11/16/2012

Flurry of Regulatory Progress in Forecast

Regulators are putting some finishing touches on three closely watched components of the Dodd-Frank Act.

By yearend, the Consumer Financial Protection Bureau plans to spell out once and for all what types of home loans would make the cut as “qualified mortgages.” Meanwhile, the Comptroller of the Currency, FDIC, Federal Reserve and SEC are reconsidering how long they’ll give banks to comply with a soon-to-be-released final draft of the Volcker Rule. And the Commodity Futures Trading Commission continues to refine a list of securitized products that would be exempt from regulation as commodity pools.

In the instances of the qualified-mortgage standards and the Volcker rule, in particular, securitization professionals have long wondered when regulators might be ready to enforce finished versions of the directives. The commodity-pool rule, meanwhile, has developed rapidly after coming to the attention of market participants just a few months ago.

The qualified-mortgage guidelines are important in a structured-finance context largely because they would set the stage for the FDIC, Federal Housing Finance Agency, Federal Reserve, HUD, SEC and Treasury Department to issue a final set of criteria for “qualified residential mortgages” next year.

Securitizations of so-called QRMs would be the only deals exempt from a Dodd-Frank Act requirement that mortgage-bond issuers retain 5% interests in their offerings — a consideration that has made many lenders hesitant to write new loans until more certainty emerges. A preliminary version of the QRM standards was released in March 2011, indicating that only accounts with loan-to-value ratios of 80% or less would make the cut.

But there are indications the CFPB will take a softer stance, setting a minimum down payment of 10%. And given expectations that the agencies in charge of the QRM would use the bureau’s standard as a guideline, it now looks like issuers might be able to securitize a far greater universe of loans without being forced to keep portions of their deals. “If they’ve been thinking of any parameters larger than the QRM, they’d have to rethink that,” one banker said.

The CFPB also appears to be leaning toward more liberal requirements for debt-to-income ratios among qualified-mortgage borrowers. The latest talk is that the agency favors a 43% threshold for the proportion of a borrowers’ monthly income that can be consumed by his or her mortgage payment, which is at the maximum end of a range it had considered.

As for the Volcker Rule, regulators still hadn’t finished drafting the mandate by the time it automatically took effect July 22 — resulting in a grace period for compliance that runs until July 2014. Banks then were told to expect a final version of the rule early next year.

That timeline has recently become more specific, with regulators signaling an intention to unveil the finished directive by March 30. But there also have been indications that the agencies would accompany such a move by shortening the timeline for compliance, perhaps to as little as six months. The result could be a scramble to conform with some finer points of the mandate, which broadly seeks to limit proprietary trading by banks.

In the meantime, the American Securitization Forum, other lobbying groups and industry lawyers continue to push for some adjustments to the Volcker Rule, including language specifying that banks could issue collateralized loan obligations and operate commercial-paper conduits.

As far as the CFTC rule is concerned, the agency is still expected to announce by yearend that covered bonds and commercial-paper conduits will be exempt from regulation as commodity pools under a Dodd-Frank provision assigning the body broad oversight of transactions involving all types of swaps. Those instruments had been left out of an Oct. 12 order granting a temporary reprieve to a range of asset- and mortgage-backed bonds.

However, expectations that the CFTC also would create an exemption for CLOs are fading. Should CLOs become subject to the regulator’s oversight, it’s possible banks including Citigroup, J.P. Morgan and Wells Fargo that offer warehouse funding to issuers or buy senior portions of the transactions could be considered commodity-pool operators themselves — in violation of Volcker Rule limits. The institutions’ only option under that scenario would be to scale back their involvement in the sector.

“I’m not confident that CLOs will get exemption relief,” said J. Paul Forrester, an attorney at law firm Mayer Brown. “Generally, they are not using swaps in their deals and no one thinks they are commodity pools, but no one is arguing for an exemption for them even though the market has really picked up.”

There also are concerns that catastrophe bonds could get roped into the CFTC rules. Meanwhile, the ASF and Sifma sent a letter to the CFTC on Nov. 15 requesting that any outstanding structured-finance transactions be grandfathered under existing regulations.

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