Lenders, lawmakers battle over risk retention rules
Apr 20, 2011 Brian Bradley
Banking industry representatives are pushing back against proposed risk retention rules that seek to make standards stricter for lending firms. The representatives contend that the rules would constrict credit and make it more difficult for first-time, minority and lower income consumers to access credit, Dow Jones reports. "Implementing this regulation will result in much higher costs for consumers where loans are subject to risk retention requirements, while cutting off access to credit to other consumers," said Henry Cunningham Jr., a representative of the Mortgage Bankers Association, in remarks prepared for testimony before the House Financial Service Committee's subcommittee on capital markets and government-sponsored enterprises. The rules, proposed last month, would probably raise costs for lenders, creating lower borrowing costs for mortgages that fit the definition of a qualified residential mortgage, the news source reports. The proposed regulations are part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and would require lending firms that repackage mortgages or other assets to keep 5 percent of the credit risk on their own balance sheets. Asset-backed securities for commercial loans, commercial mortgages and automobile loans that meet certain underwriting standards would have a zero percent risk-retention requirement. The rule aims to ensure that lenders retain a "meaningful" amount of risk, while avoiding negative effects on the availability and cost of credit for consumers and businesses. One part of the proposal addresses commercial mortgage-backed securities, and would require third parties that specifically negotiate for the interest to retain at least a 5 percent first-loss residual interest, according to a FDIC news release. Sheila Bair, chairman of the Federal Deposit Insurance Corporation, recently stood to defend the 5 percent risk retention rule, Market News International reports. The FDIC expects the general principle to lay the foundation for a "large, deep and liquid securitization market," Bair told an audience at a conference on financial reform, the news source reports. "There's such a tremendous amount of work to do to reform a servicing industry that is clearly broken," she said. "There's not going to be perfection in anything, not going to be a magic bullet" for regulation, Bair said, but borrowers and investors do need better transparency through greater disclosure in the servicing industry. "So I would say 'full speed ahead' (with regulations), and it may not be perfect."