On March 28, 2011 the OCC, FRB, FDIC, SEC, Federal Housing Finance Agency and Department of Housing and Urban Development (the “Agencies”) announced that they would be considering approval of a notice of proposed rulemaking (“NPR”) addressing the credit risk retention provisions of Section 941 of the Dodd-Frank Act. Since the announcement, both the FRB and FDIC have approved the issuance of the NPR and requested comments on the proposal.
The NPR generally requires sponsors of asset-backed securities (“ABS”) to retain at least 5% of the credit risk of the assets underlying the securities. However, as required by the Dodd-Frank Act, the NPR includes a number of exemptions for these requirements, including an exemption for U.S. government-guaranteed ABS and for mortgage-backed securities that are collateralized exclusively by “qualified residential mortgages” (“QRMs”). The NPR narrowly defines QRMs, incorporating high standards regarding documentation of income, past borrower performance, a low debt-to-income ratio for monthly housing expenses and total debt obligations, elimination of payment shock features, a maximum loan-to-value or LTV ratio, a minimum down payment, and other quality underwriting standards. Also included in the QRM standards are certain loan servicing requirements.
The NPR would also allow Fannie Mae and Freddie Mac to satisfy their risk retention requirements as sponsors of mortgage-backed securities through their 100% guarantees of principal and interest for as long as they are in conservatorship or receivership with capital support from the U.S. government.
A more detailed summary of the NPR will be published soon in a future edition of the Alert.