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House Hearing Addresses Risk Retention Proposal

April 21, 2011

The House Committee on Financial Services, Subcommittee on Capital Markets and Government-Sponsored Enterprises held a hearing April 14 titled, “Understanding the Implications and Consequences of the Proposed Rule on Risk Retention.”

The hearing focused on the proposed rulemaking announced by various agencies, including the Board of Governors of the Federal Reserve System (Fed), the Office of the Comptroller of the Currency (OOC), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), the Federal Housing Finance Agency (FHFA) and the Department of Housing and Urban Development (HUD). This proposed rulemaking addresses Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which requires that a securitizer retain an economic interest in a material portion of the credit risk for any asset that it transfers, sells or conveys to a third party.

The hearing consisted of two panels. During the first panel, agency representatives talked about how the rule would align the incentives of investors and securitizers while lowering costs to borrowers. The agency representatives also answered questions regarding the definition and specific underwriting standards for qualified residential mortgages (QRMs), which would be exempt from risk retention requirements. The second panel consisted of private sector and community representatives, who focused on the potential negative effects of the proposed rule on the housing finance industry, lower income families and minorities. Additionally, the second panel talked about the various shortcomings of the proposed rule, including the exclusion of private mortgage insurance and various asset classes from the QRM exemption.

Throughout the hearing, Republicans expressed their concerns regarding two main aspects of the proposed rulemaking: the inclusion of servicing standards and the exemption from risk retention requirements for government-sponsored enterprises (GSEs). Separately, Democrats worried that the 20 percent down payment requirement included in the proposed rulemaking would negatively impact overall access to affordable housing. Of note, FHA Acting Commissioner Bob Ryan admitted that the QRM definition could result in restricting credit.

When Congress reconvenes, the House Financial Services Committee and the House Committee on Oversight and Government Reform are expected to continue discussions regarding GSE reform and the oversight and regulatory implementation of Title VII of the Dodd-Frank Act.

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