Banking, Housing Regulators Release Revised Credit Risk Retention/QRM Rule

Dodd-Frank Qualified Residential Mortgage

On August 28, the FDIC, OCC, Federal Reserve Board, FHFA, SEC, and HUD released a revised rule to implement the credit risk retention requirements of the Dodd-Frank Act, including provisions defining “qualified residential mortgages” (QRMs). A memorandum prepared by FDIC staff in connection with the re-proposal highlights certain substantial changes from the rule as originally proposed, including, among others: (i) generally defining a QRM as a mortgage meeting the requirements for a “qualified mortgage” as defined by the CFPB; (ii) calculating the 5% risk retention requirement for non-QRM mortgages and other non-exempt assets based on fair value (rather than par value) of the securitization transaction; (iii) eliminating the premium capture cash reserve account requirements; (iv) permitting the sale and hedging of required risk retention after specified time periods; (v) permitting a sponsor to hold any combination of vertical and horizontal first-loss interests that together represent 5% of the fair value of a securitization; (vi) providing that commercial, commercial real estate and automobile loans satisfying underwriting requirements for exemption from risk retention could be blended in asset pools with non-qualifying loans of the same asset class and remain eligible for reduced risk retention; and (vii) adding a new risk retention option for open market collateralized loan obligations (CLOs), available if the lead arrangers of the loans purchased by the CLO retain the required risk. The agencies also seek comment on an alternative QRM definition called QM-plus, which would encapsulate the core QM requirements but add additional conditions, including a 70% cap on LTV at closing, certain evaluation criteria with respect to credit history, and other product limitations. Comments on the re-proposed rule are due by October 30, 2013.