Mel Watt of FHFA Discusses the Common Securitization Platform and Credit Risk Transfers

In a recent speech, Federal Housing Finance Agency (FHFA) director Melvin Watt discussed key FHFA initiatives for 2016. Watt stated that the common Securitization Platform (CSP) and Single Security efforts will be launched in two stages. Watt stated, "In the first stage, which we are calling Release 1, the CSP will begin issuing and administering only Freddie Mac's securities. In the second phase, Release 2, the CSP will begin issuing and administering securities for both Enterprises and will do so using the new Single Security for the first time."

Regarding credit risk transfers, Watt stated that Fannie Mae and Freddie Mac are on pace to exceed the 2015 Conservatorship Scorecard objectives. In terms of next steps, Watt stated, "we want to refine and further standardize the Enterprises' debt, reinsurance and upfront offerings. This will help broaden liquidity. We will continue to work with the Enterprises on other innovative transaction types, such as credit-linked notes. We will also aggressively continue our work to analyze, assess, and define upfront credit risk transfers. We are committed to engaging stakeholders as part of this process."  Speech.

CFPB Finalizes Rule to Improve Information About Access to Credit in the Mortgage Market

On October 15, 2015, the Consumer Financial Protection Bureau issued a final rule that revised the reporting requirements under the Home Mortgage Disclosure Act.  Most of these changes take effect on January 1, 2018.  Release.

FHFA Finalizes House Price Index Measure for Conforming Loan Limits for Fannie Mae and Freddie Mac

On October 19, 2015, the Federal Housing Finance Agency issued a Final Notice indicating that it will continue to use "expanded-data" House Price Index when establishing Freddie Mac and Fannie Mae's maximum conforming loan limits.  Release.

Obama Administration's Legislative Proposal to Address Puerto Rico's Fiscal Crisis

On October 21, 2015, U.S. Treasury Secretary Jacob J. Lew, National Economic Council Director Jeff  Zients, and Health and Human Services Secretary Sylvia Mathews Burwell unveiled a legislative proposal, a copy of which is attached,  to help Puerto Rico address its serious fiscal challenges.   The Administration has requested Congress to act promptly to amend chapter 9 of the Bankruptcy Code authorizing the troubled public corporations to file bankruptcy petitions.  More than twenty Democrats have become co-sponsors of that  proposed amendment, but no Republicans making passage of the proposed amendment unlikely. 

The Administration's proposal has four central elements:

• Legislative amendments to provide Puerto Rico with an orderly restructuring regime to comprehensively address its financial liabilities by restructuring its debts.
• Establishing an  independent fiscal oversight to certify that Puerto Rico adheres to the recovery plan it is implementing in a credible and transparent way.
• Reforming the Commonwealth's Medicaid program to  ensure that the program provides better access to healthcare services. 
• Providing the Commonwealth with access to the Earned Income Tax Credit (EITC).

As part of the bankruptcy proposal, the Administration has proposed a "Super Bankruptcy" for the Commonwealth itself.  The Administration's proposal contemplates a "Super Bankruptcy" that would be reserved for U.S. territories to allow a comprehensive restructuring of all of the territory's liabilities. The outline states that:

The restructuring regime should provide the basic protections of bankruptcy: a stay on creditor collection actions, priority for new private short-term cash flow financing, and voting by creditor classes on any proposed restructuring. Such an approach would, among other things, provide breathing space for consensual negotiations and ensure the uninterrupted provision of essential public services.

Proposal.

On October 20, 2015, Fitch published its updated Rating Criteria for Ports.  Release.

On October 20, 2015, Kroll released its U.S. Equity REITs & REOC Rating Methodology.  Report.

On October 20, 2015, Moody's released Moody's Approach to Rating Structured Finance Interest-Only Securities.  Report.

On October 19, 2015, Fitch published its updated RMBS Compare.  Release.

On October 19, 2015, Moody's released Moody's Approach to Rating Derivative Product Companies.  Report.

On October 19, 2015, DBRS released its General Corporate Methodology.  Report.

On October 16, 2015, Fitch published its second U.S. RMBS Mortgage Servicer Handbook.  Release.

On October 16, 2015, Moody's released its rating methodology for Gas Prepayment Bonds.  Report.

On October 15, 2015, Fitch published its updated U.S. Auto Loan ABS Rating Criteria.  Release.

On October 15, 2015, DBRS released a report entitled Operational Risk Assessment for European Structured Finance Originators.  Report.

Barclays and Wachovia Settle with NCUA

On October 19, 2015, Barclays PLC and Wachovia Capital Markets LLC agreed to pay $325 million and $53 million, respectively, to settle claims brought by the National Credit Union Administration Board (NCUA), as liquidating agent of five credit unions, regarding residential mortgage backed securities purchased by those credit unions.  NCUA alleged in the actions (filed in New York, California, and Kansas federal courts) that the characteristics of the RMBS and the underlying loans were misrepresented in the offering documents.  NCUA Press Release on Barclays.  NCUA Press Release on Wachovia.  We previously covered two of NCUA's actions against Wachovia here and here.

Joint Committee of ESAs Consults on Risk-Based Supervision and Risk Factors Guidelines

On October 21, 2015, the Joint Committee of the European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority ( together , the European Supervisory Authorities "ESAs") published two consultation papers on guidelines required under Article 48(10) of the Fourth Money Laundering Directive ((EU) 2015/849) (MLD4).

The committee's consultation paper on the risk-based supervision guidelines (JC 2015 060) focuses on the characteristics of a risk-based approach to anti-money laundering (AML) and counter financing of terrorism (CFT) supervision and the steps supervisors should take when conducting supervision on a risk-sensitive basis. The aim is to create both a common understanding of risk-based supervision (RBS) and to establish consistent and effective supervisory practices across the EU, complaint with the Financial Action Task Force's standards. RBS is characterized as an ongoing and cyclical process that includes four steps:

• identification of the money laundering (ML) and terrorist financing (TF) risk factors,
• risk assessment (whereby competent authorities use this information to obtain a holistic view of the ML/TF risk associated with each credit or financial institution),
• allocation of AML/CFT supervisory resource based on the risk assessment; and
• monitoring to ensure the risk assessment and associated allocation of supervisory resource remains up to date and appropriate.

The guidelines make recommendations for each of these steps and build on a preliminary report published by the ESAs in October 2013.

The ESAs are required to issue the guidelines on the risk factors under Article 17 and 18(4) of MLD4. The committee's consultation paper on the guidelines (JC 2015 061) covers simplified and enhanced customer due diligence and the factors which credit and financial institutions should consider when assessing the AML/CFT risk associated with individual business relationships and occasional transactions. The aim is to promote the development of a common understanding by firms and competent authorities across the EU of what the risk-based approach to AML/CFT entails and how it should be applied.

• Title II of the guidelines is generic and applies to all credit and financial institutions. It is designed to equip firms with the tools they need to make informed, risk-based decisions when identifying, assessing and managing AML/CFT risk associated with individual business relationships or occasional transactions.
• Title III of the guidelines is sector specific. It sets out risk factors that are of particular importance in certain sectors, including retail banks, wealth management and life insurance undertakings, and provides guidance on the risk-sensitive application of customer due diligence measures by firms in those sectors. The guidelines are likely to be finalized in spring 2016 and, once adopted, the ESAs will keep them under review and update them as appropriate.

Comments on both consultation papers should be received by January 22, 2016. The ESAs will hold a public hearing on the draft guidelines on December 15, 2015.

European Commission Report on Capital Requirements for Covered Bonds

On October 20, 2015, the European Commission published a report (COM(2015) 509 final), addressed to the European Parliament and the Council of the EU, on capital requirements for covered bonds as required by Article 503 of the Capital Requirements Regulation (Regulation 575/2013) (CRR).

The Commission's report follows on from the recommendations in the July 2014 report of the European Banking Authority (EBA) on EU covered bond frameworks and capital treatment.

In the report the Commission considers:

Preferential risk weighting for covered bonds. Credit institutions investing in covered bonds qualifying under Article 129 of the CRR are allowed to hold lower levels of regulatory capital in relation to those instruments than would otherwise apply to senior unsecured bank debt. The Commission agrees with the EBA's recommendation that the preferential risk weights in Article 129 and the own fund requirements for specific risk in Article 336(3) of the CRR remain an adequate prudential treatment for qualifying covered bonds.

Preferential risk weighting for aircraft loans. Covered bonds secured by aircraft loans are not currently eligible assets under Article 129. The EBA concluded that it would not be appropriate to include these loans as eligible assets and accordingly the Commission has decided not to make any proposals to amend Article 129 of the CRR for this purpose.

Preferential weighting for guaranteed residential loans. Guaranteed residential loans are currently subject to the eligibility requirements in Article 129(1)(e). The Commission's view is that it is appropriate to continue treating these loans as eligible assets.

Article 496 derogation. The Commission was mandated by Article 503 to review whether the derogation set out in Article 496 of the CRR is appropriate and should be applied to other types of covered bonds. Article 496 sets out a derogation for senior units issued by French Fonds Communs de Creances or equivalent securitization instruments. The Commission intends to await feedback to its September 2015 consultation paper on an EU covered bond framework before taking decisions on these issues.