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Risk Retention Rule Nearing Completion

governmentFinancial regulators said Tuesday they hope to finish their work on a rule aimed at tightening mortgage standards and reducing risk by the end of this year.

In a Senate Banking Committee hearing, FDIC chair Martin Gruenberg said his agency and others are "in the end game" of their work on a rule that would require mortgage-backed securities (MBS) issuers to hold a stake on packaged loans that don't meet certain exemption requirements.

"I would hope, without making predictions, that we could complete that rulemaking by the end of the year," Gruenberg told the committee Tuesday.

Federal Reserve governor Daniel Tarullo echoed Gruenberg's statement, though he was less concrete on a timeline: "I don't know whether I'd say by the end of the year, but I think we're definitely in the home stretch."

As it was proposed in 2011, the rule originally called for securities issuers to hold on to 5 percent of a mortgage's risk after selling it unless the borrower made a 20 percent down payment.

In response to industry concerns about access to homeownership, regulators have since loosened those standards to remove the down payment requirement, instead creating a parallel to the Consumer Financial Protection Bureau's qualified mortgage definition and granting exemptions to qualified loans.

If released this year, the finalized rule would achieve what former congressman Barney Frank said was the most important provision of 2010's Dodd-Frank Act: a requirement that mortgage lenders keep some "skin in the game" rather than passing off risky loans.

It would also be a step forward for the Dodd-Frank Act itself. As of July, analysts estimate only 52 percent of the required rulemakings set forth in the act have been finalized, with an additional 24 percent still yet to be proposed.

About Author: Tory Barringer

Tory Barringer began his journalism career in early 2011, working as a writer for the University of Texas at Arlington's student newspaper before joining the DS News team in 2012. In addition to contributing to DSNews.com, he is also the online editor for DS News' sister publication, MReport, which focuses on mortgage banking news.
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