A recent trend in the fintech space is what is being coined by market participants as a “co-sponsored” securitization. The transaction is usually structured such that the company will sell its assets in a whole loan sale flow arrangement between it and an investor. Once enough loans are aggregated by the investor, it will typically securitize them in a capital markets transaction where it will act as the sponsor for risk retention purposes. Counsel must carefully consider the investor’s role to ensure it performs sufficient sponsor-type activities, such as structuring the transaction, retaining the rating agencies and service providers, retaining drafting counsel and directing the accountant’s agreed upon procedures review. If it can be established that both the investor and the company are acting as sponsors of the transaction, then the risk retention regulations provide that the sponsors can agree that one of the two sponsors can covenant to hold the requisite risk retention. Typically, the investor, which also wants a long-term investment in the collateral pool, will agree to retain the risk retention piece in compliance with the US (and possibly EU and Japanese, if applicable) risk retention regulations. This is obviously appealing to companies that want to securitize their assets but don’t want to burden their balance sheet with risk retention. We expect to see many of these types of transactions in 2020.
According to the Mortgage Bankers Association, the Consumer Financial Protection Bureau intends to revise its Qualified Mortgage definition by moving away from a debt-to-income ratio threshold, and instead adopting a different test, such as one based on the loan’s pricing. The CFPB also apparently indicated it may extend, for a short time, the temporary QM status for loans eligible for purchase by Fannie Mae or Freddie Mac (the “Patch”).
The MBA reports that CFPB Director Kathy Kraninger informed Congress of the agency’s plans for its highly-anticipated QM rulemaking, expected this spring (by late May, but perhaps earlier). In July of last year, the CFPB issued an advance notice of proposed rulemaking to begin addressing the Patch expiration (scheduled for January 2021). For the past five years, the Patch has resulted in a significant presence by the government-controlled enterprises in connection with higher-DTI loans (i.e., those over 43%). The CFPB has insisted it would allow for a “smooth and orderly transition” to the Patch expiration, to give the industry time to respond. According to the recent report, the CFPB will in fact seek to extend the Patch for “a short period.”
The CFPB indicated that a brief Patch extension also is warranted because of other changes the agency intends to make to the general QM definition. Most agree that the general QM, and its reliance on a DTI threshold and the tight income standards in Appendix Q, has unduly restricted affordable credit to worthy borrowers. The CFPB apparently told Congress it intends to move away from its DTI threshold, which could also mean the demise of Appendix Q.
The CFPB may instead adopt a pricing threshold to distinguish QMs from non-QMs going forward. The CFPB otherwise distinguishes loans with an annual percentage rate that exceeds the average prime offer rate by 150 basis points. The CFPB could decide to use that threshold to define QMs in the future.
CFPB also may be considering a common-sense, results-oriented approach – by providing that loans that do, in fact, experience timely payments would be deemed to comply with the ability-to-repay requirement.
While we cannot be certain about the CFPB’s next move until the agency finalizes a rule, the changes described above would afford QM protection to higher-DTI/lower-cost loans that lack certain product features, likely opening those loans to the private capital markets. By changing the QM marketplace, the changes also would, of course, affect the size and nature of the non-QM market. As we previously noted, those changes also could affect the types of loans exempt from credit risk retention in securitizations (QRMs).
Happy New Year!
Like many of you, we have been tuning into the various predictions for ABS issuance in 2020 from the rating agencies, analysts and other market participants. Will this year bring “more of the same” for US ABS, as predicted by KBRA, or will US ABS volume be down slightly as predicted by S&P, or “another year of expanded issuance” as predicted by the market professionals polled by Asset-Backed Alert.
The Mayer Brown structured finance team is looking forward to kicking off the new year with some predictions of our own this week, as we gather for our annual “Securitization: What to Expect in 2020” seminar on January 15th in our New York office. Registration information can be found here.
The EU has, on 6 November 2019, published in the Official Journal a delegated regulation (the “Delegated Regulation”) supplementing the EU Securitisation Regulation (the “Securitisation Regulation”) with regard to regulatory technical standards (“RTS”) on the homogeneity of the underlying exposures in securitisation. The Delegated Regulation will enter into force 20 days after publication.
Click here for the Legal Update.
Today, the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency (collectively, the Agencies) issued an Interagency Statement on the use of alternative data in credit underwriting and the consumer protection implications of such use.
In the Interagency Statement, the Agencies recognize that the use of alternative data may improve the speed and accuracy of credit decisions and may help firms evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system, enabling them to obtain additional products and/or more favorable pricing/terms based on enhanced assessments of repayment capacity. These innovations reflect the continuing evolution of automated underwriting and credit score modeling, offering the potential to lower the cost of and to increase access to credit. However, while noting these benefits to consumers, the Agencies also note that the use of alternative data must be responsible and should comply with applicable consumer protection laws and other requirements.
As expected following yesterday’s action by the US Office of the Comptroller of the Currency,1 at today’s board meeting2 of the Federal Deposit Insurance Corporation (FDIC), the board proposed a rule to clarify Federal interest rate authority to address marketplace uncertainty regarding the enforceability of the interest rate terms of loan agreements following a bank’s assignment of a loan to a non-bank, including confusion resulting from a recent decision from the US Court of Appeals for the Second Circuit (Madden v. Midland Funding, LLC).3 The FDIC’s proposal would codify legal guidance on which the agency has relied for more than 20 years regarding interest rates that may be charged by State-chartered banks and insured branches of foreign banks.
The United States Office of the Comptroller of the Currency (OCC) has proposed a rule to clarify that when a national bank or savings association sells, assigns or otherwise transfers a loan, interest permissible prior to the transfer continues to be permissible following the transfer.
On October 31, 2019, in a lease dispute related to credit card processing equipment, a California appellate court held that the parties’ choice of New York forum for dispute resolution was unenforceable due to the existence of a pre-dispute waiver of a non-waivable right guaranteed by the California constitution, statutes, and case law interpreting the same. With a lot of fintech business conducted in northern California, this decision refusing to uphold New York choice of law and forum since the underlying agreement included a waiver that was impermissible under California law is significant. The case is Handoush v. Lease Fin. Group, LLC, No. A150863, 2019 WL 5615674 (Cal. Ct. App. Oct. 31, 2019).
Navigating the European Rules and Regulations.
Synthetic securitization has had a rocky ride in Europe. 2004-2005 was the high watermark. The financial crisis almost killed off the market, before a gradual recovery began. In 2018, there were 49 European synthetic securitization deals, reaching a post-crisis record of EUR 105 billion.
On October 30, 2019, SEC Chairman Jay Clayton announced that the SEC will review its RMBS asset-level disclosure requirements with “an eye toward facilitating SEC-registered offerings.” The announcement notes the absence of SEC-registered RMBS securitizations in recent years and seeks input from investors, issuers and other market participants with respect to several questions posed in the announcement, including questions about the RMBS market, the asset-level disclosure requirements for RMBS, and the market practice of providing 5-digit zip codes to investors in non-registered issuances. The announcement follows recent reports that some market participants have approached regulators to seek relief from certain of the disclosure requirements of Regulation AB, which many consider difficult or even impossible to comply with. Chairman Clayton’s announcement signals that the SEC is open to reconsidering the Regulation AB framework as it relates to RMBS. Read the full announcement here.