Agencies Issue Revised Risk Retention Proposal and QRM Definition
by: Marissa Blundell
On August 28, 2013, the Federal Reserve Board, HUD, the FDIC, the FHFA, the OCC and the SEC (collectively, “the agencies”) revised the jointly proposed risk retention rule originally issued in 2011. The new proposal provides two alternative revised definitions for “qualified residential mortgage” (QRM). Comments regarding this new proposal are due October 30, 2013.
To recap, pursuant to the Dodd Frank Wall Street Reform and Consumer Financial Protection Act (Dodd-Frank) the agencies must issue a risk retention rule requiring securitizers to retain no less than 5% of the credit risk of an asset-backed security (ABS) transferred to a third party. This required “skin in the game” is meant to address the misaligned interests between securitizers and investors, which incentivized “originate-to-distribute” activities blamed in part for the financial crisis. Dodd-Frank also provides an exemption from this risk retention requirement for securities exclusively collateralized by QRMs, as defined by the agencies.
The agencies’ original proposal was released before the Consumer Financial Protection Bureau (CFPB) proposed and finalized the Ability to Repay (ATR) rules, containing the “qualified mortgage” (QM) definition. A QM, if made by a creditor, serves as a safe harbor for compliance with the ATR rule. Dodd-Frank required that the QRM definition be “no broader than” the definition of a QM. The agencies’ original risk retention proposal set forth a QRM standard defined more narrowly than the QM.
In the revised risk retention proposal, the agencies’ include a QRM definition that aligns with the QM definition adopted by the CFPB. In doing so, the agencies have expanded the scope of loans which may qualify as QRMs. In the original proposal, the QRM was defined in part as a closed-end, first-lien, mortgage used to purchase or refinance the borrower’s principal dwelling. The QM definition contains no such lien-position or occupancy requirement. As a result, the QRM definition no longer excludes loans secured by subordinate liens or non-owner occupied dwellings. Additionally, this QRM definition eliminates certain LTV, credit, and appraisal requirements included as part of the earlier proposal.
The agencies also request comment on an alternative QRM definition, which incorporates additional underwriting requirements beyond the QM criteria. This alternative, referred to as the “QM-plus” approach, incorporates the QM criteria and re-introduces the criteria eliminated from the original proposal in the wake of the proposed alignment of the QRM and QM. Therefore, under the “QM-plus” approach, a QRM is defined as a QM that also satisfies four additional criteria: the loan must be secured by the borrower’s principal dwelling; the loan must be a first-lien mortgage; the borrower must meet certain credit history requirements regarding past-due payments and bankruptcy proceedings; and the LTV at closing must not exceed 70%, regardless of whether the transaction involves a purchase or a refinance transaction.
The agencies’ revised proposal also includes additional methods, through which sponsors will be able to satisfy the risk-retention requirements, which were not addressed in this article.
About the Author:
Marissa Aquila Blundell, Esq. is Senior Vice President and General Counsel at Bankers Advisory, Inc. She can be reached at marissa@bankersadvisory.com
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