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March 30, 2011 – A credit-risk retention proposal that doesn't apply directly to credit unions but which is expected to affect market standards for residential mortgage and other consumer lending was released Tuesday for a 60-day public comment period.

The proposed rule, issued jointly by the FDIC and Federal Reserve Board, would implement provisions of the Dodd-Frank Act. It would require issuers of securitized loans to retain at least a 5 percent interest in the risk of loss but provides exemptions based on the underlying assets and underwriting standards.

Carrie Hunt, NAFCU's general counsel and vice president of regulatory affairs, said NCUA is not a party to this proposed rule. "NAFCU is still concerned about potential market implications for credit unions and is looking closely at this rule," she said.

Under the rule, asset-based securities collateralized solely by "qualified residential mortgages" would have a full exemption from the risk-retention requirement. The proposal also sets risk-retention requirements of less than 5 percent for ABS issuances collateralized by residential mortgages, commercial mortgages, commercial real estate loans, or automobile loans where underwriting standards are set by the FDIC, the Fed and the Office of the Comptroller of the Currency.

A residential mortgage loan would be defined as a QRM where underwriting addresses ability to repay, based on:

• documented income;
• prudent ratios of housing and all installment payments;
• amortized payments incorporating taxes, insurance and any homeowner dues;
• payment performance history;
• an 80 percent loan-to-value requirement for purchase transactions; and
• stable mortgage terms that do not provide for substantial payment shock.

Comments are sought on whether the use of private mortgage insurance should be incorporated; FDIC said available data did not support using this as a tool affecting default risk.

The QRM requirements also address loan servicing, including the existence of financial incentives for servicers to consider options other than foreclosure if they would maximize value to investors. These requirements also would prohibit considering the interests of any particular tranche of investors, require disclosure to investors of first- and second-lien holders and up-front, and disclosure of how second liens would be handled if the first liens must be restructured.

The proposal will be published in the Federal Register.