Joint agency rule on risk retention goes to Fed, SEC for final adoption

Rule requires 5% skin in the game, alignment of QM and QRM

The Federal Deposit Insurance Corporation on Tuesday issued the final version of the rule that would require banks to retain at least 5% of the risk on their books when securitizing loans.

Industry watchers and regulators believe that making banks and nonbanks keep skin in the game will make them more careful about lending standards.

The rule contains an exemption for Qualified Mortgages similar to when the rule was proposed in 2013, along with a requirement for a periodic review of the definition and parameters for QM.

“Finalizing this rule represents a major step forward to providing greater certainty to the housing finance market and paves the way for increased participation by the private sector,” Federal Housing Finance Agency Director Melvin Watt said Tuesday morning.

“Aligning the Qualified Residential Mortgage standard with the existing Qualified Mortgage definition also means more clarity for lenders and encourages safe and sound lending to creditworthy borrowers," Watt continued.  

“Lenders have wanted and needed to know what the new rules of the road are and this rule defines them,” he said.

The rule is jointly issued by six regulatory agencies.

“We are largely pleased with the Qualified Residential Mortgage final rule released today, which will help ensure the largest number of creditworthy borrowers are able to access safe, quality loan products at competitive prices,” Frank Keating,  president and CEO of the American Bankers Association.

“By law, the QRM definition cannot cover more loans than the existing Qualified Mortgage rule, but it might have been more restrictive," he said.  

“Gratefully, the QRM definition aligns with QM, an approach ABA has strongly advocated. This will encourage lenders to continue offering carefully underwritten QM loans, and avoid placing further hurdles before qualified borrowers, allowing them to achieve the American dream of homeownership,” Keating said.

He added that the rule, required by Dodd-Frank to ensure that loans sold into the secondary market are properly underwritten, is a goal which the QM rule also helps to ensure. 

“It is appropriate and good policy to align the two,” Keating said.

“CUNA has advocated strongly for the important step of aligning the Qualified Residential Mortgage with the existing Qualified Mortgage definition. Doing so encourages lenders to work with creditworthy borrowers to make home loans that will continue to drive the country and our economy forward,” said Credit Union National Association’s Mary Dunn, SVP & deputy general counsel. “The Federal Housing Finance Agency, the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency finalized the rule this morning. We look forward to the Federal Reserve, Securities and Exchange Commission and Department of Housing and Urban Development continuing to finalize the rule tomorrow.”

The Structured Finance Industry Group likewise offered its take on the rule.

“SFIG thanks the FDIC for finalizing credit risk retention rules, and we look forward to approval by the remainder of the Joint Regulators,” stated Richard Johns, SFIG Executive Director. “SFIG believes that securitization is an essential source of core funding for the real economy and that new rules must be strong enough to achieve their intended actions without undermining the viability of any specific market. If carefully designed, credit risk retention can promote behaviors that increase market stability by incentivizing securitizers to monitor and ensure the quality of assets underlying securitization transactions. If taken too far, however, retention could render large portions of the securitization market uneconomic, leading to the reduction of available credit and/or increases the borrowing costs for households and businesses. SFIG and its membership will review the final rules under these dual lenses.”

The final stage before adoption of the rule, which has been in the works since 2011, will be for it to be approved by the Federal Reserve and the Securities and Exchange Commission on Wednesday.

The practice of banks selling the risk in their loan and mortgage portfolios to investors is considered a major element in the financial crisis and housing crash.

[Update: Added additional comments from CUNA, SFIG at 1:12 p.m. ET]

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