|March 29, 2011
FDIC Acts on Proposed Risk Retention Rule for Asset-Backed Securities
The Federal Deposit Insurance Corporation’s (“FDIC”) Board of Directors today gave its approval to a proposed rule (“Rule”) regarding implementation of the asset-backed securities (“ABS”) risk retention provisions of Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 941 was drafted with the view that securitizers will act more prudently if they have “skin in the game.” The Rule contains provisions relating to securitization of a wide range of assets, including a general 5% risk retention requirement, that are to be adopted jointly by the FDIC, the Office of the Comptroller of the Currency (“OCC”), the Federal Reserve Board (“FRB”) and the Securities and Exchange Commission (“SEC”).
■ maximum front-end and back-end borrower debt-to-income ratios of 28% and 36%, respectively;
■ a maximum loan-to-value (“LTV”) ratio of 80% (exclusive of mortgage insurance) in the case of a purchase transaction (with a 75% combined LTV for rate and term refinance transactions, reduced to 70% for cash-out refinancings);
■ a 20% down payment requirement in the case of a purchase transaction; and
■ borrower credit history restrictions including the requirement that there be no 60-day delinquencies on any debt obligation within the previous 24 months.
These stringent underwriting standards would create a high bar to qualify for exemption from risk retention requirements as a QRM. The QRM requirements may be further tightened as a result of future action by the Consumer Financial Protection Bureau in defining a “qualified mortgage” (“QM”) under Title XIV of the Act, since the definition of a QRM cannot be any broader than the definition of a QM.
The Rule contains provisions to guard against abuse of the QRM (and other qualifying asset) exemptions, notably the requirement that if any loan is subsequently determined not to have been underwritten in accordance with the standards, the sponsor must repurchase such loan from the asset pool for cash (at an amount equal to the unpaid principal balance plus accrued interest) within 90 days from the date the determination is made that the loan does not satisfy the QRM requirement.
Qualification for the QRM exemption will be conditioned upon meeting certain servicing requirements that are aimed at lowering the risk of default on residential mortgages. The Rule requires that the originator of a QRM incorporate certain servicing policy and procedure requirements in the mortgage transaction documents, such as procedures for actions related to mitigation of loss and default risk and procedures to address subordinate liens on the same property securing other loans held by the same creditor. The Rule does not mandate specific requirements in regard to loss mitigation techniques such as interest rate reductions and principal reductions.
Freddie Mac and Fannie Mae would be treated as satisfying any residential mortgage risk retention requirements as long as they continue their current status operating under FHFA conservatorship and being parties to a Preferred Stock Purchase Agreement with the Department of the Treasury. The impact of this treatment would presumably avoid any imposition of risk retention requirements on lenders who participate in Freddie Mac or Fannie Mae securitizations.
The agencies are seeking comment on the impact that the proposed QRM standards will have on the availability of housing finance. They have also indicated a willingness to consider permitting a less than 5% risk retention requirement for prudently underwritten residential mortgage loans that do not meet QRM requirements.
Zero Percent Risk Retention for Certain Auto Loan, Commercial Loan and Commercial Real Estate Loan ABS
Another significant provision of the Rule would impose a zero percent risk retention requirement on ABS that are exclusively collateralized by auto loans, commercial loans or commercial real estate loans from risk retention requirements if the loans meet the underwriting standards set forth in the Rule. The Rule includes detailed requirements for each of these categories of assets in order to qualify for the zero percent treatment.
Finally, the Rule includes disclosure requirements for each permissible form of risk retention. The disclosure requirements are designed to provide investors with material information concerning the retained interests, such as the amount and form of the interest retained, and the assumptions used in determining the aggregate value of ABS to be issued, which generally affects the amount of risk required to be retained.
The Rule will have a significant impact on how securitizations are conducted in the U.S. and, in turn, on how the underlying asset markets operate. In this regard, the agencies appear to recognize the need to carefully consider the views of the public, including securitization market participants. That point is made clear by the fact that the preamble to the Rule includes a remarkable 174 individual topics for comment. The wide range of interested parties should take advantage of this opportunity.
For More Information
Patrick D. Dolan
+1 212 698 3555
Robert H. Ledig
+1 202 261 3454
Ralph R. Mazzeo
+1 215 994 2417
Thomas P. Vartanian
+1 202 261 3439 firstname.lastname@example.org
Gordon L. Miller
+1 202 261 3467
Laurie J. Nelson
+1 215 994 2495
Kira N. Brereton
+1 212 698 3574
Robert F. Alleman
+1 212 698 3565
© 2011 Dechert LLP. All rights reserved. This publication should not be considered as legal opinions on specific facts or as a substitute for legal counsel. It is provided by Dechert LLP as a general informational service and may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.
|If you are unable to view this e-mail, click here to view it online.|
This e-mail may constitute an advertisement under US and Hong Kong law. If you no longer wish to receive advertising and promotional messages from Dechert LLP or (in Hong Kong) Dechert, please let us know by forwarding this e-mail to email@example.com. We can be reached at the following postal addresses: in the US: 1095 Avenue of the Americas, New York, NY 10036-6797 (+1 212 698 3500); in Hong Kong: 27/F Henley Building, 5 Queen’s Road Central, Hong Kong (+852 3518 4700); and in the UK: 160 Queen Victoria Street, London EC4V 4QQ (+44 20 7184 7000).