Credit Union Comment Sought on Credit-Risk Retention Plan

The Northwest Credit Union Association (NWCUA) is seeking comment on a proposed credit-risk retention rule that would require securitizers to retain an economic interest in the credit risk of assets they securitize.

As required under the Dodd-Frank Wall Street Reform Act, the proposal was issued jointly by the U.S. Treasury Department, Federal Reserve Board, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Securities and Exchange Commission, and the U.S. Department of Housing and Urban Development. The proposal goes beyond what Dodd-Frank intended, and could also have a negative impact on credit unions.

Originators—including credit unions and credit union service organizations—generally would be exempt from the requirements if they contribute less than 20 percent of the loans or other collateral to the asset-backed security pool. However, if any originator contributes 20 percent or more of the collateral, the proposed rules permit the securitizer to allocate a portion of its risk retention requirement to the originator in the same percentage amount as its contribution to the asset pool.

There are two major exemptions to this requirement: securities backed by assets consisting entirely of qualified residential mortgages (QRMs); and securities backed by certain commercial mortgages, commercial loans, and automobile loans meeting specific underwriting standards.

For credit unions, the most problematic aspect of this proposal is the QRM definition, which is defined, in part, as follows:

•    The borrower cannot currently be 30 days past due on any debt obligation, and cannot have been 60 or more days past due on any debt obligation in the preceding 24 months;
•    The borrower must not, within the preceding 36 months, have been a debtor in a bankruptcy proceeding, had property repossessed or foreclosed upon, engaged in a short sale or deed-in-lieu of foreclosure, or have been subject to Federal or State judgment for collection of any unpaid debt;
•    The borrower must provide a 20 percent down payment in the case of a purchase transaction, and private mortgage insurance cannot be used to support the down payment;
•    The mortgage must have maximum front-end and back-end debt-to-income ratios of 28 percent and 36 percent, respectively;
•    The total points and fees paid by the borrower in connection with the mortgage cannot exceed 3 percent of the total loan amount; and
•     A QRM mortgage cannot have payment terms that allow for interest-only payments or negative amortization, nor can the QRM mortgage permit a balloon payment.

The Association would like to see credit unions comment on the QRM definition and other aspects of the credit-risk retention. The comment deadline is August 1.

Questions? Contact Director of Regulatory Advocacy Jaycee Winn: 503.350.2209,

Posted in Federal.