In comments submitted to federal regulators in response to the re-proposed rulemaking on credit risk retention, SIFMA expresses support for many of the changes that have been made to the proposed rules in response to comments received on the original proposals. SIFMA finds that the re-proposal, in many respects, represents a significant improvement over the original proposals in terms of preserving the ability of securitization to support access to mortgage, consumer, and business credit.
“SIFMA supports the implementation of credit risk retention, as it helps to align the economic interests between the parties that securitize assets and investors and, importantly, is a key to reviving the securitization markets,” said Randy Snook, executive vice president, business policies and practices at SIFMA. “The regulators clearly put much thought and effort into the re-proposal of these rules, and we commend them for that. However, we also believe that further refinement of the rules is required to ensure that the final rules meet the goal of aligning interests, while remaining balanced against the costs of implementation, especially in light of the potential to reduce the ability of securitization to fund credit availability.”
Although SIFMA believes that the re-proposed rules should be further revised to address the suggestions in its comment letters, it does appreciate and support many aspects of the re-proposed rules. In particular, SIFMA strongly supports the following features of the re-proposed rules: (1) harmonizing the definition of “qualified residential mortgage” in the re-proposed rules with the definition of “qualified mortgage” from Section 129C of the Truth in Lending Act; (2) removing the premium capture cash reserve account requirement; (3) the ability of sponsors to customize risk retention through any combination of vertical and horizontal interests; (4) differing rules for differing types of asset-backed securities; and (5) setting the maximum required retained risk at five percent (5%).
SIFMA’s comments focus on recommendations that it believes would improve the re-proposed rules, while allowing securitization markets to continue to fund cost-effective credit for individuals and companies, and provide important capital markets investment alternatives for investors. These include general issues on the concept of risk retention as a whole, and also comments specific to residential mortgages and the definition of qualified residential mortgage, commercial mortgage-backed securities and the definition of qualifying commercial real estate loans, collateralized loan obligations and the definition of qualifying commercial loan, asset backed commercial paper conduits, automobile loans and the definition of qualifying automobile loan, credit card receivables and revolving master trusts, equipment loans, federally guaranteed student loans, and cross-border issues. Overall, SIFMA believes that rules which cover such a breadth of asset classes have the potential to have a vast impact on a range of economic drivers, so it is important to get it right and to appropriately address concerns of impacted markets.
SIFMA filed two comment letters on the risk retention standards. One letter presents the views of its member firms that act as securitization sponsors or issuers. This letter was filed jointly with the Financial Services Roundtable, the American Bankers Association, and the ABA Securities Association. The second letter presents the views of investor members of SIFMA’s Asset Management Group. Together, these groups offer a breadth of expert views and a unique perspective covering all facets of the market.
Both letters support the alignment of the definition of a ‘qualified residential mortgage’ with the definition of a ‘qualified mortgage.” SIFMA members agree that the construction of the ‘QM’ standard will significantly improve the quality of mortgage underwriting, through the operation of the rules themselves, and also due to the legal risk faced by originators should they originate loans that do not appropriately consider a borrower’s ability to repay. At the same time, the alignment of ‘QM’ with ‘QRM’ will encourage the revitalization of the private-label residential mortgage-backed securities market by creating a consistent standard for mortgage underwriting and securitization, thereby preserving credit access for home buyers, and protecting and expanding the renewal of the U.S. housing market.
Importantly, the re-proposed rules eliminated the “premium capture” provisions of the original proposal, and replaced them with requirements to calculate risk retention based on fair value. The premium capture requirements would have made securitization uneconomical for many issuers by substantially eliminating the profitability of securitization transactions and along with it, incentives to securitize. Requiring a premium capture cash reserve account as proposed would have undermined efforts to revive the private market for residential and commercial mortgage-backed securities. While SIFMA members generally support the fair value approach, the comment letters do raise important concerns with its application in the re-proposal.
In addition, both letters express concern that the risk retention rules, as re-proposed, do not work for collateralized loan obligations, and risk harming the ability of the CLO market to fund corporate lending. CLOs are fundamentally different from other types of asset-backed securities in that they are not originate-to-distribute transactions, which are the type of transactions Section 941 of Dodd-Frank was intended to regulate. CLOs fund a significant proportion of corporate lending, yet do not present the same risks as other securitizations. Current market practices in the CLO market involve elements of risk retention that should be recognized in any final rules.
The SIFMA comment letters are available at the following links:
SIFMA and Other Associations Submit Comments to Multiple Federal Agencies on Credit Risk Retention
http://www.sifma.org/issues/item.aspx?id=8589945935
SIFMA AMG Submits Comments to Multiple Federal Agencies on Credit Risk Retention
