U.S. bank regulators delay risk retention rule

By Dave Clarke

WASHINGTON (Reuters) – U.S. regulators are delaying by about two months the roll-out of a new proposal that would require financial institutions that package loans and sell them as securities to retain some of the risk on their books.

Comments on a proposed rule implementing this provision of the Dodd-Frank financial oversight law were due by June 10. That deadline has been extended to Aug. 1 “to allow interested persons more time to analyze the issues and prepare their comments,” the regulators said in a release Tuesday.

Regulators were being heavily lobbied by banks, housing advocates and members of Congress to delay or scale back the rule because of concerns that a provision in the broader proposal would make it more difficult for Americans to afford a home.

The overall rule, as directed by the Dodd-Frank law, takes aim at widespread criticism that lending standards became too lax in the run up to the 2007-2009 financial crisis because loans were bundled together and sold as securities. Critics argue that the originator of the loan or the firm creating the security had little stake in whether the loan performed because it was being sold to investors.

In response, the law requires the securitizer to hold onto 5 percent of the loans being securitized so they have a stake in the loan’s performance, or “skin in the game.”

Mortgages that meet strict underwriting standards, however, are exempted from this risk retention requirement. These exempted loans are known as Qualified Residential Mortgages, or QRM.

In March, regulators released a proposed rule that would require these exempt home loans to have, among other standards, a 20 percent down payment.

Banks, housing groups and lawmakers from both parties have complained this exemption is too narrow and will make it difficult for qualified borrowers to get a home loan.

“These restrictions unduly narrow the QRM definition and would necessarily increase consumer costs and reduce access to affordable credit,” 39 senators wrote to regulators last month. ”Well underwritten loans, regardless of down payment, were not the cause of the mortgage crisis.”

Top banking regulators have pushed back against this criticism saying the exemption should only impact a small part of the home lending market.

Opponents say their concern is that the exemption, regardless of its intent, will become the benchmark used by lenders when deciding on providing mortgages and will drive up the cost of loans that do not meet the QRM standards.

The agencies involved in drafting the rule are the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development. (Reporting by Dave Clarke, Editing by Neil Stempleman, Dave Zimmerman)