Monday, August 15, 2011

Banking and Securities Groups Ask SEC and Bank Regulators to Re-Propose Dodd-Frank Risk Retention Regulations

The proposed Dodd-Frank risk retention regulations are so flawed as currently drafted that they should be withdrawn and re-issued, said securities and banking associations in a letter to the SEC and the federal banking agencies. The associations believe that fundamental concepts in the proposal, such as how to measure the retained risk, are so unclear that it is impossible for the industry to provide well-reasoned responses to those critical aspects of the proposal. In addition, without significant changes, the proposal will have a destructive impact on securitization markets and the availability of credit to consumers and businesses.

The proposed Premium Capture Cash Reserve Account (PCCRA) is but one example of the fatal flaws in the proposal, said the groups. By increasing the base risk retention requirement of five percent to five percent plus all of the securitizer’s and originator’s profit as well as a significant percent of their cost basis in the underlying assets, the PCCRA will effectively render most securitizations economically untenable.

Moreover, in the view of the associations, the exceptions to the risk retention requirements fail to comport with Congressional intent with respect to the narrowness with which they are crafted. Section 941 granted the federal agencies significant discretion when promulgating their regulations to establish the scope of the qualified residential mortgage exemption, and to employ a range of amounts of retained economic interests from zero percent to five percent that would be reflective of the underwriting standards of particular assets, and finally, to exempt entire classes of assets where warranted. The proposal reflects an all or nothing approach to the retention requirements, said the associations, with zero percent retention for very narrowly crafted asset classes, and five percent retention for all other assets, with nothing in between.

These narrow qualified asset exemptions are not workable, contended the groups, with the result that five percent retention will become the standard, leading ultimately to a constriction of credit for otherwise creditworthy borrowers. While Section 941 applies the risk retention rules to all asset-backed securities, not just to mortgage-backed securities, the associations believe that the performance of non-mortgage-backed securities sectors throughout the financial crisis should be given significant weight in the regulalatory deliberations and use of exemptive authority.

In addition, the associations believe that the risk retention rules must be viewed in a holistic perspective that takes into account additional Dodd-Frank and other rulemakings that, taken collectively, may magnify the impact of the risk retention rules. This is particularly the case in the context of securitizations collateralized by residential mortgages, a market currently experiencing wholesale transformations in applicable regulations. These changes include a regulatory overhaul in light of Title XIV of the Dodd-Frank Act as well as other regulatory initiatives to further regulate residential mortgages that predate that Act. The associations pointed out that the risk retention requirements will necessarily interact with current and future Basel capital requirements and accounting rules. As a result, a risk retention requirement that, on its face, appears to be workable, may nonetheless make securitization transactions economically unfeasible.

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