Several of the Federal government agencies on whose shoulders it would fall to implement changes to securitization rules and regulations recommended by the US Treasury Department last week have little to say about whether, or when, they’ll get to work implementing those suggestions.
Spokespersons for the OCC, Federal Reserve and FDIC declined comment about any implementation plans after first referring questions to Treasury. “We are reviewing the report, and have no additional comment at this time,” said Stephanie Collins, spokesperson for the OCC, in a representative response.
The OCC would have to act on 14 of the report’s specific recommendations to put them into effect, the Fed would have to act on 19 recommendations and the FDIC would have to act on 16.
An FHFA spokesperson did not respond after asking for more details about the report’s recommendations. The FHFA would have to act on only one Treasury recommendation — that the mandatory five-year risk retention period be shortened by an undefined amount.
Spokespersons for the SEC, HUD and Treasury did not respond.
The lack of a battle plan for the extensive regulatory revisions outlined by Treasury’s 9 October “A Financial System That Creates Economic Opportunities: Capital Markets” report to President Trump is emblematic of the biggest problem facing its authors: It appears to have no solid implementation plan, and even its most fervent proponents have little hope its recommendations will be implemented or even proposed anytime soon.
“Treasury does not have much, if any, authority to make much, if any, of these things happen,” said a prominent securitization attorney. “I think we’re a long way from making any of this a reality.”
Respect the process?
The Treasury report is the second of an expected four documents prepared in response to a 3 February Trump executive order directing the department to evaluate existing laws and regulations in light of the administration’s core principles for regulating the financial system.
The first Treasury report, published in June, focused on regulations affecting banks and credit unions. It recommended changes to the Ability to Repay rule’s Qualified Mortgage definition, the repeal or significant revision of risk retention requirements for residential mortgages, and other housing finance rule changes.
To date, there is no sign that any action has been taken to implement any of those recommendations, said the attorney, a second attorney and a third industry source.
Treasury’s second report can be seen here. A list of all of its recommendations, including which agencies must act to implement them, begins on p. 205. Of all the recommendations on securitization, only one — a requirement that a single agency be designated as the lead agency in charge of rewriting risk retention regulations — requires Congressional action.
The three sources agree that the fastest any federal agency could possibly implement a new rule would be about two years, and that would be in a case in which the agency was acting visibly and aggressively. Under federal rulemaking regulations, rules must be proposed and market participants given an opportunity to comment. After the comment period, rulemakers revise the proposal and, if necessary, reopen the comment period for any significant changes. Then a final rule is issued, which typically doesn’t go into effect for as long as a year. “It doesn’t happen quickly,” said the first attorney.
Process aside, recommendations (mostly) lauded
While not enthused about the report’s immediate prospects, the sources are generally pleased with its contents, many of which parallel changes for which groups such as SFIG and SIFMA have been lobbying for years.
Most significant are Treasury’s recommendations on bank capital and liquidity rules, according to the attorneys and the source. With its proposals, Treasury seeks to level the playing field between securitized and non-securitized assets by recommending the repeal of rules that require banks to hold more capital against securitized assets than against the unsecuritized collateral that backs those assets. For instance, banks must hold more capital against AAA rated RMBS than they must hold against unsecuritized mortgages of the same type that back those RMBS, according to the sources.
Treasury also calls for capital rules to account for the credit risk that banks transfer away from themselves by securitizing and selling bonds. Current rules require banks hold capital against all of the assets they securitize.
If implemented, the recommendations would essentially reverse rules implemented during and after the financial crisis by a combination of Dodd Frank Act mandates and the FAS 166 and FAS 167 accounting rule changes that ended off-balance sheet accounting treatment for securitized assets.
“That would be a significant boon to the securitization market,” said the source. As a result of the crisis-era and FAS rule changes, “there has been a substantial reduction in bank investment in ABS product.”
Along the same lines Treasury recommends that bank liquidity coverage ratio (LCR) rules be changed to allow high-quality senior securitized holdings to be treated more favorably toward a banks’ LCR. Changing the LCR and capital holding rules would greatly improve liquidity in securitized markets, the sources said.
“That very clearly has had some impact on the amount of bank investment in ABS product,” said the industry source.
Another of the Treasury report’s most important recommendations is the suggestion that agencies adopt a broad qualified exemption from risk retention requirements for CLO transactions, the attorneys and source said. Risk retention rules for CLOs have been a major issue for the industry, and are still being litigated by the LSTA.
The template are Qualified Residential Mortgages, which issuers can securitize exempt from risk retention rules, said the first attorney and the source.
Tinkering or significant?
The sources are less in agreement on the significance of other Treasury recommendations. For instance, the first attorney describes the recommendation on reducing required risk retention interest holding times and a separate recommendation regarding the number of data fields issuers must disclose to investors be reduced as “tinkering at the margins.”
“These are things that are hardly going to open the floodgates,” said the attorney.
The risk retention recommendation, for instance, leaves the overall rule essentially intact. It just suggests cutting the amount of time an issuer must hold a risk retention interest — but makes no recommendation about what an appropriate holding period would be. Some issuers had hoped that the risk retention requirement be rescinded completely.
On the disclosure field reduction recommendation, however, the second attorney disagrees that such a change is insignificant. “That’s not tinkering,” he said. “We haven’t done public RMBS in 10 years,” as a result of the requirement that public securitizers disclose around 200 separate data fields to investors. Requiring disclosure of “200 data fields has effectively chilled the market,” he said.
The requirement is a significant hindrance to banks, which have put a lot of lobbying weight behind reducing the disclosure requirement, the second attorney said.
While recommendations such as reducing data disclosure requirements and the risk retention holding period may cheer securitization issuers, investors have a different view, said the second attorney and the industry source. That leads to some schizophrenia on the issues on the part of trade and advocacy groups such as SFIG, which includes both issuers and investors among its membership, according to the second attorney.
SFIG officials say that they plan to advocate on behalf of the Treasury bank capital and liquidity rule change recommendations, and to perform more of an educational function on issues such as risk retention and disclosure. On the latter issues, SFIG sees its role as making regulators and legislators aware of the varied views of different types of industry participants, said executive director Richard Johns.
On the bank capital and liquidity issues, SFIG’s advocacy won’t differ much from its past practices, Johns said. But with the weight of Treasury recommendations behind it, “we may find there’s a more receptive audience this time around,” he said. “We just hope that the brick wall that we’ve been coming up against is more pliable the next time around.”
by John Wilen