Federal Agencies Propose Credit Risk Retention Requirements

Article excerpt

IREM submitted a letter to six federal agencies (Securities and Exchange Commission, Office of Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation, Federal Housing Finance Agency and Department of Housing and Urban Development) commenting on a proposed rule on credit risk retention. Agencies proposing the rule are tasked with implementing sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act. (1)

The proposed credit risk retention rules would apply to all forms of assets that can be securities, including commercial real estate (CRE) and commercial loans. The proposal suggests a five percent risk retention requirement, unless asset-backed securities (ABS) backed exclusively by loans meet specific standards to quality for the proposed zero percent rate.

The proposed rule defines CRE loans as those secured by five or more residential units or by non-farm, non-residential real property, with the primary source of repayment to be derived from rental income or from the proceeds of the sale, refinancing or permanent financing of the property. Land development and construction loans, loans on raw or unimproved land, loans to real estate investments trusts (REITs) and unsecured loans are excluded.

According to the proposed rule, a qualifying commercial real estate (QCRE) loan must meet five requirements for assurance of repayment, property value and risk management, in order to be exempt from the risk-retention requirements.

Ability to Repay--the originator must conduct an analysis of the borrower's ability to repay all outstanding debt by looking back two years at the borrower's credit history.

Loan Terms--Debt service coverage (DSC) of at least 1. …