The agencies responsible for the securitization credit risk retention regulations and qualified residential mortgages ("QRMs") are asking for public input as part of their periodic review of those requirements. Comments on the review are due by February 3, 2020.
Five years ago, in response to the Dodd-Frank Act, an interagency final rule provided that a securitizer of asset-backed securities ("ABS") must retain not less than five percent of the credit risk of the assets collateralizing the securities. Sponsors of securitizations that issue ABS interests must retain either an eligible horizontal residual interest, vertical interest, or a combination of both. The Act and the rule establish several exemptions from that requirement, including for ABS collateralized exclusively by residential mortgages that qualify as "qualified residential mortgages," as defined in the rule.
The Act provides that the definition of QRM can be no broader than the definition of a "qualified mortgage" ("QM"), as that term is defined under the Truth in Lending Act ("TILA") and applicable regulations. QMs are a set of residential mortgage loans deemed to comply with the requirement for creditors to determine a borrower's ability to repay. The Office of the Comptroller of the Currency ("OCC"), Federal Reserve Board, Federal Deposit Insurance Corporation ("FDIC"), Securities and Exchange Commission ("SEC"), Federal Housing Finance Agency ("FHFA"), and Department of Housing and Urban Development ("HUD") decided to define a QRM in full alignment with the definition of a QM. The agencies concluded that alignment was necessary to protect investors, enhance financial stability, preserve access to affordable credit, and facilitate compliance. Their rule also includes an exemption from risk retention for certain types of community-focused residential mortgages that are not eligible for QRM status but that also are exempt from the TILA ability-to-pay rules under the TILA. The credit risk retention requirements became effective for securitization transactions collateralized by residential mortgages in 2015, and for other transactions in 2016.
The agencies of the credit risk retention regulations committed to reviewing those regulations and the definition of QRM periodically, and in coordination with the CFPB's statutorily mandated assessment of QM. The Consumer Financial Protection Bureau ("CFPB") is in the process of an in-depth assessment of its QM Rule, considering whether QM should be redefined and how to address the compliance safe harbor afforded to loans eligible for purchase by Fannie Mae and Freddie Mac (often referred to as the GSE "Patch"), which is set to expire in January 2021. The industry and consumer advocates have had varying suggestions for revising the QM requirements, with some commenters recommending the elimination of an underwriting requirement for QM loans altogether, since the Dodd-Frank Act does not require it (although those commenters would retain an income documentation requirement).
As part of their review of the risk retention/QRM rule, the agencies will consider changes in the mortgage and securitization market conditions and practices (which may include, for example, the structures of securitizations, the relationship between, and roles undertaken by, the various transaction parties, implications for investor protection and financial stability arising from the relationship between GSE and private label markets, and trends in mortgage products in various markets and structures), as well as how the QRM definition affects residential mortgage underwriting and securitization of residential mortgage loans under evolving market conditions. The agencies also will review other regulatory changes affecting securitization, and any changes to the structure and framework of the GSEs and those markets. In addition, the agencies will consider any changes the CFPB makes to the QM definition, which would automatically modify the QRM definition. Specifically, the agencies are requesting public input on: (1) the definition of QRM; (2) the community-focused residential mortgage exemption; and (3) the exemption for qualifying three-to-four unit residential mortgage loans.
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