Dodd-Frank News Center

Fed announces tool for calculating capital requirements using the SSFA

This story appeared in Bank Digest.

The Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency have released an automated tool to assist financial institutions subject to the agencies' regulatory capital rules in calculating risk-based capital requirements for individual securitization exposures. Specifically, institutions that use the rules' Simplified Supervisory Formula Approach (SSFA) to calculate risk-based capital requirements for securitization exposures may use the tool, at their discretion, to calculate capital requirements for such exposures.

FDIC releases regulatory capital tool for securitization exposures

This story appeared in Bank Digest.

The Federal Deposit Insurance Corporation has published a simplified supervisory formula approach tool as part of its continued outreach efforts to help institutions implement the revised capital rules. The SSFA is a new method banks may use under the revised capital rules to calculate capital requirements for securitization exposures. It is a formula-based approach designed to apply relatively higher capital requirements to the more risky junior tranches that are the first to absorb losses, and relatively lower requirements to the most senior tranches.

FDIC and OCC approve "skin in the game" rule

This story appeared in Bank Digest.

At its Oct. 21, 2014, meeting, the board of directors of the Federal Deposit Insurance Corporation approved a final rule to implement the credit risk retention requirements found in section 941 of the Dodd-Frank Act. The FDIC staff also released a memorandum recommending the board approve the final rule for publication in the Federal Register.

Agencies repropose risk retention rules

This story appeared in Bank Digest.

The bank regulatory agencies—Office of the Comptroller of the Currency, Federal Reserve Board, and Federal Deposit Insurance Corporation—along with the Securities and Exchange Commission, Federal Housing Finance Agency, and Department of Housing and Urban Development, have issued a notice revising a proposed rule requiring sponsors of securitization transactions to retain risk in those transactions. The new proposal revises a proposed rule the agencies issued in 2011 to implement the risk retention requirement in the Dodd-Frank Act. Comments on the proposed rule are due by Oct. 30, 2013. The FDIC also released an accompanying Staff Memorandum. 

New GSE Securitization Entity Outlined

By Serena Lynn, Editor, the Federal Banking Law Reporter and Bank Digest and Sarah Borchersen-Keto, Washington News Bureau, Contributing Author, the Federal Banking Law Reporter and Bank Digest.

FHFA Acting Director Edward J. DeMarco has released the 2013 Conservatorship Scorecard for government-sponsored enterprises Fannie Mae and Freddie Mac. The scorecard details specific priorities for the GSEs in 2013. “A great deal of progress was made in 2012 and we are ready to move to the next phase,” said DeMarco. “The steps outlined in the 2013 Scorecard lay a strong foundation for the secondary mortgage market of the future.”

Downside of Securitization Examined

By Serena Lynn, Editor, the Federal Banking Law Reporter and Bank Digest.

According to a report by the Federal Reserve Bank of New York, there is growing evidence that securitization adversely affected the screening incentives of mortgage lenders, contributing to a large increase in delinquencies in the U.S. subprime housing market during the financial crisis. New York FRBank Vice President João Santos has posted an article discussing whether the growth of securitization also affected corporate lending. According to Santos, “the securitization of corporate loans grew spectacularly in the years leading up to the financial crisis.” Prior to 2003, Santos says the annual volume of new collateralized loan obligations issued in the United States rarely surpassed $20 billion, but eclipsed $180 billion in 2007. “By securitizing loans, banks could lower the risk on their balance sheets and free up capital for other business while continuing to earn origination fees,” Santos asserts, adding that “if banks anticipate that they won’t retain in their balance sheets the loans they originate, their incentives to screen loan applicants at origination will be reduced” and, once securitized, a bank’s “incentives to monitor the borrower during the life of the loan will also be reduced.” 

Walsh Discusses Securitization and Derivatives at Securities Industry Conference

This story appeared in Bank Digest.

Acting Comptroller of the Currency John Walsh on Jan. 24, 2012, addressed members of the American Securitization Forum Annual Conference on issues related to Dodd-Frank Act rulemaking in the areas of securitization and derivatives. Walsh noted that the rulemaking goal of the agencies “must be to strike a balance that meets the objectives of Dodd-Frank, while enabling financial firms to continue conducting business in a manner that is safe, sound, and profitable; ensuring appropriate monitoring and management of risk; promoting healthy and liquid markets; and supporting a strong and growing economy.” He also remarked on the status of the Dodd-Frank rulemaking process, especially the “Volcker Rule” proposal. On that matter, Walsh said, “As the interagency group drafted the proposal, it became clear that this rule could have a significant impact on securitizations; so we wrote more than two dozen questions directly related to securitization, asking commenters to supply us with additional information.”

Key Senators Suggest Enhancements to SEC Proposed Regulations on Securitization Conflicts of Interest

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

The Senate authors of the securitization conflict of interest provisions of the Dodd-Frank Act codified in Section 621 have suggested enhancements to the proposed SEC regulations implementing those provisions. In a letter to the SEC, Senators Carl Levin (D-MI) and Jeff Merkley (D-Ore) said that securitization transactions rife with conflicts of interest demonstrate not only the importance of investor safeguards, but also the need to strengthen aspects of the proposed regulations.

The proposed regulations would apply to an underwriter, placement agent, initial purchaser, or sponsor, or any affiliate or subsidiary of such entity, of an asset-backed security. While recognizing that such parties typically have substantial roles in the assembly, packaging and sale of asset-backed securities, the Senators noted that this language simply repeats the statutory terms without adding needed clarification to ensure that key asset-backed securities participants are prohibited from engaging in conflicts of interest damaging to the securitization markets.

House Legislation Reforming Mortgage Securitization Would Abolish Dodd-Frank Risk Retention Provisions

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

Legislation introduced by Rep. Scott Garrett (R-NJ) would abolish the Dodd-Frank risk retention provisions as part of a broad reform of the mortgage securitization process. The Private Mortgage Market Investment Act would also direct the Federal Housing Finance Administration, overseer of Fannie Mae and Freddie Mac, to develop standard and uniform securitization agreements and representations and warranties and to streamline the process for securities that meet the standard underwriting characteristics and securitization agreements to be sold to investors. The legislation would also authorize FHFA to ensure underwriting and securitization standardization compliance. Rep. Garrett is the Chair of the House Capital Markets Subcommittee. The subcmmittee will hold hearings on the legislation on November 3.

Bill Offered to Reform Secondary Mortgage Market

This story appeared in Bank Digest.

Scott Garrett, R-N.J., Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, has introduced a bill intended to reform the secondary mortgage market to ensure robust private investment without a government guarantee. According to Garrett, “My proposal to reform the secondary mortgage market will facilitate continued standardization and uniformity, ensure rule of law and legal certainty, and provide investors with the standardization and transparency necessary to ensure that a deep and liquid market develops in the absence of Fannie and Freddie.” Among the bill's effects would be the promotion of standardized mortgages that would facilitate securitization and the elimination of the risk retention requirements of the Dodd-Frank Act.