A Dodd-Frank rule to address a financial market risk associated with the 2008 crisis is still far from completion, and if the industry gets its way, the reform will fall further behind schedule. Sec. 941 of PL111-203. If the rule is implemented, issuers of asset-backed securities will have to hold 5% of the repackaged loans, or securitized investments, to discourage the accumulation of too much risk. Almost 90% of the subprime and other low-grade mortgages issued in 2005 and 2006 were repackaged into investments.
The repackaging let many lenders keep risky assets off their balance sheets, and as long as the credit bubble was inflating, push more loans onto borrowers with weak credit.
Dodd-Frank called for issuing the final rule by April 2011, but the SEC and the banking agencies didn’t publish the proposal in Release No. 34-64148,Credit Risk Retention, until the end of March 2011. In June 2011, the comment deadline was extended to give more time to analyze the rules.
A financial industry trade group, the American Securitization Forum, called the rules extremely complex and broad-ranging. Financial companies are afraid of a rule that’s too restrictive and limits the size of the lending and securitization markets, and they pressured the SEC and the banking regulators to revise the proposal.
In August 2013, the SEC and the other regulatory agencies issued Release No. 34-70277,Credit Risk Retention.
Like the 2011 proposal, the updated release requires sponsors of asset-backed securities offerings to keep at least 5% of the credit risk for any group of assets packaged into a securities offering. But the proposal offers more flexibility for complying with the requirement.
Unlike the original proposal, Release No. 34-70277 measures the 5% risk retention based on fair value, rather than the initial principal balance of the retained interests. It also changes the definition of a “qualified residential mortgage,” a type of high quality loan that isn’t saddled with the 5% retention rule. The American Bankers Association said the looser definition for qualified mortgages will help the economy and make sure the largest number of creditworthy borrowers are able to get loans at competitive prices.
Comments are due October 30, two months after the proposal was issued. But the Loan Syndications and Trading Association, the Securities Industry and Financial Markets Association, the Association for Financial Markets in Europe, and the Structured Finance Industry Group asked for a 40-day extension.
They said they need more time to consider “significant” revisions as they relate to collateralized loan obligations so that market participants can better analyze how the proposed changes will affect the markets for funding loans.
The U.S. Chamber of Commerce requested a 60-day extension that will bring the comment deadline to December 31. The Chamber said the comment period for the revised proposal was insufficient for a lengthy and complex rule.
If the agencies grant the extension, a final rule may not be in place until mid- to late 2014, three-and-a-half years after the initial Dodd-Frank deadline.