Expanded exemptions from credit risk retention standards proposed
By Ann M. Grochala
More than two years after releasing a proposal to ensure that securitizers retain an economic interest in the credit risk of the assets they securitize, financial regulators recently went back to the drawing board. In late August, regulators released a revised proposed qualified residential mortgage rule, or QRM rule, that requires securitizers that issue securities backed by certain mortgage loans to retain some of the risk of the loans.
The good news for community banks is that the new QRM rule appears to be worth the wait—regulators took a softer touch than they did with the initial rule they proposed in March 2011. More loans would be exempt from the credit risk-retention standards, which will reduce the potential impact of the new rulemaking on the mortgage market.
It’s been a couple years, so let’s back up and start from scratch. The proposed rule would implement the risk-retention standard established by the Dodd-Frank Wall Street Reform Act, which requires securitizers to retain at least 5 percent of any loan securitized, unless it is determined to be a “qualified” loan. While this would apply to any asset-backed securitization, most important for community banks are those consisting of residential mortgages.
The question over which residential mortgages would be deemed QRMs, and receive the exemption has been the chief concern of many in the financial-services and housing industries. If standards were too strict, many traditional mortgage providers would be forced out of the housing market, restricting residential mortgage credit.
For its part, ICBA urged regulators to scuttle the proposal and take a do-over. In an August 2011 comment letter, ICBA called on the agencies to broaden the definition of which loans qualify for an exemption from the risk-retention rules. Too narrow a definition of these “qualified residential mortgages” (QRMs) would make it nearly impossible for many lower-income and first-time homebuyers to obtain affordable mortgages. ICBA also wrote that the agencies should not include a specific down-payment requirement in any final rule, and it urged regulators to ensure that the QRM definition is consistent with other relevant regulations In particular the qualified mortgage (QM) definition.
While not exactly fine wine, the updated “skin in the game” proposal has become more potable for community banks as it has matured. The new proposed rule broadens the QRM definition by including QM loans, as recently defined under the Consumer Financial Protection Bureau’s ability-to-repay rules.
Loans backed by Fannie Mae and Freddie Mac while those housing finance enterprises are under government conservatorship would also be included in the QRM standard—which incorporates the vast majority of residential mortgages originated and sold by community banks. Further, as requested by ICBA, regulators removed a provision that would have required securitizers to retain a stake in mortgages with down payments of less than 20 percent.
The new proposal also requests comment on an alternative definition of QRM that would include certain underwriting standards in addition to the QM criteria, including a 70 percent loan-to-value requirement.
More to come
It’s too soon for a victory lap, but regulators have taken positive steps with their updated QRM proposal. ICBA continues to review the proposed rule and will file comments by the deadline at the end of the month—which will be here in no time.