WASHINGTON (7/20/11)—The Credit Union National Association (CUNA) is seeking comment on a proposed credit-risk retention rule that would require securitizers to retain an economic interest in the credit risk of assets they securitize. The proposal was issued jointly by the U.S. Treasury Department, Federal Reserve Board, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Securities and Exchange Commission, and the U.S. Department of Housing and Urban Development as required under the Dodd-Frank Wall Street Reform Act. Congress intended that the agencies implement rules requiring credit securitizers to maintain “skin in the game” by retaining not less than a 5% economic interest in any asset, such as mortgage loans, other loans or leases, that the securitizer transfers, sells or conveys to a third party to securitize into an asset-backed security (ABS). Originators--including credit unions and credit union service organizations--generally would be exempt from the requirements if they contribute less than 20% of the loans or other collateral to the ABS pool. However, if any originator contributes 20% or more of the collateral, the proposed rules permit the securitizer to allocate a portion of its risk retention requirement to the originator in the same percentage amount as its contribution to the asset pool. Furthermore, the originator would have to hold its allocated share of the risk retention in the same manner as would have been required of the securitizer and subject to the same restrictions on transferring, hedging, and financing the retained interest. There are two major exemptions to this requirements: securities backed by assets consisting entirely of qualified residential mortgages (QRMs); and, securities backed by certain commercial mortgages, commercial loans, and automobile loans meeting specific underwriting standards. For credit unions, the most problematic aspect of this proposal is the QRM definition, although the agencies continue to seek comments on this and other aspects of the proposed rules. The proposed rule would define a QRM as follows:
* A QRM must be secured by a first lien on a one-to-four family property to be purchased or refinanced, and have a maturity date of not more than thirty years. At least one unit must be the principal dwelling of a borrower; * A QRM must meet the following stringent underwriting standards: * The borrower cannot currently be 30 days past due on any debt obligation, and cannot have been 60 or more days past due on any debt obligation in the preceding 24 months; * The borrower must not, within the preceding 36 months, have been a debtor in a bankruptcy proceeding, had property repossessed or foreclosed upon, engaged in a short sale or deed-in-lieu of foreclosure, or have been subject to Federal or State judgment for collection of any unpaid debt; * The borrower must provide a 20% down payment in the case of a purchase transaction, and private mortgage insurance cannot be used to support the down payment; *The mortgage must have maximum front-end and back-end debt-to-income ratios of 28% and 36%, respectively; * The mortgage must have a maximum loan-to-value ratio of 80 percent in the case of a purchase transaction, 75% on a refinance transaction, and 70% on cash-out refinance loans; * The total points and fees paid by the borrower in connection with the mortgage cannot exceed three percent of the total loan amount; and * A QRM mortgage cannot have payment terms that allow for interest-only payments or negative amortization, nor can the QRM mortgage permit a balloon payment.
CUNA is seeking credit union comment on the QRM definition and other aspects of the credit-risk retention proposal by July 26. The agency comment deadline is Aug. 1--extended from the original due date of June 20. CUNA has been working as part of the Coalition for Sensible Housing to oppose the proposed QRM standard. The coalition has issued a white paper, released on June 22, warning that the proposed definition threatens to harm credit-worthy borrowers and frustrate a recovery of the nation’s housing market. CUNA has also argued that the proposal goes beyond what Dodd-Frank intended, and would also have a negative impact on credit unions. CUNA Deputy General Counsel Mary Dunn, earlier this week, participated in a CUNA Mutual Group webinar to outline issues that most affect credit unions. An archived version of the webinar is expected to be available later this week. Use the resource links below to access the CUNA Comment Call and the coalition white paper.