Yesterday the U.S. Department of Housing and Urban Development, joined with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Federal Reserve, and the Securities and Exchange Commission announced the consideration and release of their Notice of Proposed Rulemaking (“NPR”) for Section 941 of the Dodd-Frank Act.

The rule-making sets proposed rules to implement the credit risk retention requirements for asset-backed securities and sets a 60 day comment period where all stakeholders are able to comment and provide feedback. Following this comment period, the rule writers will consider all comments received before releasing final rules.

HUD Secretary Shaun Donovan issued the following statement upon release of the proposed rule:

HUD Secretary Shaun Donovan

“Getting this right is critical. With the financial crisis, we saw how bundling and packaging mortgages to sell on Wall Street with no accountability helped lead to the erosion of lending and underwriting standards that fed the housing boom and deepened the housing bust. The Dodd-Frank Wall Street Reform Act requires that securitizers or originators have ‘skin in the game’ by retaining at least 5 percent of the credit risk and the rule proposed today sets out options to accomplish that mandate.”

“Importantly, the rule seeks to define qualified residential mortgages – the loans that would not be subject to the risk retention requirements. Much debate will center on the size of down payments. While there is no question that larger down payments correlate with better loan performance, down payments only tell part of the story. That’s why we have laid out two alternatives, one requiring a 10 percent down payment and another requiring 20 percent. We look forward to comment from stakeholders on the relative merits of these choices, so that we strike the right balance between managing risk and maintaining access to safe, responsible homeownership.”

All involved agencies are set to vote on the proposal by the end of the week.