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OCC BULLETIN 2013-25
Subject: Credit Risk Retention of Securitized Assets
Date: October 18, 2013
To: Chief Executive Officers of All National Banks, Federal Savings Associations, Federal Branches and Agencies, Department and Division Heads, and All Examining Personnel
Description: Notice of Proposed Rulemaking
The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, the Federal Housing Finance Agency, and the U.S. Department of Housing and Urban Development (the agencies) are seeking comment on a notice of proposed rulemaking (NPR) that would implement the credit risk retention requirements of section 15G of the Securities Exchange Act of 1934 (15 USC 78o-11), as added by section 941 of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd–Frank). The proposal would require sponsors of asset-backed securities (ABS) to retain at least 5 percent of the credit risk of the assets underlying the securities and would not permit sponsors to transfer or hedge that credit risk. This proposal replaces an earlier proposal (original proposal) published by the agencies on April 29, 2011 (76 FR 24090).
The risk retention requirements added by section 15G are intended to help address problems in the securitization markets by requiring that securitizers, as a general matter, retain an economic interest in the credit risk of the assets they securitize. Requiring a securitizer to retain an interest in the assets it securitizes provides a strong incentive for the securitizer to monitor and ensure the quality of the assets underlying a securitization transaction. Retaining this interest aligns the securitizer’s economic interest with those of investors in the ABS. The new proposal would provide securitization sponsors with various options for meeting Dodd–Frank’s risk retention requirements.
Section 15G includes a variety of exemptions from these requirements for assets and securitizations that the agencies determine pose low credit risk, including an exemption for ABS that are collateralized exclusively by residential mortgages that meet the standard for QRMs. The agencies propose to define a QRM as any residential mortgage loan that meets the definition of a qualified mortgage (QM), as recently defined by the CFPB pursuant to the creditors’ safe-harbor from “ability-to-repay” liability under the Truth in Lending Act. The agencies believe that aligning the QM and QRM definitions would best minimize the potential indirect costs stemming from the QRM definition with existing regulations and market conditions that might negatively affect the availability of mortgage credit. However, the agencies recognize that aligning the QRM and QM definitions has the potential to intensify bifurcation in the mortgage market between QM and non-QM loans.
The agencies invite comment on an alternative formulation of QRM, called QM-plus, that would incorporate a limited number of additional factors into QRM, such as a borrower credit history standard and a 70 percent LTV cap. Under this approach, significantly fewer mortgages would qualify for QRM-exempt status, but those mortgages would be significantly less likely to default than QMs. The agencies request comment as to whether this alternative approach might increase investor acceptance of residential mortgage-backed securities without intensifying any potential bifurcation of QMs and non-QMs. The agencies also request comment as to whether a “blended pool” approach to the QRM exemption—as the agencies are proposing for certain other asset classes under the new proposal—would mitigate the market segmentation concerns underlying the proposal to align QRM with QM.
The new proposal has a zero percent risk retention requirement for ABSs collateralized exclusively by commercial loans, commercial real estate loans, or automobile loans that meet certain underwriting standards. These underwriting standards are designed to ensure that the loans backing the ABS are of very low credit risk.
Significant Changes From Original Proposal
The agencies have made numerous substantive changes compared with the original proposal. These significant changes include the following:
The NPR was published in the Federal Register on September 20, 2013. Comments on the proposal are due on or before October 30, 2013. Because of its length, the NPR is not attached to this bulletin but can be found at the Related Link listed below.
The NPR describes appropriate methods to submit comments on the proposal to the OCC and other agencies. In addition, the NPR includes contact information for agency staff.
Amy S. Friend
Related Link:Federal Register, “Credit Risk Retention; Proposed Rule”