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Fitch Insights: A Discussion on the Future of RMBS

In a roundtable event held earlier this month, Fitch Ratings spoke with several leading third-party review (TPR) firms to identify potential grading, process, and standardization improvements. The report titled “U.S. RMBS TPR Roundtable Takeaways: Striving for Improvement in RMBS Due Diligence” highlights 12 focus areas designed to improve the RMBS industry.

The main takeaways from the event included establishing a working group, possibly within the Structured Finance Industry Group (SFIG) to create an industry consensus on recent due diligence items. It also included making changes to reporting and processing to make the due diligence product clearer and easier to use.

While uncertainty exists among TPR firms on how to perform due diligence on new loan products, particularly for compliance due to differing methodologies, the participants suggested regulatory compliance be open source with a single interpretation of rules for all TPR firms to operate from.

The most noteworthy aspect of the event was reduced bank statement program loans, asset depletion programs, and investor cash flow loans making their way into new deals. Fitch is taking a more bearish view on new RMBS containing these newer types of loans.  

Regulatory Compliance

The participants believe the industry should work to establish standard regulatory compliance guidelines to be used across all TPR firms, similar to the SFIG RMBS 3.3 TRID Compliance Review Scope for TILA/RESPA Integrated Disclosure related compliance items. Since disagreements exist among TPR firms, primarily due to a lack of regulatory clarity, a consensus and standardization of approach should be considered. For example, among the TPR firms, originators and RMBS participants, disagreements occurred on calculating prepaid finance charges.

Addressing New Loan Product Challenges

TPR firms expressed the importance of effectively testing new loan products, particularly one-month bank statements and investor cashflow loans because of the less granulated review scope. These loan products do not address the eight ability to repay (ATR) factors needed to determine whether a consumer has the ability to repay the loan. Fitch believes the RMBS industry should provide guidelines on what review of these loans should entail, as some TPR firms reach for Fannie Mae and Freddie Mac guidelines when product-specific guidelines are not available.

On Due Diligence

Each TPR firm produces reports using their own proprietary format, creating challenges for those conducting diligence review, particularly when multiple firms are involved in a single RMBS transaction. To solve the issue of conflicting determinations of compensating factors for underwriting exceptions, firms believe a hybrid approach of determining factors should be considered.

About Author: Dean Terrell

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