Mortgage credit risk retention rules under review by regulators

Federal banking, housing finance, and securities regulators have begun a review of credit risk retention rules affecting federally insured banks and thrifts that securitize residential mortgage loans. The agencies said they would accept public comments until Feb. 3.

The credit risk retention rules were issued in 2014 to implement Securities Exchange Act requirements added under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Rules were finalized and published by the Office of the Comptroller of the Currency (OCC), Federal Reserve Board, Federal Deposit Insurance Corp. (FDIC), Federal Housing Finance Agency (FHFA), Securities and Exchange Commission (SEC), and Department of Housing and Urban Development (HUD).

This review is expected to cover the definition of qualified residential mortgage (QRM); the community-focused residential mortgage exemption; and the exemption for qualifying three-to-four-unit residential mortgage loans.

The agencies in 2014 said this review would consider, among other things, the results of any future review of, or changes to, the qualified mortgage (QM) definition published by the Consumer Financial Protection Bureau (CFPB).

The CFPB last year issued an advance notice of proposed rulemaking (ANPR) on potential changes to the QM definition in light of the planned expiration of a temporary “GSE patch” that is set to expire Jan. 10, 2021. The ANPR (the comment period expired last September) invited input on whether a measure of a consumer’s finances – such as the 43% debt-to-income (DTI) ratio cap now required for the general QM safe harbor under the bureau’s ability-to-repay mortgage rules – is needed in the factors present to show a lender has exercised a reasonable, good-faith effort to ensure the borrower will be able to repay the loan.

The “GSE patch,” which imposes no DTI cap for loans eligible for purchase or guarantee by government-sponsored enterprises (GSEs) Fannie Mae or Freddie Mac, will likely be allowed to expire, though the bureau said it might provide a brief extension for transition purposes only.

In reviewing their credit risk retention rules, the agencies also plan to look at securitization structures, roles of various transaction parties, investor protection and financial stability implications for the relationship between government-sponsored enterprise (GSE) markets and private label markets, trends in mortgage products, and how the QRM definition is affecting residential mortgage underwriting and securitization of residential mortgage loans under evolving market conditions.

The agencies published their notice of review in the Federal Register Dec. 20.

Credit Risk Retention – Notice of Commencement of Review (F.R. notice)

RR: Comments on ‘qualified mortgage’ definition, without the ‘GSE patch,’ due in mid-September (July 30, 2019)

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