SEC, FRB and HUD Join OCC, FDIC and FHFA in Adopting Credit Risk Retention Rules
Commentary by Steven Lofchie
The SEC, the Board of Governors of the Federal Reserve System ("FRB") and the Department of Housing and Urban Development ("HUD") voted to adopt the final Credit Risk Retention Rule.
The rule was adopted on October 21, 2014 by the Federal Deposit Insurance Corporation ("FDIC"), the Office of the Comptroller of the Currency ("OCC") and the Federal Housing Finance Agency ("FHFA"), and implements Section 941 of the Dodd-Frank Act, which requires the securitizers of asset-backed securities to retain "not less than five percent" of the credit risk of assets collateralizing the securitization. Additionally, Section 941 exempts qualified residential mortgages ("QRMs") from risk retention and aligns the definition of "QRM" with the Consumer Financial Protection Bureau's definition of "qualified mortgage."
Regulators who voiced their support include SEC Chair White, FRB Chair Yellen, and SEC Commissioners Stein and Aguilar, with Commissioner Stein stating that the rule "attempts to realign the incentives of securitization market participants back toward quality, back into alignment with investors."
House Financial Services Committee Chair Hensarling, and SEC Commissioners Gallagher and Piwowar issued dissenting statements concerning the Rule's adoption. According to Commissioner Gallagher, the rulemaking "takes the untenable housing policy that injected irrational exuberance into mortgage lending and, as a result, caused a catastrophic financial crisis and chisels that failed policy into the stone tablets of the Code of Federal Regulations." Commissioner Piwowar stated that, while the adopting release includes a section discussing SEC economists' considerations, economic analysis from the other rulemaking agencies is "glaringly absent." He also stated that he is broadly concerned about the "continued dominant role" in housing finance played by Freddie Mac and Fannie Mae.
See: Final Rule Release; SEC Press Release; FRB Press Release; OCC Press Release; FDIC Press Release. See also: SEC Chair White's Opening Statement; FRB Chair Yellen's Opening Statement; SEC Commissioner Gallagher's Statement of Dissent; SEC Commissioner Piwowar's Statement of Dissent; SEC Commissioner Stein's Statement of Support; SEC Commissioner Aguilar's Statement of Support; House Financial Services Committee Chair Hensarling's Statement of Dissent; FHFA Director Watt's Statement of Support. Related news: FDIC and OCC Approve Final Credit Risk Retention Rule (October 21, 2014).
Commentary
When regulators adopt a major set of new rules (as when businesses launch a major new activity), they must do so on the basis that the rules will have some positive, predictable benefit that can be observed reasonably. Picking up on Commissioner Piwowar's comment about the lack of economic analysis, what effect will the new rules have on the mortgage markets or the financial markets generally? Does the rule make it harder or easier to get a mortgage? How does the rule affect the willingness of banks to extend mortgage credit? How will the rule alter the balance of assets held by banks? In the absence of any economic analysis and projection, there is no standard against which to judge the new rules.