Risk Retention Rule/QRM

In December 2014, six federal regulators finalized the risk retention rule, as mandated by the Dodd-Frank Act. Compliance with the new rules was required by December 24, 2015 for residential mortgage-backed securities (MBS) and will be required by December 24, 2016 for all other asset-backed securities.

Overview:

  • The Dodd-Frank Act required the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the Department of Housing and Urban Development, the Securities and Exchange Commission, and the Federal Housing Finance Agency (collectively, the Agencies) to develop rules to require issuers of asset-backed securities to retain at least five percent of the credit risk of assets they securitize.
  • For single-family MBS, an exemption from risk retention is provided for "Qualified Residential Mortgages" (QRM), which the Agencies must define using criteria that demonstrate a lower risk of default. Under Dodd-Frank, the QRM exemption may be "no broader than" the QM designation contained in the Act's Ability-to-Repay (ATR) rule.
  • The final risk retention rule aligned QRM with the Consumer Financial Protection Bureau's (CFPB's) Qualified Mortgage (QM) definition under the ATR rule (QRM = QM), and it eliminated onerous requirements in the proposed rules - such as the 20 percent downpayment requirement, the maximum front- and back-end debt-to-income ratios, and the Premium Capture Cash Reserve Account (PCCRA).
  • The final rule also included an improved disclosure requirement and exempted certain assets from risk retention that were not addressed in the ATR/QM rule, representing a substantial improvement over the original proposal.

Impact:

  • Aligning QRM with QM streamlines lender compliance and serves as an important precondition to the restoration of a healthy and liquid private-label MBS market.  
  • Eliminating the PCCRA also ensures that a private securitization market will continue to function. The PCCRA would have eliminated much of the economic incentive to securitize MBS.
  • Additionally, eliminating the downpayment requirement helps to ensure that the private securitization market can provide liquidity and access to credit for low- and moderate-income families and first-time homebuyers.

MBA's Position/Next Steps:

  • MBA supports much of the final risk retention rule, as it reflects many of MBA's advocacy priorities. The rule represents an important step in rebuilding the private-label MBS market. 
  • MBA will continue to monitor the implementation of the new rule and work with the Agencies to address any concerns or obstacles that may arise. 

Get Loud with the Mortgage Action Alliance

MAA is MBA's voluntary, non-partisan and free nationwide grassroots lobbying network of real estate finance industry professionals. Participation is simple and FREE. Learn more.