WASHINGTON, March 29 (UPI) -- U.S. bank regulators Tuesday issued a call for comment on a rule proposing banks retain 5 percent of the risks when reselling mortgage loans.
The rule proposed by the Federal Reserve and the Federal Deposit Insurance Corp. was proposed under guidelines set out in the Dodd-Frank financial system overhaul passed into law in July 2010.
The rule would "require sponsors of asset-backed securities to retain at least 5 percent of the credit risk of the assets underlying the securities," the Fed said.
The idea behind the rule is to have banks that write loans take greater care in writing them by mandating they hold onto some of the risk, rather than sell the loans outright, as is generally done when they bundle loans into securities and sell them to another bank.
A key issue in the rule the fine print defining what determines a "qualified residential mortgage" that would make up the loans affected by the 5 percent risk retention requirement -- and which loans would skate by.
The proposal includes "a variety of exemptions," the Fed said.
Exceptions would be based on "borrower credit history, payment terms, down payment for purchased mortgages and loan-to-value ratio designed to ensure they are of very high credit quality."
In other words with a good credit history and a sizable down payment, some of the more conservative loans would be exempt from the 5 percent risk retention rule.
The Fed said it would accept comments on the proposal through June 10, 2011.