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CUNA concerned about risk-retention rule impact
WASHINGTON (3/31/11)--Federal financial agencies this week are considering rules that would require a loan securitizer--but not most loan originators--to retain an economic interest in a material portion of the credit risk for any asset that it transfers, sells, or conveys to a third party. Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair has said that requiring issuers of securitized loans--such as Wall Street banks and other entities that issue asset-backed securities--to retain a 5% interest in the risk of loss “will encourage better underwriting by assuring that originators and securitizers cannot escape the consequences of their own lending practices.” Credit Union National Association (CUNA) Deputy General Counsel Mary Dunn said that CUNA has raised concerns about the potential impact of the 5% risk requirement on the credit union mortgage market even though the proposal would generally exempt originators from these requirements. So far, the credit risk retention proposal has been jointly released by the FDIC and the Securities and Exchange Commission, with other relevant agencies expected to approve it in the near future. Those agencies are the Office of the Comptroller of the Currency, the Federal Reserve, the FDIC, the SEC, the Department of Housing and Urban Development, and the Federal Housing Finance Agency (FHFA). Dunn said that the regulatory proposal aims to address abuses in the mortgage lending market that contributed to the financial crisis. “Credit unions did not participate in those abusive practices, but CUNA is concerned that credit union mortgage lending will be impacted by these rules and standards that develop in the marketplace,” Dunn added. Loan originators would generally be exempt from the credit risk retention requirements as long as they contribute less than 20% of the loans or other collateral to a given pool of asset-backed securities. This threshold will likely mean that credit unions would be exempt from the proposed rule unless the credit union contributes a high percentage of loans or other assets backing a particular asset-backed security issuance. If the originator’s loans make up 20% or more of a pool of asset-backed securities, the originator would then be required to take on a portion of the loan securitizer’s risk retention requirement in the same percentage amount as its contributions to the asset pool. Qualified residential mortgages and U.S. government guaranteed mortgages such as FHFA and Veterans Administration mortgages would be exempt from all risk-retention requirements under the proposal. Government-sponsored entities Fannie Mae and Freddie Mac would also be exempt from the securitzer risk-retention requirements for as long as they are held under government conservatorship. CUNA’s Examination and Supervision Subcommittee and its Lending Council will soon review the complex risk proposal. Once concerns are identified, CUNA will comment to all federal agencies involved in the rulemaking, Dunn said.

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