October 22, 2014
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Yesterday, the Federal Deposit Insurance Corporation (FDIC) approved a final rule requiring asset-backed security issuers to retain part of the risk in any asset they securitize.  The U.S Securities and Exchange Commission (SEC) approved the rule earlier today, while the Federal Reserve is expected to consider it later this afternoon.  HUD, the Federal Housing Finance Agency (FHFA), and the Office of the Comptroller of the Currency (OCC) are expected to follow suit in the coming weeks.
 
The final rule is the result of three-year, multiagency rulemaking process to implement the risk retention requirements of the Dodd-Frank Wall Street Reform Bill.  The agencies released their original proposed rule in March 2014 before releasing a revised proposed rule last August.  
 
Under Dodd-Frank, banks and other security issuers are required to retain at least 5 percent of the risk for mortgages and other loans they bundle into securities.  The purpose of this requirement is to provide banks an incentive to ensure that the loans they bundle are of good quality by mandating that they maintain some of the risk.  Dodd-Frank tasked the above-mentioned agencies with developing the specific risk retention requirements.
 
The rule will take effect a year after it is approved by all six agencies and officially published in the Federal Register.
 
Exemption for HFA Program Loans
The final rule explicitly exempts all loans originated through state HFA programs from the risk retention requirements.  In short, this means that banks and others who sell securities comprised of HFA loans will not be required to maintain any portion of the risk on those loans.
 
NCSHA requested such an explicit exemption in comments submitted last year on the revised proposal, because NCSHA believed that other exemptions in the proposed rule (described below) did not fully ensure that HFA loans would be shielded from the rule’s requirements.  The regulators cite these concerns when explaining their decision to exempt all HFA program loans from the risk retention requirements.  The final rule also credits HFAs’ strong track record of responsible affordable lending and notes that, as public mission-driven entities, HFAs have a strong incentive to adopt and follow prudent underwriting standards.
 
All State and Local Municipal Securities Exempt
 
The final rule exempts all securities backed by municipal bonds, including HFA-issued housing bonds and other assets “issued or guaranteed” by state and local government agencies, from the risk retention requirements.  This broad exemption for municipal bonds was included in the original and revised proposed rule rules.  NCSHA supported this exemption in its official comments on both proposals.
 
As NCSHA pointed out in its comments, while this provision would have exempted the majority of HFA loans from the rule’s requirements, there could still be some instances where HFAs utilize financing executions, such are warehouse lines of funding or securitization trusts, in which the HFA may not technically be considered the securitizing party.  Consequently, some state HFA program loans might not qualify for the exemption, which could make it harder for HFAs to fulfill their affordable homeownership mission.
 
Qualified Residential Mortgages
 
Dodd-Frank also authorizes the agencies to establish several exemptions to the risk retention requirements, including an exemption for mortgage-backed securities (MBS) collateralized by residential mortgages that qualify as “qualified residential mortgages” (QRMs).  The regulators were tasked with determining the standards loans must meet in order to be considered QRMs. 
 
The final rule aligns the definition of “QRM” with that of a “Qualified Mortgage” (QM), as defined in the Consumer Financial Protection Bureau’s (CFPB) final Ability-to-Repay/Qualified Mortgage rule. Essentially, any loan that qualifies as a QM would also qualify as a QRM.  This is largely the same definition of “QRM” that was included in the agencies’ revised proposal released last year.  The agencies redefined the proposed definition of “QRM” last year in response to concerns that the QRM definition in their initial rule was too strict and would increase the cost of credit for low- and middle-income families.  NCSHA shared such concerns in its comments on the original proposal.
 
In its comments, NCSHA commended the regulators for adopting an updated definition of “QRM” that would allow for more flexible underwriting standards.  However, the letter also pointed out that, because CFPB chose to exempt all state HFA program loans from the Ability-to-Repay rule and HFA loans are not considered QMs, an explicit exemption for all state HFA program loans was warranted. 
 
NCSHA commends the federal regulators for recognizing the key role HFAs play as responsible providers of affordable mortgage credit to low- and moderate-income and other underserved borrowers.  Exempting state HFA program loans from the risk retention requirement will help to ensure that HFAs’ can access the liquidity they need to continue fulfilling this important mission.