The FDIC and Federal Reserve have approved a proposed rule to implement Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which requires that a securitizer retain an economic interest in a material portion of the credit risk for any asset that it transfers, sells, or conveys to a third party. The OCC announced on March 28 that it is in the process of considering the same proposed rule along with the Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development. Section 941 generally requires a securitizer of asset-backed securities to retain not less than 5% of the credit risk of the assets collateralizing the asset-backed securities, and requires the agencies to issue joint rules implementing the credit risk retention requirement. The term “securitizer” includes both an issuer of an asset-backed security or a person who organizes and initiates an asset-backed securities transaction by selling or transferring assets, either directly or indirectly, to the issuer (i.e., the sponsor of a securitization transaction). Section 941 also includes certain exemptions from the credit risk retention requirement, including an exemption for asset-backed securities that are collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages” (QRMs) as defined by the agencies in the joint rule. Although the risk retention requirements do not apply to the originator of a residential mortgage loan which is not a securitizer, secondary market investors may require originators, including banks, to structure residential mortgage loans as QRMs so the investors can securitize the loans under the exemption from the risk retention requirements. Comments on the FDIC’s proposed rule are due by June 10, 2011.
Notes: The proposed QRM definition sets qualification standards that require documentation of income, information about past borrower performance, a debt-to-income ratio for monthly housing expenses and total debt obligations, elimination of payment shock features, a maximum loan-to-value ratio depending on the type of loan, a minimum down payment and other underwriting standards. For example, the proposed QRM standard requires a maximum loan-to-value (LTV) ratio of 80% in the case of a purchase transaction (with a lesser combined LTV permitted for refinance transactions) and a 20% down payment requirement in the case of a purchase transaction. Total points and fees payable by the borrower in connection with a mortgage transaction may not exceed 3% of the total loan amount to satisfy QRM criteria under the proposal. The proposed QRM standard also requires that the ratio of the borrower’s monthly housing debt to monthly gross income not exceed 28% and the ratio of the borrower’s total monthly debt to monthly gross income not exceed 36% within 60 days prior to the closing of the mortgage transaction. FDIC Chairman Sheila Bair pointed out in a statement on the proposed rule that “the QRM requirements will not define the entire mortgage market, but only that segment that is exempt from risk retention.” However, the FDIC is requesting comments on what impact, if any, the proposed QRM standards might have on pricing, terms, and availability of non-QRM residential mortgages, including availability to low- and moderate-income borrowers.