Magazine article Mortgage Banking

MBA Letter to Hill Voices Concerns with 'Risk Retention' Provision in Bill

Magazine article Mortgage Banking

MBA Letter to Hill Voices Concerns with 'Risk Retention' Provision in Bill

Article excerpt

As the House Financial Services Committee considers a bill that would address systemic risk in the financial services industry, the Mortgage Bankers Association sent a letter to key committee members voicing its "very strong" opposition to a provision that would require additional risk retention for residential and commercial mortgage financing and securitization.

The committee began consideration on Nov 5 of a discussion draft of the Financial Stability Improvement Act (FSIA). The bill creates a mechanism for monitoring and reducing threats that systemically risky firms pose to the financial system and establishes a process for winding down large, financially troubled non-bank financial institutions. Among other things, it creates a Financial Services Oversight Council to monitor systemic risks; removes "no place to hide" loopholes in the Gramm-Leach-Bliley Act that prevent Federal Reserve authority over certain companies; subjects firms or activities that pose "significant risks" to the system to increased scrutiny by federal regulators; provides for an orderly wind-down of failing firms and ends "too big to fail," giving the Federal Deposit Insurance Corporation (FDIC) and the Fed new powers.

But the bill also directs federal banking regulators and the Securities and Exchange Commission (SEC) to jointly write rules to require creditors to retain 10 percent or more of the credit risk associated with any loans that are transferred or sold, including for the purpose of securitization. It is aspects of this provision that MBA opposes.

The MBA letter notes that creditors and securitizers of residential loans will already be subject to risk retention under the provisions of H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act, which passed the House earlier this year, and which Committee Chairman Barney Frank (D-Massachusetts) has indicated will be merged with the larger regulatory reform package moving through the House. MBA said that under H.R. 1728, it is not necessary to subject mortgage lenders to additional risk-retention requirements.

"To avoid the prospect of creditors and securitizers being forced to comply with two conflicting provisions, we urge you to revise the FSIA to exclude risk-retention requirements for creditors and securitizers of residential loans, and instead subject them to the provisions of H.R. 1728," MBA said. "Moreover, we believe commercial loans, as business-to-business loans, should be excluded from the bill altogether."

MBA said while it understands the committee's purposes in developing these provisions--to assure that lenders and securitizers have a stake in the successful performance of loans and pools--the FSIA's broad requirement for risk retention for all creditors and securitizers would have particularly dire consequences for the mortgage markets. …

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