[Federal Register Volume 86, Number 241 (Monday, December 20, 2021)]
[Rules and Regulations]
[Pages 71810-71813]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-27561]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 43

[Docket No. OCC-2019-0012]

FEDERAL RESERVE SYSTEM

12 CFR Part 244

[Docket No. OP-1688]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 373

RIN 3064-ZA07

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1234

[Notice No. 2021-N-14]

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 246

[Release No. 34-93768]

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 267

[FR-6172-N-04]


Credit Risk Retention--Notification of Determination of Review

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC); 
Board of Governors of the Federal Reserve System (Board); Federal 
Deposit Insurance Corporation (FDIC); U.S. Securities and Exchange 
Commission (Commission); Federal Housing Finance Agency (FHFA); and 
Department of Housing and Urban Development (HUD).

ACTION: Determination of results of interagency review.

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SUMMARY: The OCC, Board, FDIC, Commission, FHFA, and HUD (the agencies) 
are providing notice of the determination of the results of the

[[Page 71811]]

review of the definition of qualified residential mortgage, the 
community-focused residential mortgage exemption, and the exemption for 
qualifying three-to-four unit residential mortgage loans, in each case 
as currently set forth in the Credit Risk Retention Regulations (as 
defined below) as adopted by the agencies. After completing the review, 
the agencies have determined not to propose any change at this time to 
the definition of qualified residential mortgage, the community-focused 
residential mortgage exemption, or the exemption for qualifying three-
to-four unit residential mortgage loans.

DATES: December 20, 2021.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Kevin Korzeniewski, Counsel, Chief Counsel's Office, (202) 
649-5490; Maria Gloria Cobas, (202) 649-5495, Senior Financial 
Economist, Office of the Comptroller of the Currency, 400 7th Street 
SW, Washington, DC 20219.
    Board: Flora H. Ahn, Special Counsel, (202) 452-2317, David W. 
Alexander, Senior Counsel, (202) 452-287, or Matthew D. Suntag, Senior 
Counsel, (202) 452-3694, Legal Division; Sean Healey, Lead Financial 
Institution Policy Analyst, (202) 912-4611, Division of Supervision and 
Regulation; Karen Pence, Deputy Associate Director, Division of 
Research & Statistics, (202) 452-2342; Nikita Pastor, Senior Counsel, 
Division of Consumer & Community Affairs (202) 452-3692; Board of 
Governors of the Federal Reserve System, 20th and C Streets NW, 
Washington, DC 20551.
    FDIC: Rae-Ann Miller, Senior Deputy Director, (202) 898-3898; 
Kathleen M. Russo, Counsel, (703) 562-2071, [email protected]; Phillip E. 
Sloan, Counsel, (202) 898-8517, [email protected], Federal Deposit 
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
    Commission: Arthur Sandel, Special Counsel, (202) 551-3850, in the 
Office of Structured Finance, Division of Corporation Finance; or 
Chandler Lutz, Economist, (202) 551-6600, in the Office of Risk 
Analysis, Division of Economic and Risk Analysis, U.S. Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549.
    FHFA: Ron Sugarman, Principal Policy Analyst, Office of Capital 
Policy, (202) 649-3208, [email protected], or Peggy K. Balsawer, 
Associate General Counsel, Office of General Counsel, (202) 649-3060, 
[email protected], Federal Housing Finance Agency, Constitution 
Center, 400 7th Street SW, Washington, DC 20219. For TTY/TRS users with 
hearing and speech disabilities, dial 711 and ask to be connected to 
any of the contact numbers above.
    HUD: Kurt G. Usowski, Deputy Assistant Secretary for Economic 
Affairs, U.S. Department of Housing & Urban Development, 451 7th Street 
SW, Washington, DC 20410; telephone number 202-402-5899 (this is not a 
toll-free number). Persons with hearing or speech impairments may 
access this number through TTY by calling the toll-free Federal Relay 
at 800-877-8339.

SUPPLEMENTARY INFORMATION: The Credit Risk Retention Regulations are 
codified at 12 CFR part 43; 12 CFR part 244; 12 CFR part 373; 17 CFR 
part 246; 12 CFR part 1234; and 24 CFR part 267 (the Credit Risk 
Retention Regulations). The Credit Risk Retention Regulations require 
the OCC, Board, FDIC and Commission, in consultation with the FHFA and 
HUD, to commence a review of the following provisions of the Credit 
Risk Retention Regulations no later than December 24, 2019: (1) The 
definition of qualified residential mortgage (QRM) in section _.13 of 
the Credit Risk Retention Regulations; (2) the community-focused 
residential mortgage exemption in section _.19(f) of the Credit Risk 
Retention Regulations; and (3) the exemption for qualifying three-to-
four unit residential mortgage loans in section _.19(g) of the Credit 
Risk Retention Regulations (collectively, the subject residential 
mortgage provisions).
    Notification announcing the commencement of the review was 
published in the Federal Register on December 20, 2019 (84 FR 70073). 
Notification announcing the agencies' decision to extend to June 20, 
2021, the period for completion of the review and publication of 
notification disclosing determination of the review was published in 
the Federal Register on June 30, 2020 (85 FR 39099). On July 22, 2021, 
the agencies published another notification in the Federal Register, 
announcing their decision to extend the period to complete the review 
further to December 20, 2021 (86 FR 38607).
    The agencies have completed their review of the subject residential 
mortgage provisions and this notification discloses the agencies' 
determination as a result of the review.

Overview

    Section 15G of the Securities Exchange Act, as added by section 
941(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act), required the Board, FDIC, OCC (collectively, the 
Federal banking agencies) and the Commission, together with, in the 
case of the securitization of any ``residential mortgage asset,'' HUD 
and FHFA, to jointly prescribe regulations that (i) require a 
securitizer to retain not less than five percent of the credit risk of 
any asset that the securitizer, through the issuance of an asset-backed 
security (ABS), transfers, sells, or conveys to a third party, and (ii) 
prohibit a securitizer from directly or indirectly hedging or otherwise 
transferring the credit risk that the securitizer is required to retain 
under section 15G and the agencies' implementing rules.\1\ Section 941 
of the Dodd-Frank Act also provides that a securitizer shall not be 
required to retain any part of the credit risk for an asset that is 
transferred, sold, or conveyed through the issuance of ABS interests by 
the securitizer, if all of the assets that collateralize the ABS 
interests are QRMs, as that term is jointly defined by the agencies. 
Section 941 provides that the definition of QRM can be ``no broader 
than'' the definition of a ``qualified mortgage'' (QM) as that term is 
defined under section 129C of the Truth in Lending Act (TILA),\2\ as 
amended by the Dodd-Frank Act, and regulations adopted thereunder.\3\ 
The agencies decided to align the definition of QRM with the definition 
of QM.\4\ The Credit Risk Retention Regulations define QRM to mean a 
QM, as defined under section 129C of TILA and Regulation Z issued 
thereunder at 12 CFR part 1026, as amended from time to time.
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    \1\ See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B)(i).
    \2\ 15 U.S.C. 1639c.
    \3\ See 15 U.S.C. 78o-11 (e)(4)(C).
    \4\ See 79 FR 77740 (Dec. 24, 2014).
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    As part of the Credit Risk Retention Regulations, the agencies are 
required to review the definition of QRM periodically to assess 
developments in the residential mortgage market, including the results 
of the statutorily required five-year review by the Consumer Financial 
Protection Bureau (CFPB) of the ability-to-repay rules and the QM 
definition. In conducting the review (the commencement of which was 
announced on December 20, 2019) and reaching their conclusions, the 
agencies considered what has been learned since 2014 about whether the 
loan and borrower characteristics specified in the QRM definition are 
predictive of a lower risk of default and also assessed how mortgage 
credit access conditions have changed since 2014, using data from the 
date on which the Credit Risk Retention Regulations were announced, 
October 22, 2014, through December 31, 2019 (the review period). Among 
other things, the agencies analyzed Fannie Mae and Freddie Mac (the 
Enterprises) and non-Enterprise loan-level mortgage

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origination and performance data (including data on originations, 
defaults, and loan and borrower characteristics), held discussions with 
market participants, and reviewed academic research, policy research 
prepared by research and advocacy organizations, and the results of the 
CFPB's Ability-to-Repay and Qualified Mortgage Rule Assessment Report 
issued in 2019.\5\ The analysis also considered the effects on default 
risk of additional loan and borrower characteristics not included in 
the QRM definition.
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    \5\ Available at https://files.consumerfinance.gov/f/documents/cfpb_ability-to-repay-qualified-mortgage_assessment-report.pdf.
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    The analysis confirmed that the loan and borrower characteristics 
specified in the QM definition in effect during the review period were 
predictive of a lower risk of default. In addition, the agencies found 
that, while credit conditions have improved since 2014, they remain 
tight relative to longer-term norms.\6\
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    \6\ Measures of mortgage credit availability, such as those 
produced by the Urban Institute (www.urban.org), suggest that credit 
availability during the review period was tight relative to levels 
in the early 2000s. Tight credit conditions generally refer to 
periods of reduced availability of credit.
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    After analyzing those data, reviewing those analyses and 
considering the importance of maintaining broad access to credit, the 
agencies have decided, at this time, not to propose to amend the 
definition of QRM, the community-focused residential mortgage 
exemption, or the exemption for qualifying three-to-four unit 
residential mortgage loans.\7\
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    \7\ The Credit Risk Retention Regulations require the agencies 
to conduct a review of the subject residential mortgage provisions 
upon the request of any agency, specifying the reason for such 
request. Accordingly, the agencies may conduct a further review of 
the subject residential mortgage provisions at any time.
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Public Comments

    In response to the notification of commencement of the review, 
which included a request for comment, the agencies received one comment 
(on behalf of 37 organizations) prior to the end of the comment period. 
The comment requested that the agencies defer the review until after 
the CFPB completed its then-proposed rulemaking to make changes to the 
QM definition, which would automatically modify the QRM definition to 
the extent no changes are made to the definition.\8\
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    \8\ The letter noted that an advance notice of proposed 
rulemaking had been issued by the CFPB and that the CFPB was 
expected to follow with a notice of proposed rulemaking.
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    In response, the agencies note that the review is intended to 
consider the definition of QRM in light of changes in mortgage and 
securitization market conditions and practices and how the QRM 
definition has affected residential mortgage underwriting and 
securitization of residential mortgage loans under evolving market 
conditions during the review period. The CFPB did not issue the final 
QM changes until December 10, 2020, well after the review period.\9\
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    \9\ The agencies nonetheless reviewed what were, at the time of 
the review, the CFPB's changes to the general definition of a QM 
(from a definition based, in part, on debt-to-income (DTI) to one 
based on loan pricing). Based upon the information provided by the 
CFPB to support the changes, the agencies concluded that these 
changes, if implemented, were not likely to significantly affect the 
overall impact of the QRM definition on the mortgage market.
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    In June 2021, the agencies received a second comment letter (on 
behalf of six organizations), expressing support for the continued 
alignment of the definitions of QRM and QM.\10\
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    \10\ While this comment letter also praised the agencies for 
delaying the issuance of the review determination until the CFPB 
changes were finalized, as noted above, the agencies did not delay 
the issuance of their determination to consider those changes as 
those changes occurred outside of the review period.
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Definition of QRM

    The agencies' decision in 2014 to equate the QRM and QM definitions 
in the Credit Risk Retention Regulations was based on two main factors. 
First, the Dodd-Frank Act mandated that the definition of QRM ``tak[e] 
into consideration underwriting and product features that historical 
loan performance data indicate result in a lower risk of default.'' 
\11\ Second, the Dodd-Frank Act specified that the QRM definition could 
not be broader than the QM definition, and the agencies were concerned 
that a QRM definition that was narrower than the QM definition could 
exacerbate already-tight mortgage credit conditions existing at that 
time.
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    \11\ 15 U.S.C. 78o-11(e)(4)(B).
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    In the current review of the definition of QRM, the agencies 
considered whether the loan and borrower characteristics specified in 
the QM definition are predictive of a lower risk of default and how 
mortgage credit conditions have changed since 2014. The agencies 
confirmed that the QRM definition that was in effect for the review 
period--with the requirement that debt-to-income (DTI) ratios generally 
not exceed 43 percent--was predictive of lower default rates.
    The agencies used loan-level mortgage origination and performance 
data on Enterprise and non-Enterprise loans in the review.\12\ The 
agencies followed the performance of loans originated between 2012 and 
2015 and found that, after four years, loans with a DTI ratio greater 
than 43 percent were more likely to have become 90-days delinquent than 
loans with lower DTI ratios. The review also confirmed that the 
measurement of DTI had improved from when the analysis was last 
conducted, with a greater proportion of full documentation mortgage 
loans in the dataset in 2019 than in 2014. In the review, the agencies 
also considered the effects of additional loan and borrower 
characteristics on default risk.\13\
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    \12\ Mortgage servicing data from the Enterprises was used for 
this analysis, and the Commission staff contributed its analysis 
using mortgage servicing data from CoreLogic.
    \13\ The agencies confirmed that loan-to-value (LTV) ratio and 
credit score, which the agencies considered in the 2014 rulemaking 
but did not incorporate into the QRM definition, also predict 
default.
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    The agencies also considered whether the QRM definition, as aligned 
with the QM definition, affected the availability of credit. While 
credit conditions had improved since 2014, they remained tight during 
the review period relative to longer-term norms.\14\ However, the 
agencies determined that the QRM definition did not appear to be a 
material factor in credit conditions during the review period, in part 
because so much of the market was funded through Enterprise and Ginnie 
Mae securitizations.\15\ More generally, the agencies concluded from 
the review that risk retention remains an effective tool for aligning 
the interests of securitizers, originators, and investors, and reducing 
default risk on certain loans. In addition, the Credit Risk Retention 
Regulations do not appear to be weighing materially on mortgage credit 
availability.
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    \14\ Measures of mortgage credit availability, such as those 
produced by the Urban Institute, suggest that credit availability 
during the review period was tight relative to levels in the early 
2000s.
    \15\ The Enterprises are subject to risk retention, but benefit 
from a provision in the Credit Risk Retention Regulations that 
allows their full guarantee of principal and interest on mortgage 
backed securities to count as an eligible form of risk retention 
while they are under conservatorship or receivership and have 
capital support from the U.S. Treasury. In contrast to the 
Enterprises, Ginnie Mae, a wholly owned U.S. Government corporation 
within HUD, is exempt from risk retention pursuant to statutory 
direction in the Dodd-Frank Act. See 15 U.S.C. 78o-11(c)(1)(G)(ii) 
and (e)(3)(B).
    According to estimates by Inside Mortgage Finance and the Urban 
Institute, the annual share of the dollar volume of first-lien 
mortgage originations that were either acquired by the Enterprises 
or securitized through an FHA or VA program has ranged from about 62 
to 76 percent over the period 2015 to 2020(https://www.urban.org/sites/default/files/publication/104602/july-chartbook-2021_2.pdf).
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    Finally, the agencies considered whether the QRM definition, as 
aligned with the QM definition, affected the securitization market. As 
the agencies anticipated, the QRM definition contributed to the 
bifurcation of the

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private-label securitization market between securitizations of ``prime/
jumbo'' loans \16\ which typically meet the characteristics of QM and 
are, therefore, exempt from risk retention as QRM, and securitizations 
of ``non-QM'' loans that are not QRM and, therefore, generally not 
exempt from risk retention. However, according to industry sources, the 
market for securitizations of non-QM loans was quite competitive 
through the end of 2019, which suggests that risk retention did not 
materially affect the ability of issuers in this market to obtain 
capital needed for mortgage originations.\17\
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    \16\ These securitizations are typically collateralized by jumbo 
mortgages that are ineligible for purchase by the Enterprises 
because they exceed the conventional loan limits set by the FHFA and 
by prime loans that are offered to highly qualified borrowers. These 
mortgages typically meet the QRM standards.
    \17\ See, e.g., ``On the Rise: Trading Desks Focusing on Non-QM 
Paper.'' Inside MBS & ABS, Inside Mortgage Finance Publications, 
2019.30, 6.
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    In light of the foregoing, the agencies are not proposing to amend 
the definition of QRM at this time.

Community-Focused Residential Mortgages

    Community-focused residential mortgages are mortgages made by 
community development financial institutions (CDFIs), community housing 
development organizations, certain non-profits, or certain secondary 
financing providers, or through a state housing finance agency (HFA) 
program. These entities frequently make mortgage loans using flexible 
underwriting criteria that are not compatible with the TILA ability-to-
repay requirements. To ensure continued borrower access to these loan 
programs, the CFPB exempted these loans from the TILA ability-to-repay 
requirement and, as a result, such loans are unable to be made as QMs. 
Similarly, the agencies provided a separate exemption for these loans 
from the risk retention requirement. The agencies justified this 
exemption by citing the ``strong underwriting procedures to maximize 
affordability and borrower success in keeping their homes'' and noted 
that the exemption ``serve[s] the public interest because these 
entities have stated public mission purposes to make safe, sustainable 
loans available primarily to [low-to moderate-income] communities.'' 
\18\ In the years since adoption of the Credit Risk Retention 
Regulations, only a few CDFIs have used this exemption.\19\ While HFAs 
have not used this exemption, discussions with market participants 
revealed that private securitization could become a more attractive 
option if a state HFA needed to issue bonds in excess of its tax-exempt 
allotment. Therefore, the agencies, at this time, are not proposing to 
amend the exemption for community-focused residential mortgages.
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    \18\ 79 FR 77602, 77694 (December 24, 2014).
    \19\ The agencies identified seven securitizations that relied 
upon this exemption since 2019; these securitizations funded 
approximately $610 million in community-focused residential 
mortgages.
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Three-to-Four Unit Residential Mortgages

    Mortgages that are collateralized by three-to-four-unit properties 
are defined as ``business purpose'' loans rather than consumer credit 
transactions under TILA, and as such are not subject to the ability-to-
repay requirement, and are unable to qualify as QMs. The agencies 
recognized that securitization markets typically pool mortgages 
collateralizing three-to-four-unit residential mortgages with other 
residential mortgage loans. The agencies also provided an exemption for 
three-to-four-unit residential mortgages that otherwise would qualify 
as QMs to ensure that credit did not contract to this part of the 
market. The number of mortgages collateralized by three-to-four-unit 
properties, and the percentage of such mortgages funded through 
private-label securitizations, is small.\20\ The exemption also does 
not appear to be spurring any significant speculative activity in the 
securitization market and, at the same time, these properties are a 
source of affordable housing. Therefore, the agencies are not proposing 
to amend this exemption at this time.
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    \20\ Based on data reported under the Home Mortgage Disclosure 
Act (HMDA), there were about 35,000 such purchase originations in 
2018 and 2019 combined, and of these, less than 2 percent appear to 
have been funded through private-label securitizations.

Michael J. Hsu,
Acting Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System.
Ann E. Misback,
Secretary of the Board.
    Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on December 14, 2021.
James P. Sheesley,
Assistant Executive Secretary.
    Dated: December 14, 2021.

    By the Securities and Exchange Commission.
Vanessa A. Countryman,
Secretary.
Sandra L. Thompson,
Acting Director, Federal Housing Finance Agency.
    By the Department of Housing and Urban Development.
Lopa P. Kolluri,
Principal Deputy Assistant Secretary for Housing, Federal Housing 
Commissioner.
[FR Doc. 2021-27561 Filed 12-17-21; 8:45 am]
BILLING CODE 4210-67;4810-33; 6210-01; 6714-01;2011-018070-01-P


