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Six Agencies Approve Final Risk Retention Rule to Relax Lending Guidelines
Oct 23, 2014

Six federal agencies have approved a final rule requiring sponsors of securitization transactions to retain risk in those transactions. The final rule implements the risk retention requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The final rule 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 and Exchange Commission (SEC). As provided under the Dodd-Frank Act, the Secretary of the Treasury, as Chairperson of the Financial Stability Oversight Council, played a coordinating role in the joint agency rulemaking.

“Today's rule is an important step forward in creating an environment where good lenders and good borrowers can work together without reservation," said HUD Secretary Julián Castro. "This cross-agency effort affirms the Administration's commitment to creating needed certainty for lenders to expand access to credit for our nation's underserved borrowers, while ensuring that the past abuses that helped cause the last financial crisis aren’t repeated. We believe that these steps will help create additional opportunity for more Americans to fulfil their dreams of homeownership.”

As required by the Dodd-Frank Act, the final rule defines a "qualified residential mortgage" (QRM) and exempts securitizations of QRMs from the risk retention requirement. The final rule aligns the QRM definition with that of a qualified mortgage as defined by the Consumer Financial Protection Bureau (CFPB). The final rule also requires the agencies to review the definition of QRM no later than four years after the effective date of the rule with respect to the securitization of residential mortgages and every five years thereafter, and allows each agency to request a review of the definition at any time. The final rule also does not require any retention for securitizations of commercial loans, commercial mortgages, or automobile loans if they meet specific standards for high quality underwriting.

“We are pleased with the final risk retention rule as voted on by the FDIC today," said Mortgage Bankers Association (MBA) President & CEO David H. Stevens. "It’s positive for the housing market that the final QRM definition will generally mirror the qualified mortgage rule that lenders are operating under today. Doing such will likely not exacerbate the tight credit environment currently facing many borrowers. We are particularly pleased that regulators abandoned the concept of a restrictive down payment requirement that would have hurt many potential low-to- moderate and first-time homebuyers.  But it is important to realize that this rule will not have a significant impact in making mortgage credit more available, as there remain structural and market barriers that need to be addressed for the private label securities market to fully return."

The final rule largely retains the risk retention framework contained in the proposal issued by the agencies in August 2013 and generally requires sponsors of asset-backed securities (ABS) to retain not less than five percent of the credit risk of the assets collateralizing the ABS issuance. The rule also sets forth prohibitions on transferring or hedging the credit risk that the sponsor is required to retain.

"I support the overall proposal because it is important that other loan categories that will be better served if these risk retention rules are implemented," said FDIC Vice Chairman Thomas M. Hoenig. "Lending, investing and securitizing assets are essential elements of a successful economy. However, for such activities to benefit the greatest part of the economy consistently over time, then they must be tempered with sound underwriting standards that promote sustainable growth over the business cycle."

The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securitizations (RMBS) and two years after publication for all other securitization types.

“The QRM rule is a win-win for consumers, Realtors and the housing finance industry," said National Association of Realtors (NAR) President Steve Brown. "NAR thanks U.S. Sens. Johnny Isakson (R-GA), Kay Hagan (D-NC) and Mary Landrieu (D-LA) for their work to craft an effective QRM rule that supports middle-class families and the housing recovery. We look forward to working with regulators and industry stakeholders on the implementation of the new risk-retention standards.”

Kevin Kelly, chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Wilmington, Del., said, "The new QRM rule will encourage sound lending behaviors that support a housing recovery, attract private capital in the mortgage market, help ease tight credit conditions for borrowers and reduce future defaults without punishing responsible borrowers and lenders."

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