The Risk Retention Rule Is Coming! The sky may not be falling, but The Risk Retention Rule is Coming at last! Very soon, we hear.
After a long, long wait, the logjam appears to be broken and the Rule is coming. Remember now, Dodd Frank is now over four years old. One might muse that if it has taken four years to figure out what to do, perhaps doing nothing should be seen as a viable option? Certainly that’s what the SEC has done with the so-called Franken Amendment about restructuring the rating agency model which is well and truly buried, effectively for good, one hopes. Being that as it may, the risk retention beast is about to slouch into Bethlehem. The “tell” on this was the SEC giving up its long-held resistance to gutting the Qualified Mortgage definition to remove conservative down payment requirements. (Gutting is too harsh a word? Ah, maybe. It seems an open question as to whether deciding low down payment loans ought to fit into the no risk retention safe harbor is good or bad public policy). But, it had to be resolved before the Rule would come out. For want of a nail the shoe was lost, for want of a shoe, the horse was lost, etc. With that resolved, the Risk Retention Rule can be completed and released. The Kremnologists of the Washington regulatory establishment say that we will see it sometime between now and year end.
What it might say is now the more intriguing question. Is premium recapture dead? Might we get relief on very low single lever, standalone structures? Could we see a senior subordinated B piece fix? We certainly think Premium Recapture is finally dead; I don’t think we’ll get relief on the standalones or B pieces. Might we see something entirely new? I also don’t think so, but we will only really know when the Rule comes out. Will the Rule come out as a re-proposal in whole or in part, will it come out as a Final Rule? An interim Final Rule? The chatter is that it will be final. No more dialogue with the regulators, no more impassioned pleas, no more efforts to try to explain how the capital markets really work. Done. The two year transition period will begin.
And let’s not forget RegAB. This could be the bigger deal. RegAB was on the runway behind risk retention so that the risk retention components of RegAB could be reconciled with the broader Risk Retention Rules. We should be ready to see RegAB in short order after the Rule is published. Moreover, there is even some chatter that it may come up out before risk retention. Remember the SEC is reportedly grumpy that it lost the inter agency argument on QM.
What will RegAB look like? It’s been so long since any of us have really looked at RegAB 2.0 (which was originally published in 2010, republished in 2012 and then a small piece of it regarding information privacy republished for comment this past spring) that I’m going to need to go back and re-read the damn thing. I do remember, however, it was seriously problematic in many respects.
Stand by; it’s not all going to be good. If we see re-proposals, we have a chance to engage. If we see final rules, it’ll be time to figure out how to conduct business in a very, very changed regulatory landscape.