), and the Securities & Exchange Commission (SEC). As provided under the statute, the Secretary of the Treasury, as Chairperson of the Financial Stability Oversight Council, played a coordinating role in the rule-making. The rule would provide asset-backed securities (ABS) sponsors with several options to satisfy the risk retention requirements. The original proposal generally measured compliance with the risk retention requirements based on the par value of securities issued in a securitization transaction and included a so-called premium capture provision. The agencies are now proposing that risk retention generally be based on fair value measurements without a premium capture provision.
As required by the Dodd-Frank Act, the near 500-page proposal would define “qualified residential mortgage” (QRM) and exempt securitizations of QRMs from risk retention. The new proposal would define QRMs to have the same meaning as the term qualified mortgages as defined by the Consumer Financial Protection Bureau (CFPB). The new proposal also requests comment on an alternative definition of QRM that would include certain underwriting standards in addition to the qualified mortgage criteria.
“We are extremely pleased with the proposal that aligns the Qualified Mortgage and Qualified Residential Mortgage definitions for risk retention purposes. The QM standard already clearly stipulates what is considered to be a safe and sound loan. Adding additional layers of regulation would have contracted credit for first time home buyers and borrowers without large down payments, and prevented private capital from entering the market," said David H. Stevens, President and CEO of the Mortgage Bankers Association (MBA). "While we strongly support the core proposal, we remain concerned that the regulators are still considering an alternative option that would add a 30 percent downpayment or equity requirement to the QRM definition. As we detailed in our original comments on the rule, such steep down payment requirements are unnecessary to accomplish the purposes of the QRM standard and would severely impair access to credit for all but the most well-heeled borrowers."
Similar to the original proposal, under the new proposal, securitizations of commercial loans, commercial mortgages, or automobile loans of low credit risk would not be subject to risk retention. Further, the rule would recognize the full guarantee on payments of principal and interest provided by Fannie Mae and Freddie Mac for their residential mortgage-backed securities (MBS) as meeting the risk retention requirements while Fannie Mae and Freddie Mac are in conservatorship or receivership and have capital support from the U.S. government.
“As the independent third party at the real estate closing table, we understand the importance of having access to safe and affordable loans," said Michelle Korsmo, CEO of American Land Title Association (ALTA). "For more than a century, title insurance has provided this backstop, helping ensure residential mortgages are of very high credit quality while reducing risk for all parties involved in real estate transactions."
“Realtors were among the most vocal opponents of the first QRM rule proposed in April 2011 because it would have denied millions of creditworthy Americans access to the lowest cost and safest mortgages," said National Association of Realtors (NAR) President Gary Thomas. "We applaud the regulators for removing the 20 percent downpayment requirement and for adopting reasonable credit and debt-to-income standards."