SEC, Federal Reserve, HUD Approve Laxer Mortgage-Lending Rule

The U.S. Securities and Exchange Commission, the Department of Housing and Urban Development, the Federal Reserve, the Federal Housing Finance Agency, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have jointly approved a new rule for mortgage-backed securities and collateralized loan obligations. The regulation completes what had been a delayed provision of the 2010 Dodd Frank Act.

The rules are supposed to enhance the quality of loans by providing banks with a financial impetus to make sure the mortgages can be repaid. An earlier version of the proposed rule had obligated banks to retain either 5% of the risks of mortgages sold and packaged to investors or require a 20% borrower down payment.

Regulators, however, were concerned that these stipulations could hurt the housing market and they have since rescinded that 20% down payment requirement. The 5% of the risk on banks’ books when securitizing loans, however, still stands. And banks can get around the 5% risk retention requirement as long as they confirm the borrower’s ability to repay the loan and remain in compliance with other requirements, including debt payments that aren’t above 43% of income.

Private label securities that were put out without federal backing will fall under the jurisdiction of the new rule. Loans that were sold to Freddie Mac (FMCC) and Fannie Mae (FNMA), however, are exempt from the risk-retention requirements.

The regulation will go into effect next fall. It will be evaluated for impact in 2019 and every five years thereafter.

At The SSEK Partners Group, our mortgage-backed securities lawyers represent investors that suffered losses from fraud, negligence, and criminal acts by members of the securities industry. Please contact our securities fraud law firm to request your free case consultation. You may have reason to pursue an MBS fraud claim.

The Final Rule for Risk Retention (PDF)

Regulators Approve New Risk-Retention Rules on CLOs, The Wall Street Journal, October 1, 2014

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Judge Rakoff Approves Citigroup’s $285M Mortgage Securities Fraud Deal with the SEC, Institutional Investor Securities Blog, August 5, 2014