Alert September 03, 2013

Federal Regulators Issue Proposal to Revise Qualified Residential Mortgage Rule

Collectively, the FDIC, the OCC, FRB, SEC, FHFA, and HUD issued a second proposal Notice of Proposed Rulemaking to implement the risk retention requirements of the Dodd-Frank Act.  Section 941 of the Dodd-Frank Act amended the Securities Exchange Act of 1934 by adding a new section. This new section requires federal agencies to issue rules that would generally require that a securitizer of asset-backed securities retain an economic interest in not less than 5% of the credit risk of the assets collateralizing such ABS—risk retention requirement. In April 2011, the agencies issued a Notice of Proposed Rulemaking, but in response to numerous comments received, the agencies collectively developed the revised proposal, which includes significant modifications, including modifying the risk retention options, prohibition on selling and hedging, and the exemptions for qualified residential mortgages.

The revised proposal includes various exemptions from the risk retention requirement. Most notably, a sponsor is exempt from the risk retention requirements if, among other conditions, all of the assets that collateralize the asset-backed securities are qualified residential mortgages. In response to the negative comments on the original proposal’s QRM definition, the revised proposal abandons that definition and instead defines “QRM” to equate to the definition of  “qualified mortgage” in TILA and Regulation Z issued by the CFPB in January 2013 (see January 10, 2013 Alert). The agencies chose to define “QRM” as a “qualified mortgage” after considering an alternative approach referred to in the release accompanying the proposed rule as “QM-plus.” As described in the release, the QM-plus approach begins by defining “QRM” based on the same factors adopted by the CFPB in the “qualified mortgage” definition, but also adds four additional factors. More specifically, classification as a QRM would only be available if, in addition to satisfying the factors identified by the CFPB: 

  • the loan secures a 1-4 family real property that constitutes the principal dwelling of the borrower;
  • the loan must be a first-lien mortgage. Of note, junior liens are permitted for QRMs used for refinancing purposes, but must be included in the loan-to-value calculations described below;
  • the originator must determine that the borrower meets certain credit history criteria, including not currently being 30 or more days past due on any debt obligation and not having been a debtor in a bankruptcy proceeding within the preceding 36 months; and
  • the loan-to-value ratio at closing must not exceed 70%.

Comments on the revised proposal are due October 30, 2013.