Fed, Other Agencies Finalize Risk Retention Rule
Six federal agencies have re-issued their proposal for defining "qualified residential mortgages" that avoid risk retention, which is more to the industry's liking than a 2011 plan. But a much tougher alternative is still drawing attention.
WASHINGTON The Federal Reserve Board and Securities and Exchange Commission on Wednesday both signed off on an interagency rule requiring securitizers to hold 5% of the credit risk on loans sold to investors.
The two agencies, which discussed and voted on the rule in separate public meetings, joined four others tasked with implementing the Dodd-Frank Act's skin-in-the-game requirements and defining which loans are exempt from risk retention. The Federal Deposit Insurance Corp. approved the rule in a meeting Tuesday. Also signing off were the Department of Housing and Urban Development, Federal Housing Finance Agency and Office of the Comptroller of the Currency.
The rule lays out how securitizers must hold the risk retention interest, but also defines "qualified residential" mortgages, a new safe category of loans that are excused from the requirement. Following criticism of a 2011 proposal that required a 20% down payment for QRM status, the final rule equates the definition with that of the Consumer Financial Protection Bureau's underwriting standard known as the "Qualified Mortgage", which lacks a down payment requirement.
As a result of the rule, any changes the CFPB makes to QM would translate into parallel changes for QRM. Yet the risk retention rule requires the six agencies to review the QRM definition in four years, and every five years thereafter. Any agency can also request an additional review at any time.
"This requirement will provide the agencies the opportunity to consider changed circumstances, including any changes to the structure and framework of the [Government-Sponsored Enterprises] and these markets and whether additional regulatory changes affecting securitization should be made," SEC Chair Mary Jo White said in remarks at her agency's meeting.
Yet not all regulators considering the rule were on board. While the Fed's board voted unanimously in support of the regulation, two of the five SEC commissioners Daniel Gallagher and Michael Piwowar opposed it.
In his remarks, Gallagher strongly criticized the agencies' ultimate approach to QRM, saying they had "disgracefully abdicated" the job of defining the standard to the CFPB. He favored the stronger QRM definition in the 2011 proposal.
"Of the many dissenting votes I have had to cast over the last three years, this one hurts the most given the dire consequences that I believe will result from today's vote," he said.