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Industry Wants Risk Retention Exemption in Dodd Bill

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Senator Christopher Dodd (D-CT), chairman of the Senate Banking Committee, unveiled details of a new bill to Congress yesterday that aims to overhaul the financial regulatory system and establish the Consumer Financial Protection Agency (CFPA). Under the Restoring American Financial Stability Act of 2010, financial firms would be required to hold a portion of the credit risk inherent in certain loan products on their books. This "risk retention" is designed to make banks hold an interest in the financial products they create. The language is already earning the criticism of industry professionals that say risk retention could make origination and securitization prohibitively expensive. "While we understand concerns about risk retention, we strongly believe Senator Dodd’s legislation’s 5% retention proposal will severely limit the amount of future securitization, thus making it harder and more expensive for ordinary Americans to get badly needed credit for new cars, homes or businesses," said acting executive director of the American Securitization Forum (ASF) Tom Deutsch. The Community Mortgage Banking Project (CMBP), the public policy organization representing independent mortgage bankers, said the bill needs a clear risk retention exemption for well underwritten, lower-risk traditional loans. "Without outlining an exemption for lower-risk loans, the bill provides no clarity or certainty to the fragile securitization markets, which will keep private capital parked on the sidelines and impair the availability of loans for creditworthy borrowers,” said CMBP managing director Glen Corso. Mortgage Bankers Association (MBA) chairman Robert Story Jr. suggested that qualified residential loans with certain characteristics -- like a 30-year fixed rate, full documentation and a sufficient downpayment -- should be exempt from the risk retention requirement. “Further, it should be pointed out that residential mortgage originators, when they sell a loan into the secondary market, retain legal representations and warranties that require them to buy the loan back from the investor where there is proof that the loan was not properly underwritten," Story said in a press statement. "Requiring originators – especially small, locally-based lenders – to retain a certain percentage of the loan on their books threatens the very business model that offers consumers choice and competition, and thus more affordable loans." Critics claim the proposed legislation will make business more expensive in other aspects aside from risk retention. Dodd's bill would make the Federal Reserve responsible for systemically vital non-banks and control banks with more than $50bn in assets under the new bill. Dodd told PBS Newshour this works out to around 60-90 financial institutions in the country. Under Dodd's proposed legislation, the Fed will also play a role in housing the CFPA, which will form rules and regulations to ensure that consumers understand certain financial products – such as complex mortgages – before making any commitments. The CFPA will also aim to enforce fair lending practices. A level of misinformation already surrounds the bill's establishment of the CFPA. Dodd, speaking to PBS Newshour, urged a critic of the Fed's control of the CFPA to "read the bill." The independent CFPA would be housed at the Federal Reserve, according to Dodd. The president would appoint the head of the CFPA, who would then be confirmed by the US Senate. The agency would have an independent source of funding, an independent rule-making authority, and the authority to conduct examinations in an effort to enforce those regulations, according to Dodd. "The Federal Reserve has no authority over this," he said. "The provisions of the bill couldn't be clearer on the subject matter. So, those who are arguing that, somehow, it's under the thumb of the Federal Reserve just haven't read the proposed legislation." He did say the CFPA would be funded out of Federal reserves under the proposed legislation, but added that the Fed has no control of those funds. Write to Diana Golobay.

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