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Regulators to Issue Risk Retention Proposal With Stringent QRM Test

Posted on 3/30/2011

The FDIC Board met yesterday to discuss and vote on a joint notice of proposed rulemaking to implement the Dodd-Frank Act's credit risk-retention requirements.

According to a summary posted on the New York Times and American Banker websites, the proposal would set conservative standards for "qualified residential mortgages," which are exempt from the risk retention requirement. Those standards include a 20-percent down payment requirement, a maximum loan-to-value ratio of 80 percent, specific debt-to-income ratios and no 60-day delinquencies on any debt within the past 24 months.

Certain servicing requirements also would be built into the QRM test, including procedures for loss mitigation actions. The proposal also seeks comment on an alternative approach that would apply less stringent underwriting standards to QRMs but would increase the risk retention requirements for non-QRM mortgages.

The proposal also outlines underwriting standards for other asset classes used in securitizations, including auto loans, commercial loans and commercial real estate loans. Securitizations that meet these standards would be exempt from the rule's overall 5 percent risk-retention requirements.

Under the proposal, the securitization "sponsor" must hold the required risk retention, but a sponsor may allocate a proportional share of the obligation to the originators of the assets under a certain conditions. The proposal also provides several options for the form in which the sponsor may retain risk, including a 5 percent "vertical" slice of the ABS interests, a "horizontal" first-loss position, and a representative sample, among others.

The risk retention requirements would not apply to government-guaranteed securitizations and assets.

All of the other agencies participating in the joint rulemaking process -- namely, the Federal Reserve, Office of the Comptroller of the Currency, Securities and Exchange Commission, Federal Housing Finance Agency, and the Department of Housing and Urban Development -- also plan to individually approve the joint notice this week. Read a summary on American Banker's website. Watch a live webcast of the FDIC meeting.



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