You are here

US FDIC issues final risk retention rule for board vote

usbanks10-211014.jpg
The US Federal Deposit Insurance Corp (FDIC) unveiled a final rule on Tuesday that requires banks to retain at least 5 per cent of the risk on their books when they bundle loans, securitize them and sell them to investors. - PHOTO: BLOOMBERG

[WASHINGTON] The US Federal Deposit Insurance Corp (FDIC) unveiled a final rule on Tuesday that requires banks to retain at least 5 per cent of the risk on their books when they bundle loans, securitize them and sell them to investors.

The rule, expected to be adopted by the FDIC later on Tuesday, aims to prevent a repeat of the 2007-2009 financial crisis, when banks' lending standards became sloppy and they securitized toxic subprime mortgage loans.

Banks then broadly passed that risk on to large numbers of investors, setting the stage for credit markets to implode once borrowers defaulted on millions of underlying mortgages.

The FDIC is one of six regulators required to adopt the so-called "risk retention" rule, which is mandated by the 2010 Dodd-Frank Wall Street reform law.

At least two of the other agencies, the Federal Reserve and the Securities and Exchange Commission, are expected to formally adopt the rule on Wednesday.

The risk retention rules require banks to keep 5 per cent of the risk on their books when securitizing loans, a measure that encourages them to be more prudent when lending money because they now have "skin in the game." The six regulators in charge of writing the risk retention rule have been struggling for several years to agree.

They first proposed the measure in 2011, but decided to propose it again last year after receiving more than 10,000 comment letters from the industry, many of which were negative.

The most hotly debated issue has been the scope of an exemption for ordinary mortgages, something deemed crucial so as not to stifle the market for home loans for people with moderate or low incomes.

Many on Wall Street would prefer the rule for so-called "qualified" residential mortgages to be equivalent to a separate rule from the Consumer Financial Protection Bureau (CFPB) that protects borrowers from taking on too much debt.

Crucially, the CFPB's rule does not set a minimum down payment for mortgages.

Last year's proposal largely aligned the two definitions, and the final rule unveiled Tuesday by the FDIC contained an exemption for "qualified" mortgages that was largely similar to when the rule was proposed the second time in 2013.

It also introduced a periodic review of the definition stating which mortgages qualify.

REUTERS