Three agencies approve final risk retention rule

by Rachel.Norvell21 Oct 2014
The U.S. Federal Deposit Insurance Corp. (FDIC), Office of the Comptroller of the Currency and Federal Housing Finance Agency have approved a final rule today that requires banks to retain at least 5% of the risk on their books when they bundle loans, securitize them and sell them to investors.

The rule aims to prevent a repeat of the housing crisis when defective loans were being bundled into securities and sold to investors unaware of the risks. The FDIC is expected to adopt it later today.
“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 this morning.

The final rule includes an exemption for Qualified Mortgages (QM) similar to when the rule was proposed last year. It does not require steep down payment standards that were a part the initial draft and would have required borrowers to put up as much as 20% of the price of their home to qualify.

Frank Keating, president and CEO of American Bankers Association, said the final rule will “encourage lenders to continue offering carefully underwritten QM loans  and avoid placing further hurdles before qualified borrowers."

Ultimately, the final rule was drafted closely to the related Consumer Financial Protection Bureau’s QM regulations enacted in January to ensure borrowers have the ability repay their home loans.
The agencies are three of six regulators required to adopt the so-called "risk retention" rule, which is mandated by the 2010 Dodd-Frank Wall Street reform law. At least two of the other agencies, the Federal Reserve and the Securities and Exchange Commission, are expected to formally adopt the rule on Wednesday.

Dodd-Frank, passed in 2010, has been unpopular in the mortgage industry, as it has brought about regulations many say are overly burdensome – including the “ability to repay” rule and various fee caps. Industry leaders say many of the new regulations place undue burden on originators and put mortgages out of reach for prospective borrowers who would have qualified under the old rules.

After pushback from housing and real estate groups, the regulators backed down and issued a new proposal last year. That approach included a broad exemption for issuers of mortgage-backed securities from having to retain a portion of the credit risk on their books.

Click here to find out more about the rule.  
 

COMMENTS

  • by MIke | 10/21/2014 12:20:22 PM

    How are small lenders going to comply with the 5% retention withour raising the rates to pay for it???? Big lenders too will raise the rates to pay for it...Am I wrong here??

  • by Cheryl M | 10/21/2014 12:38:51 PM

    I do not believe this rule applies to government mortgages. However, with that said forget about the "Big lenders or the small ones" this rule applies and helps only those who have big bucks and are mainly in the white male arena. So ask yourself "what about the rest of us...?" ...those American that aren't rich, white dudes. Dodd Frank forgot about everyone else when this rule was written. Go figure. The other problem is those at places like the FDIC don't realize they are actually now contributing to the next financial crisis. Isn't that what they're trying to avoid in the first place (AGAIN)? Squeezing out the little guy isn't going to help their cause; but putting us right back into that "financial crisis."

  • by Rachel Norvell | 10/21/2014 12:43:49 PM

    Cheryl and Mike,
    Interesting takes. Would love to talk to you about this in more detail. If you have a chance, please email me at Rachel.norvell(at)keymedia.com

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