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Hearing of the Capital Markets and Government-Sponsored Enterprises of the House Financial Services Committee - Dodd-Frank Risk-Retention Rule


Location: Washington, DC

Today, we are examining the ongoing rule-writing of Section 941 of the Dodd-Frank Act. Section 941 of Dodd-Frank mandates that our financial regulators craft rules requiring entities involved in the securitization process to retain a certain level of risk of the assets being securitized. The intent is to better align incentives among the chain of originators, securitizers and investors.

While I have stated numerous times that risk-retention, in theory, can be a constructive addition if done correctly, I have significant concerns with the rule as currently written and the many unanswered questions it specifically raises.

Some of my main concerns are not only with the policy implications of the rule, but also with the process and manner in which some of the policies were included and the explicit disregard of congressional intent.

Section 941, 15G, (e)(3)(B) specifically exempts all assets which are insured or guaranteed by the United States or an agency of the United States. The rest of the section specifically says that Fannie and Freddie are not agencies of the U.S. government.

"It's hard for me to see how much more explicit Congress can be. It was not the intent to have the GSEs exempted from the risk-retention requirements. Yet, the rule before us today allows for the GSE's to be exempt by claiming that their guarantee functionally acts as a formal type of risk-retention. This will severely hinder ongoing efforts by the administration and Congress to encourage more private capital in our mortgage markets and reduce taxpayer risk.

By a 34-0 unanimous vote last week, this Subcommittee passed legislation that I introduced which attempts to ensure that the government and private sector are treated equally with regards to this risk-retention proposal. As most of you know, over the last several years, there have not been many pieces of legislation that have passed in this committee by unanimous vote.

So, this should be a clear indication to you that Congress believes you need to alter your rule and follow the clear intent of Dodd-Frank on this topic. I look forward to working with each of you to ensure the final draft is structured in a way that does not put the private market at a disadvantage to the government.

Another one of my main concerns is the addition of servicing standards to this rule. While I agree there are a number of problems that have occurred in the servicing sector, I do not believe that unelected bureaucrats should be attaching their unauthorized policy goals on the next train leaving the station.

As you all know, I was on the Dodd-Frank Conference Committee. During the over 6 days of discussion during that conference, I do not remember a time when servicing standards was contemplated, much less discussed. I certainly cannot find anything in Section 941 authorizing regulators to include servicing standards in this rule.

It is Congress' role to examine the issues in the servicing industry and make specific policy proposals -- not the regulators.

These two instances, the exemption of the GSEs and inclusion of servicing standards, highlight my overarching concern about the manner in which this rule was drafted. In one instance, Congress specifically directed the regulators to do something and you did the opposite. And then in another instance, Congress didn't provide any authority or authorization to do something and you did it anyway.

I certainly hope that you and the heads of your agencies will reverse course on these issues and actually follow the letter of the law instead of inventing your own. This is just a microcosm of the absurdity of delegating over 300 rules affecting millions of people and businesses, not to mention the entire U.S. economy, to dozens of agencies and then mandating they have to be done in a year or less.

There are many other very important issues that members need to learn more about today like the specific underwriting standards proposed for the Qualified Residential Mortgage (QRM), how private mortgage insurance should factor in to that criteria, and the "premium capture cash reserve accounts" requirement and its possible tremendous negative effect on the residential and commercial securitization markets.

This rule will have a broad impact on so many people and our economic recovery, and it is critical we get it right. I hope today's hearing can begin to help move us in that direction.

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