Federal Housing Finance Agency: Enterprise Regulatory Capital Framework – Commingled Securities, Multifamily Government Subsidy, Derivatives, Other Enhancements
The rule was issued by
* * *
SUMMARY:
The
DATES:
This final rule is effective on
FOR FURTHER INFORMATION CONTACT:
SUPPLEMENTARY INFORMATION:
I. Introduction
On
FHFA proposed these amendments to implement lessons learned through the continued application of the ERCF and to better reflect the risks faced by the Enterprises in operating their businesses. Regulatory capital requirements that properly account for risk will allow the Enterprises to build capital to enhance their safety and soundness and protect
II. Overview of the Final Rule
FHFA continuously monitors the risks faced by the Enterprises and reviews the appropriateness of the ERCF's capital requirements and buffers to mitigate those risks. After carefully considering the comments on the proposed rule, FHFA has determined that the amendments in the final rule will enhance the ERCF, contribute to the Enterprises' safety and soundness, and better enable the Enterprises to fulfill their statutory mission throughout the economic cycle. Specifically, the final rule will:
- Reduce the risk weight and credit conversion factor for guarantees on commingled securities to 5 percent and 50 percent, respectively,
- Introduce a risk multiplier of 0.6 for multifamily mortgage exposures secured by properties with certain government subsidies,
- Replace the current exposure methodology (CEM) with the standardized approach for counterparty credit risk (SA-CCR) as the method for computing exposure and risk-weighted asset amounts for derivatives and cleared transactions,
- Update the credit score assumption to 680 for single-family mortgage exposures originated without a representative credit score,
- Introduce a risk weight of 20 percent for guarantee assets,
* Align the timing of the first application of the single-family countercyclical adjustment with the first property value adjustment, and
Delay the compliance date for the advanced approaches to
FHFA has also identified several aspects of the ERCF where modifications will clarify and enhance the usefulness of the framework. Therefore, the final rule will also:
- Expand the definition of MSAs to include servicing rights on mortgage loans owned by the Enterprise,
- Explicitly permit eligible time-based call options in the CRT operational criteria, subject to certain restrictions,
- Amend the risk weights for IO MBS to 0 percent, 20 percent, and 100 percent, conditional on whether the security was issued by the Enterprise, the other Enterprise, or a non-Enterprise entity, respectively, and
- Clarify the calculation of the stability capital buffer when an increase and a decrease might be applied concurrently.
III. General Overview of Comments on the Proposed Rule
FHFA received 23 public comment letters on the proposed rule from a variety of interested parties, including private individuals, trade associations, consumer advocacy groups, and financial institutions.[3] In general, and as discussed in greater detail in the relevant sections of this preamble, commenters were supportive of FHFA's proposed amendments to the ERCF.
One commenter recommended that FHFA consider climate-related financial risks in relation to most topics covered in the proposed rule. FHFA recognizes that climate change poses a serious threat to the
In addition to the feedback FHFA received on elements of the proposed rule, FHFA also received comments on many issues that are outside the scope of this rulemaking. In these letters, commenters offered views on important topics such as single-family and multifamily base risk weights, a multifamily countercyclical adjustment, a risk multiplier for multifamily senior housing, defeased loans, early redemption features in senior-subordinated CRT structures, the CRT risk-weight floor, the calculation of the stability capital buffer, the commingling fee, pricing for single-family loans originated by third-parties, the alternative credit score implementation timeline, and the Enterprises' exits from conservatorships. FHFA acknowledges the importance of these topics and will thoroughly consider the public's feedback on these issues when relevant rulemakings and policy decisions are under consideration.
IV. Final Rule Requirements
A. Guarantees on
The proposed rule would reduce the risk weight under the standardized approach for guarantees on commingled securities from 20 percent to 5 percent and the credit conversion factor for guarantees on commingled securities from 100 percent to 50 percent. A commingled security is a security issued by one Enterprise that is backed, in whole or in part, by collateral issued by the other Enterprise, subject to certain restrictions. FHFA posited that the 20 percent risk weight and 100 percent credit conversion factor for guarantees on commingled securities may not accurately reflect the counterparty risks posed by commingling activities and in certain circumstances may impair the liquidity of the Enterprises' securities, which may adversely affect the nation's housing finance market.
Many commenters supported FHFA's proposal to lower the risk weight and credit conversion factor for guarantees on commingled securities. Several commenters supported the proposed 5 percent risk weight and 50 percent credit conversion factor. Others expressed the view that guarantees on commingled securities should have a risk weight and credit conversion factor lower than 5 percent and 50 percent, respectively, stating that lower capital requirements would enhance the liquidity of the common MBS known as the Uniform Mortgage-Backed Security (UMBS) and foster the stability and liquidity of the secondary mortgage market. Several commenters recommended that FHFA eliminate all capital requirements for guarantees on commingled securities, suggesting that any provisions in the ERCF that might deter commingling activity by hindering the fungibility of the Enterprises' MBS or by driving commingling fees should be removed. One commenter opposed any non-zero risk weight because in the commenter's view, it results in a double capital charge on the securities underlying the UMBS, as each Enterprise is already required to hold capital for the underlying securities it guarantees.
The final rule adopts FHFA's proposal to reduce the risk weight for guarantees on commingled securities from 20 percent to 5 percent and the credit conversion factor for guarantees on commingled securities from 100 percent to 50 percent. FHFA is adopting a non-zero risk weight and a non-zero credit conversion factor because a key tenet of the ERCF is that all exposures with risk, however small, are capitalized. The Enterprises' obligations do not have an unlimited explicit guarantee of the full faith and credit of
FHFA is retaining the 5 percent risk weight as proposed because the credit exposures arising out of these guarantees and the resultant losses an Enterprise would experience from commingled securities would likely occur in remote circumstances through sustained catastrophic levels of loss after the other Enterprise has exhausted its loss-absorbing financial resources. FHFA will continue to monitor the impact of a non-zero risk weight on the performance of the UMBS in keeping with the intent and purpose of the Single Security Initiative. Conceptually, the risk weight for guarantees on commingled securities in the final rule aligns with the risk-weight floor for retained CRT exposures. In addition, the final rule's 50 percent credit conversion factor for guarantees on commingled securities aligns with the prevailing regulatory capital treatment for off-balance sheet undrawn commitments with an original maturity of more than one year that are not unconditionally cancelable by the Enterprise.
B. Multifamily Government Subsidy Risk Multiplier
The proposed rule would introduce a risk multiplier under the standardized approach equal to 0.6 for any multifamily mortgage exposures secured by one or more properties each with at least one applicable government subsidy, subject to certain affordability criteria. Under the proposed rule, the applicable government subsidies would be limited to the following three primary subsidy programs: (i) Low-Income Housing Tax Credit (LIHTC),[5] (ii) Section 8 project-based rental assistance, and (iii) State and local affordable housing programs that require the provision of affordable housing for the life of the loan. A multifamily mortgage exposure meeting the collateral criteria would qualify for the 0.6 risk multiplier if the Enterprise can verify that each property securing the exposure has at least 20 percent of its units restricted as affordable units, where the affordability restriction means the income of the renter is less than or equal to 80 percent of area median income (AMI).
The current rule does not differentiate between multifamily mortgage exposures secured by properties with a government subsidy and by properties without a government subsidy. Properties with government subsidies represent an important segment of the Enterprises' multifamily business models, and as part of the annual acquisition limits, FHFA directs the Enterprises to meet specific affordable housing or mission goals by acquiring multifamily loans collateralized by properties that charge rents affordable to certain segments of the population with specified income levels. Affordable property units are available to renters at a rental rate below the typical market rate, leading to generally strong demand for affordable property units and therefore to relatively stable vacancy rates.
Many commenters expressed support for FHFA's proposal to introduce a government subsidy risk multiplier to reflect that multifamily mortgage exposures associated with government-subsidized properties are less risky than those associated with unsubsidized properties, all else equal. Many commenters supported the 0.6 risk multiplier as proposed, while a few commenters recommended that FHFA adopt a multiplier smaller than 0.6. One commenter recommended that FHFA consider a pro-rated risk multiplier scaled between 0.6 and 1.0 when a multifamily mortgage exposure is secured by multiple properties and some but not all of the properties have an applicable government subsidy.
One commenter recommended that FHFA require an Enterprise to measure the percentage of affordable units at each property only at acquisition rather than on a quarterly basis, which the commenter understood was FHFA's intent, to avoid operational constraints and be consistent with the application of the housing goals regulation. Multiple commenters recommended that FHFA expand the affordability criteria to allow for exceptions in high-cost and very-high-cost markets. For example, one commenter suggested that an 80 percent of AMI threshold could be used in standard markets, while thresholds of 100 percent of AMI and 120 percent of AMI could be used high-cost and very-high-cost markets, respectively. Several commenters recommended that FHFA expand the list of applicable government subsidies, with suggested additions including the rural rental housing program under Section 515 of the Housing Act of 1949 (Section 515 Rural Rental Housing Loans),
The final rule adopts a multifamily government subsidy risk multiplier that is scaled between 0.6 and 1.0 depending on the properties securing the multifamily mortgage exposure. When some but not all properties securing a multifamily mortgage exposure have an applicable government subsidy, each property with an applicable government subsidy will receive a property multiplier of 0.6 and each property without an applicable government subsidy will receive a property multiplier of 1.0, and the government subsidy risk multiplier for the multifamily mortgage exposure will be calculated as a weighted average of the property multipliers using the total number of units per building as weights.
In addition, the final rule adopts the affordability criteria and list of applicable government subsidies substantially as proposed, with the addition of Section 515 Rural Rental Housing Loans as an applicable government subsidy. Section 515 Rural Rental Housing Loans are direct loans made by the
To ensure that the applicable subsidy programs meet the affordability criteria without creating ongoing compliance and operational burdens for the Enterprises, the final rule requires that at least 20 percent of the property's units are restricted to be affordable units per a regulatory agreement, recorded use restriction, a housing-assistance payments contract, or other restrictions codified in loan agreements. Each program included in the list of applicable government subsidies has its own requirements that ensure the subsidies are significant, long-term, and continuous. By requiring the affordability criteria to be included in contractual provisions, FHFA believes it is not necessary for the final rule to specify that the percentage of affordable units be measured only at acquisition. FHFA expects an Enterprise to validate that a property is receiving a valid government subsidy at acquisition in order for the multifamily mortgage exposure secured by that property to receive a government subsidy risk multiplier less than 1.0, and subsequently not to undertake additional compliance exercises on top of what is required by the subsidy programs themselves.
The final rule does not include a government subsidy risk multiplier less than 0.6. In a data-driven exercise, FHFA determined that a 40 percent decrease in regulatory capital appropriately captures the lower credit risk associated with multifamily mortgage exposures secured by properties with a significant, long-term, and continuous government subsidy. The final rule does not include exceptions for high-cost and very-high-cost markets in order to mitigate the operational complexity of applying the government subsidy risk multiplier, as rental costs and income levels within metro areas change over time.
Finally, the final rule does not include the Enterprises' voluntary rent restriction programs (SIA and TAC), block grant programs, or tax-exempt private activity bonds as applicable government subsidies. While these programs do often support affordable housing and provide benefits to lenders, FHFA sought to include as applicable government subsidies programs administered by the Federal or a State government that span most of the Enterprises' affordable businesses and that have significant performance data available. Many of the additional programs identified by commenters as recommended inclusions are either non-governmental, are used as a layer in a financing stack in conjunction with an already applicable government subsidy, do not have performance data readily available for FHFA to assess, or are not specifically oriented to the creation or preservation of affordable rental housing.
C. Derivatives and Cleared Transactions
The proposed rule would require an Enterprise to calculate risk-weighted assets for the standardized approach based on the exposure amounts of its over-the-counter (OTC) derivative contracts, cleared derivative contracts, and contributions of commitments to mutualized loss sharing agreements with central counterparties ( i.e., default fund contributions) calculated using SA-CCR. The proposed rule would also require an Enterprise to use these same exposure amounts for inclusion in adjusted total assets. The current regulation requires an Enterprise to use the CEM to determine the exposure amounts of its OTC derivative contracts and cleared derivative contracts and the risk-weighted assets amounts of its default fund contributions.
The proposed rule would require an Enterprise to apply SA-CCR in the following ways:
1. Netting Sets
The proposed rule would require an Enterprise to calculate the exposure amount of its derivative contract at the netting set level. The proposed rule would define a netting set to mean either one derivative contract between an Enterprise and a single counterparty, or a group of derivative contracts between an Enterprise and a single counterparty that are subject to a qualifying master netting agreement (QMNA).
2. Hedging Sets
To calculate potential future exposure (PFE), the proposed rule would require an Enterprise to fully or partially net derivative contracts within the same netting set that share similar risk factors. This approach would recognize that derivative contracts with similar risk factors share economically meaningful relationships with close correlations that make netting appropriate.
Under SA-CCR, a hedging set means those derivative contracts within the same netting set that share similar risk factors. The proposed rule would define five types of hedging sets--interest rate, exchange rate, credit, equity, and commodities--and would provide formulas for netting within each hedging set. Each formula would be particular to each hedging set type and would reflect the regulatory correlation assumptions between risk factors in the hedging set.
3. Derivative Contract Amount for the PFE Component Calculation
The proposed rule would require an Enterprise to use an adjusted derivative contract amount for the PFE component calculation under SA-CCR. However, as part of the estimate, SA-CCR would use updated supervisory factors that reflect the stress volatilities observed during the financial crisis. The supervisory factors would reflect the variability of the primary risk factors of the derivative contract over a one-year time horizon. In addition, SA-CCR would apply a separate maturity factor to each derivative contract that would scale down, if necessary, the default one-year risk horizon of the supervisory factor to the risk horizon appropriate for the derivative contract.
4. Collateral Recognition and Differentiation Between Margined and Unmargined Derivative Contracts
Under the proposed rule, SA-CCR would account for collateral directly within the exposure amount calculation. For replacement cost, the proposed rule would recognize collateral on a one-for-one basis. For
To accommodate the introduction of the SA-CCR into the ERCF's standardized approach, the proposed rule would make a series of corresponding modifications, including adding appropriate defined terms to ERCF's definitions and updating the calculation of total risk-weighted assets. Notably, the proposed rule would replace the current requirements for cleared transactions (12 CFR 1240.37) and collateralized transactions (12 CFR 1240.39) with modified requirements from the
The proposed rule would maintain the current collateral haircut approach and standard supervisory haircuts for collateralized transactions. However, the proposed rule would remove the current simple approach and add the
The proposed rule would also add credit valuation adjustment (CVA) risk-weighted assets to the calculation of standardized total risk-weighted assets. The CVA is a fair value adjustment that reflects counterparty credit risk in the valuation of OTC derivative contracts. CVA risk-weighted assets cover the risk of incurring mark-to-market losses because of the deterioration in the creditworthiness of an Enterprise's counterparties. The proposed rule would include the
Two commenters supported FHFA's proposal to replace CEM with SA-CCR, with certain revisions. Both commenters recommended an implementation timeline of no less than 24 months due to the complexity of implementing SA-CCR and to be generally consistent with the transition period offered to large
The final rule adopts the requirements that an Enterprise must determine the exposure amounts of its OTC derivative contracts, cleared derivative contracts, and default fund contributions, for use in calculating risk-weighted assets under the standardized approach and adjusted total assets, using SA-CCR substantially as proposed, with a transition period resulting in an effective date of
FHFA agrees with commenters that a 24-month transition period will allow the Enterprises a suitable amount of time to update their systems and processes to implement SA-CCR. During the transition period, the Enterprises must continue to use CEM to calculate exposure amounts for derivatives and cleared transactions, as provided in prior 1240.36, 1240.37, and 1240.39.[7] On
Regarding the commenter's suggestion to make SA-CCR an optional requirement, although the Enterprises' derivatives portfolios are relatively uncomplicated today, that may not be the case after the Enterprises exit their conservatorships. Furthermore, in constructing the ERCF, FHFA has consistently developed requirements similar to those applicable to banking organizations subject to the advanced approaches rather than those subject to the standardized approach. For example, the ERCF includes a stability capital buffer (analogous to surcharge for global systemically important banks), a leverage buffer, market risk capital requirements, and operational risk capital requirements, none of which are applicable to banking organizations subject to the standardized approach. Following this reasoning, and to limit certain capital arbitrage opportunities between Enterprises and between the Enterprises and large banking organizations, the final rule does not include CEM as an option for calculating regulatory capital ratios after the transition period.
D. Original Credit Scores for Single-Family Mortgage Exposures Without a Representative Original Credit Score
The proposed rule would require an Enterprise to assign an original credit score of 680 under the standardized approach to a single-family mortgage exposure without a permissible credit score at origination (unscored), subject to Enterprise verification that none of the borrowers have a credit score at one of the repositories. The current regulation requires an Enterprise to assign a credit score of 600 to any single-family mortgage exposure that is unscored. The current regulation's conservative assignation places single-family mortgage exposures with unscored borrowers in the lowest possible ERCF credit score buckets across the single-family base grids, implying the highest level of risk.
Four commenters expressed full support for FHFA's proposal to increase the assigned original credit score for unscored single-family mortgage exposures from 600 to 680. Therefore, to reflect post-crisis improvements in regulatory, underwriting, and lending standards, as well as the recent inclusions of positive rental payment histories in the Enterprises' automated underwriting systems,[8] the final rule adopts the requirement to assign an original credit score of 680 to unscored single-family mortgage exposures without a permissible credit score, subject to Enterprise verification that none of the borrowers have a credit score at one of the repositories, as proposed.
E. Guarantee Assets
The proposed rule would introduce a 20 percent risk weight under the standardized approach for an Enterprise's guarantee assets. A guarantee asset is an on-balance sheet asset that represents the present value of a future consideration for providing a financial guarantee on a portfolio of mortgage exposures not recognized on the balance sheet. Examples of such off-balance sheet exposures include, but are not limited to,
One commenter supported FHFA's proposed 20 percent credit risk weight for guarantee assets. In addition, in response to a question posed in the proposed rule, the commenter recommended that FHFA not include guarantee assets in the definition of covered positions subject to market risk capital requirements. The commenter expressed the view that because guarantee assets are not positions held for the purpose of short-term resale or with the intent of benefitting from short-term price movements, the positions do not contribute to an Enterprise's interest rate risk.
The final rule adopts the risk weight of 20 percent for guarantee assets as proposed. In addition, and in consideration of the feedback FHFA received, the final rule does not include guarantee assets in the definition of covered positions subject to market risk capital requirements.
F. Mortgage Servicing Assets
The proposed rule would modify the definition of MSAs to include the contractual right to service any mortgage loans, regardless of the owner of the loan at the time the servicing rights are acquired. Currently, the ERCF defines an MSA as the contractual right to service for a fee mortgage loans that are owned by others. Therefore, this definition omits MSAs created when an Enterprise acquires servicing rights on mortgage loans already owned by the Enterprise, bifurcating the capital treatment for MSAs by the owner of the underlying loans.
One commenter supported FHFA's proposal to expand the definition of MSA to include servicing rights on mortgage loans owned by the acquiring Enterprise. No commenters raised objections or provided alternative recommendations to the proposal. The final rule adopts the definition of MSA as proposed.
G. Time-Based Calls for CRT Exposures
The proposed rule would amend the ERCF to permit eligible time-based calls for CRT exposures under the standardized approach, defining an eligible time-based call as a time-based call that:
(i) Is exercisable solely at the discretion of the issuing Enterprise, and with a non-objection letter from FHFA prior to being exercised;
(ii) Is not structured to avoid allocating losses to securitization exposures held by investors or otherwise structured to provide at most de minimis credit protection to the securitization; and
(iii) Is only exercisable five years after the securitization exposure's issuance date.
Under the current regulation, time-based calls, which are integral to the Enterprises' credit risk management and are routinely used by the Enterprises to manage CRT economics, are not explicitly included as eligible clean-up calls in the credit risk transfer approach.[9]
Three commenters supported FHFA's proposal to permit eligible time-based calls for CRT exposures. One commenter recommended that FHFA modify the proposed definition of time-based calls to be a contractual provision that permits an originating Enterprise to redeem a securitization or credit risk transfer exposure on or after a specified redemption or cancellation date to clarify FHFA's intent that eligible time-based calls will be permitted for all CRT exposures. While this is FHFA's intent, the Agency believes that the proposed definition without the phrase "or credit risk transfer" is sufficient because the definition of a securitization exposure in 1240.2 explicitly includes both retained CRT and acquired CRT exposures. Further, the proposed rule would only modify the operational criteria for credit risk transfers (1240.2(c)), implying that the only securitization exposures that would be affected by the amendment are CRT exposures. One commenter recommended that FHFA modify proposed restriction (i) to be "is exercisable no less than five years after the securitization or credit risk transfer issuance or effective date," because the commenter expressed the view that adding "or effective date" would clarify FHFA's intent that eligible time-based calls will be permitted for CRT that do not involve securitizations, such as reinsurance transactions. Finally, one commenter recommended that for CRT involving single-family mortgage exposures with terms less than or equal to 20 years, the proposed five-year exercise restriction be shortened to four years.
The final rule adopts the ERCF amendment permitting eligible time-based calls for CRT exposures substantially as proposed, with revisions reflecting two commenter suggestions. First, the final rule adopts the suggested clarification that an eligible time-based call is one that is exercisable no less than a certain number of years after the securitization or CRT issuance or effective date. This revision reflects FHFA's intent that eligible time-based calls will be permitted for CRT that do not involve securitizations. Second, the final rule adopts the suggested modification to shorten the exercise restriction for CRT involving single-family mortgage exposures with terms less than or equal to 20 years to no less than four years after the CRT issuance or effective date. This revision reflects the risk reduction associated with the faster amortization of shorter-term loans relative to longer-term loans.
H.
The proposed rule would clarify that, under the standardized approach, an Enterprise must assign a zero percent risk weight to an IO MBS issued and guaranteed by the Enterprise, a 20 percent risk weight to an IO MBS issued and guaranteed by the other Enterprise, and a 100 percent risk weight to an IO MBS issued by a non-Enterprise entity. Currently, the ERCF contains conflicting requirements that an Enterprise must assign a zero percent risk weight to any MBS guaranteed by the Enterprise (other than any retained CRT exposure), but also that the risk weight for a non-credit-enhancing IO MBS must not be less than 100 percent.
One commenter supported FHFA's proposal to amend the risk weights for IO MBS to clarify which risk weight must be applied when an IO MBS is issued and guaranteed by the Enterprise versus when an IO MBS is issued by a non-Enterprise entity. No commenters raised objections or provided alternative recommendations to the proposal. The final rule adopts the updated IO MBS risk weights as proposed.
I. Single-Family Countercyclical Adjustment
The proposed rule would require under the standardized approach an Enterprise to apply to a single-family mortgage exposure's loan-to-value ratio (LTV) the first single-family countercyclical adjustment simultaneously with the first property value adjustment, six months after acquisition. Currently, an Enterprise is required to apply the first single-family countercyclical adjustment after acquisition without delay, while the Enterprise is required to apply the first property value adjustment after a six-month delay to allow for a rate of change to be computed following the quarterly release of FHFA's Purchase-only State-level House Price Index.
One commenter supported FHFA's proposal to align the timing between the application of the first single-family countercyclical adjustment and the first property value adjustment. However, the commenter recommended that both adjustments be applied immediately rather than after a six-month delay. The commenter did not provide analytical support for this recommendation.
The final rule adopts the timing adjustment to the application of the first single-family countercyclical adjustment as proposed. FHFA believes this modification will reduce the volatility in the capital requirement for a single-family mortgage exposure over the first six months after origination and mitigate the incentive for the Enterprises to delay acquiring credit protection.
J. Stability Capital Buffer
The proposed rule would clarify that if an increase and decrease in the stability capital buffer are scheduled for the same date, the Enterprise should rely on the more recent data and implement the decrease, disregarding the increase. Under the ERCF, increases in the stability capital buffer are implemented with a two-year delay, while decreases are implemented with a one-year delay. This delay difference potentially creates a situation where an increase and a decrease in the stability capital buffer are scheduled to become effective at the same time.
One commenter supported FHFA's proposed clarification to the calculation of the stability capital buffer. No commenters raised objections or provided alternative recommendations to the proposal. The final rule adopts the clarification as proposed.
K. Advanced Approaches
The proposed rule would extend the compliance date for an Enterprise's advanced approaches from
Commenters fully supported FHFA's proposal to extend the compliance date of the advanced approaches. One commenter expressed the view that the advanced approaches are exceptionally burdensome and undermine the capital visibility provided by the ERCF's standardized approach.
The final rule extends the compliance date for an Enterprise's advanced approaches to
V. Representative Credit Scores for Single-Family Mortgage Exposures
FHFA currently is not adopting the proposed modification to the procedure for selecting a representative credit score for a single-family mortgage exposure when multiple credit scores have been submitted for at least one borrower. The proposed methodology would have required an Enterprise to use an average credit score for each borrower whenever multiple scores are present as opposed to the current methodology which requires an Enterprise to select the median borrower credit score when three scores are present or the lower borrower credit score when two scores are present.
FHFA proposed this modification to prevent a downward shift in representative credit scores under the current methodology once the Enterprises require a minimum of two, rather than three, credit reports (bi-merge credit score requirement) from the repositories.[11] While the implementation date for the bi-merge credit score requirement has yet to be announced, the proposed modification would have positioned the Enterprises to account for the new requirement upon implementation.
Many commenters supported FHFA's proposal to modify the current procedure for selecting a representative credit score for single-family mortgage exposures. However, other commenters expressed concern over the proposed change. Several commenters stated that it is difficult or impossible to evaluate the proposed change without additional data and when the eventual effects of the bi-merge credit score requirement and the transition to alternative credit scores are not yet known. Others expressed concern that changes to the ERCF could lead to policy changes at the Enterprises that would front-run the implementation of the bi-merge credit score requirement and the transition to alternative credit scores. FHFA also received a number of comments on the bi-merge credit score requirement and on the use of alternative credit scores more generally, but those initiatives are outside the scope of this rulemaking.
One commenter provided empirical support for FHFA's proposal to use the average credit score when multiple scores are present rather than the median/lower score. However, the commenter also suggested that FHFA should require a third score when the two submitted scores are more than 30 points apart to minimize the impact of outliers. In addition, the commenter requested further analysis on, among other things, the potential impact of the bi-merge credit score requirement on race, gender, and geographic location for high-LTV loans with bi-merge representative credit scores greater than or equal to 10 points higher or lower than the score derived under the tri-merge process. Several commenters expressed the view that they could not comment on the appropriateness of the representative credit score proposal until FHFA or the Enterprises released additional data on the bi-merge credit score requirement under Classic FICO scores and under the new alternative credit scoring models. Several commenters also expressed criticism that FHFA's analysis only considered Classic FICO scores, suggesting that the results of the analysis might differ after the Enterprises begin accepting alternative credit scores.
FHFA proposed this narrow change to the calculation of a representative credit scores to prepare the ERCF for the eventual transition to the bi-merge credit score requirement. In
FHFA may, in the future, finalize this aspect of the proposed rule. The Agency's options for doing so include adopting the changes substantially as proposed without another notice and comment period, reopening the comment period for the proposed change, or reproposing this item in another notice of proposed rulemaking.
VI. Effective Dates
Under the rule establishing the ERCF published on
VII. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.) requires that regulations involving the collection of information receive clearance from the
VIII. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (5 U.S.C.
IX. Congressional Review Act
In accordance with the Congressional Review Act (5 U.S.C.
List of Subjects for 12 CFR Part 1240
- Capital
- Credit
- Enterprise
- Investments
- Reporting and recordkeeping requirements
Director,
BILLING CODE 8070-01-P
BILLING CODE 8070-01-C
[FR Doc. 2023-26078 Filed 11-29-23;
BILLING CODE 8070-01-P
* * *
The document was published in the
TARGETED NEWS SERVICE (founded 2004) features non-partisan 'edited journalism' news briefs and information for news organizations, public policy groups and individuals; as well as 'gathered' public policy information, including news releases, reports, speeches. For more information contact
Americans for Financial Reform Education Fund, 6 Collaborators Issue Public Comment to NCUA
Three candidates seek Florida House District 118 vacancy. Here’s who’s running [Miami Herald]
Advisor News
- Social Security Fairness Act increases need for financial advice
- It’s a new year: How will you reinvigorate your client service?
- Trump should impose China tariffs, prioritize renewing tax cuts and immigration reform
- Fewer report having retirement savings than a year ago
- Paul Brahim becomes 2025 FPA president
More Advisor NewsAnnuity News
- AM Best Affirms Credit Ratings of Reinsurance Group of America, Incorporated and Subsidiaries
- Life insurance and annuity sales: What’s ahead for 2025?
- Ares Management Raises Over $2.3 Billion of Equity Commitments to Support the Long-Term Growth of Aspida
- Salt Financial Annuity Index analytics report for 2024
- Ibexis Life & Annuity Insurance Company® Launches WealthDefender™ Fixed Index Annuity Series
More Annuity NewsHealth/Employee Benefits News
- HCA's purchase of CMC could lead to higher costs for some
- North Dakota lawmakers to consider bill capping price of insulin
- Americans’ rage at insurers goes beyond health coverage
- Community roots, expanding horizons: MountainOne Insurance's decade of growth and commitment
- HCA-CMC deal could lead to higher costs
More Health/Employee Benefits NewsLife Insurance News
- AM Best Affirms Credit Ratings of Reinsurance Group of America, Incorporated and Subsidiaries
- Life insurance and annuity sales: What’s ahead for 2025?
- Investor overview presentation
- AM Best Affirms Credit Ratings of Etiqa General Insurance Berhad
- UnitedHealth ordered to pay $165M for deceiving costumers
More Life Insurance News