115th CONGRESS 1st Session |
To require Fannie Mae and Freddie Mac to engage in credit risk transfer transactions, and for other purposes.
July 28, 2017
Mr. Royce of California (for himself and Ms. Moore) introduced the following bill; which was referred to the Committee on Financial Services, and in addition to the Committees on Ways and Means, and Agriculture, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned
To require Fannie Mae and Freddie Mac to engage in credit risk transfer transactions, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
This Act may be cited as the “Taxpayer Protections and Market Access for Mortgage Finance Act of 2017”.
SEC. 2. Credit risk-transfer transactions.
(a) Requirement for enterprises.—Subpart A of part 2 of subtitle A of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4541 et seq.) is amended by adding at the end the following new section:
“SEC. 1328. Enterprise credit risk-transfer transactions.
“(a) Requirement.—Not later than 12 months after the date of enactment of this Act, the Director shall, after taking into consideration market conditions and the safety and soundness of the enterprises, establish guidelines requiring that each enterprise engage in significant, increasing, and varied credit risk-transfer transactions, with an emphasis on front-end transactions.
“(b) Considerations.—In establishing the guidelines under subsection (a), the Director shall—
“(1) seek to promote a deep, broad market for a variety of structures that together insulate the taxpayer from losses, minimize ongoing risks to the enterprises, remain stable through the economic cycle, maintain adequate access to the secondary market for lenders of all sizes, and promote credit for borrowers in all communities;
“(2) continue and seek to increase the amount of credit risk transferred to the private sector and the types of risk-transfer transactions that the enterprises engaged in each year with the goal that the risk transferred by an enterprise by all credit risk-transfer transactions shall be at least 400 basis points of risk in total, starting from the first dollar of credit loss among all the different credit risk-transfer structures;
“(3) continue and seek to increase front-end risk transfer transactions, including those done at the time of origination; and
“(4) continue and seek to increase transactions in which the first loss position is transferred or shared and through structures that are scalable and transparent.
“(c) Guarantee fees.—The enterprises shall set and publish guarantee fees, including up-front delivery fees and loan level price adjustments, commensurate with the enterprises’ reduced credit risk resulting from any new risk-transfer transaction.
“(d) APA compliance.—The guidelines required under subsection (a) shall be issued and made available to the public pursuant to section 553 of title 5, United States Code.
“(e) Compensation.—The Director shall adjust individual and corporate scorecards used in determining compensation for relevant enterprise employees to align with the considerations of subsection (b).
“(f) Exemption from certain Commodity Exchange Act provisions.—A swap (as such term is defined in section 1a of the Commodity Exchange Act (7 U.S.C. 1a)) entered into for the purpose of transferring or sharing credit risk in connection with a risk-transfer transaction shall not be deemed to be a commodity interest (as such term is defined in section 1.3(yy) of the regulations of the Commodity Futures Trading Commission (17 C.F.R. 1.3(yy))), and no swap counterparty or other person sponsoring or arranging a risk-transfer transaction shall be deemed to be a commodity pool operator (as such term is defined in section 1.3(cc) of such regulations), solely by virtue of entering into or sponsoring or arranging such a swap in connection with such transaction.
“(g) Report.—The Director shall submit a report, not later than October 30 of each year, to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate, on the activities of each enterprise in meeting the guidelines established under subsection (a) and any obstacles the Director has determined have impeded the ability of the enterprises to meet such guidelines.
“(h) Definitions.—For purposes of this section, the following definitions shall apply:
“(1) CREDIT RISK.—The term ‘credit risk’ means, with respect to a mortgage loan on a one- to four-family residential property that is held or guaranteed, or intended to be held or guaranteed, by an enterprise or any security backed by such residential mortgage loans held or guaranteed by the enterprise, the risk of loss to the enterprise that could result from a mortgagor’s failure to repay any such loan in accordance with its terms.
“(2) FIRST LOSS.—The term ‘first-loss’ means the risk of loss for an enterprise on a mortgage loan on a one- to four-family residential property or a security backed by such residential mortgage loans, beginning with the first dollar of loss.
“(3) FRONT-END RISK TRANSFER.—The term ‘front-end risk transfer’ means, with respect to a mortgage loan on a one- to four-family residential property or any security backed by such residential mortgage loans, a risk transfer or risk share that occurs before or simultaneous with the acquisition of such loan or security by an enterprise.
“(4) GUARANTEE FEE.—The term ‘guarantee fee’ has the meaning given such term in section 1327(a) (12 U.S.C. 4547(a)).
“(5) RISK-TRANSFER TRANSACTION.—The term ‘risk-transfer transaction’ means any transaction that provides for—
“(A) the sale, disposition, retention, or transfer within the private sector of credit risk on any residential mortgage loan on a one- to four-family residential property or a pool of such residential mortgage loans that back securities on which the enterprise guarantees the timely payment of principal and interest; or
“(B) the retention by the private sector of any such credit risk in connection with the sale of any such loan or security to an enterprise.”.
(b) Conforming amendment to Commodity Exchange Act.—Paragraph (10) of section 1a of the Commodity Exchange Act (7 U.S.C. 1a(10)) is amended by adding at the end the following new subparagraph:
“(C) RULE OF CONSTRUCTION.—A swap (as such term is defined in section 1a) entered into for the purpose of transferring or sharing credit risk in connection with a risk-transfer transaction shall not be considered to be a commodity interest (as such term is defined in section 1.3(yy) of title 17, Code of Federal Regulations), and no swap counterparty or other person sponsoring or arranging a risk-transfer transaction shall be considered to be a commodity pool operator (as such term is defined in section 1.3(cc) of such title), solely by virtue of entering into or sponsoring or arranging such a swap in connection with such transaction.”.
(c) Conforming amendments to existing laws.—
(1) INVESTMENT COMPANY ACT OF 1940.—Section 3(c)(5) of the Investment Company Act of 1940 (15 U.S.C. 80a–3(c)(5)) is amended by inserting before the period the following: “, including notes, bonds, other evidences of indebtedness, certificates, securities, and other interests, issued in connection with or otherwise related to a risk-transfer transaction (as such term is defined in section 1328(h) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992)”.
(2) ASSET AND INCOME TEST CLARIFICATION FOR ENTERPRISE RISK-TRANSFER TRANSACTIONS.—The Internal Revenue Code of 1986 is amended—
(A) in each of paragraphs (2)(B) and (3)(B) of section 856(c) (26 U.S.C. 856(c)), by inserting before the semicolon at the end the following “, and gross income resulting from participation in any transaction, including notes, bonds, other evidences of indebtedness, certificates, securities, and other interests, that are risk-transfer transactions (as such term is defined in section 1328(h) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992)”; and
(B) in subparagraph (B) of section 856(c)(5) (26 U.S.C. 856(c)(5)(B)), by inserting before the period at the end of the first sentence the following: “, and participation in any transaction, including notes, bonds, other evidences of indebtedness, certificates, securities, and other interests, that are risk-transfer transactions (as such term is defined in section 1328(h) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992)”.
SEC. 3. Pilot program for small lender risk transfer.
(a) In general.—Not later than one year after the date of the enactment of this Act, the Director of the Federal Housing Finance Agency shall require each enterprise (as such term is defined in section 1303 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4502)) to establish a pilot program under which the enterprise shall annually engage, for each of the next 5 consecutive years, in at least one front-end risk-transfer transaction for which at least 75 percent of the credit risk transferred is transferred to bank or non-bank mortgage originators having under $10,000,000,000 in assets.
(b) Report.—Not later than the conclusion of the fifth year of the pilot program, the Director shall submit a report to the Congress that assesses the extent to which the pilot program under this section has—
(1) transferred credit risk from the Federal Government to mortgage originators; and
(2) resulted in increased participation in credit risk-transfer transactions by bank or non-bank mortgage originators having under $10,000,000,000 in assets.
(c) Extension of program.—Based on the assessments in the report required under subsection (b), the Director may extend the program beyond its fifth year of operation if the Director determines that such extension would be in the public interest.
SEC. 4. Pilot program for mortgage insurance risk transfer.
(a) In General.—Not later than one year after the date of the enactment of this Act, the Director shall require each enterprise to establish a pilot program to increase the amount of risk that is shared by the enterprise using private mortgage insurance.
(b) Program requirements.—Each pilot program established pursuant to subsection (a) shall meet the following requirements:
(1) DURATION.—The pilot program shall have a duration of 5 years.
(2) AMOUNT OF MORTGAGE PURCHASES.—
(A) IN GENERAL.—Except as provided in subparagraph (B), in each year each enterprise shall purchase under its pilot program sufficient qualifying loans or pools of qualifying loans such that the aggregate unpaid principal balance of all qualifying loans or loan pools purchased by the enterprise is not less than $25,000,000,000.
(B) EXCEPTION.—The amount of qualifying loans that each enterprise is required to purchase each year under paragraph (1) may be reduced if the Director and the Secretary of the Treasury jointly—
(i) make a determination that such a reduction is necessary to prevent an adverse impact to the housing market; and
(ii) submit to the Congress a report describing the justification for the determination referred to in clause (i).
(3) SELECTION OF MORTGAGE INSURANCE.—For each transaction under the pilot program involving a qualifying loan, the loan originator shall select an eligible mortgage insurance provider or providers, consistent with existing market practice.
(4) MORTGAGE INSURANCE PREMIUMS.—Mortgage insurance premiums applicable to qualifying loans purchased by an enterprise under the pilot program shall be subject to requirements and limitations under applicable State laws.
(5) GUARANTEE FEES.—Each enterprise shall set and publish guarantee fees, including up-front delivery fees and loan level price adjustments, commensurate with the enterprise’s reduced credit risk resulting from any new risk-transfer transaction under the pilot program.
(c) Report.—Not later than the conclusion of the fifth year of the pilot program, the Director shall submit a report to the Congress that assesses the extent to which the pilot program under this section has—
(1) transferred credit risk from the enterprises to the private sector;
(2) resulted in reduced guarantee fees for mortgage originators; and
(3) produced benefits or costs for borrowers under qualifying loans under the program.
(d) Extension of program.—Based on the assessments in the report required under subsection (c), the Director may extend the program beyond its fifth year of operation if the Director determines that such extension would be in the public interest.
(e) Mitigating counterparty risk.—Nothing in this section shall prevent the Director from establishing additional requirements on participants in the pilot program necessary to mitigate counterparty risk to the enterprises comparable to other credit risk-transfer structures.
(f) Definitions.—For purposes of this section, the following definitions shall apply:
(1) DIRECTOR.—The term “Director” means the Director of the Federal Housing Finance Agency.
(2) ELIGIBLE MORTGAGE INSURANCE PROVIDER.—The term “eligible mortgage insurance provider” means a company that—
(A) is regulated as a mortgage guaranty insurance company by its State of domicile;
(B) provides qualifying mortgage insurance; and
(i) (I) minimum requirements established or recognized by the Director, pursuant to public notice and comment, with respect to capital, leverage, and reserve requirements; or
(II) Private Mortgage Insurer Eligibility Requirements published by the enterprises on April 17, 2015; and
(ii) any additional requirements added by subsection (e) of this section.
(3) ENTERPRISE.—The term “enterprise” has the meaning given such term in section 1303 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4502).
(4) QUALIFYING LOAN.—The term “qualifying loan” means a first mortgage loan that—
(A) is secured by a one- to four-family residence; and
(B) is subject to qualifying mortgage insurance.
(5) QUALIFYING MORTGAGE INSURANCE.—The term “qualifying mortgage insurance” means, with respect to a qualifying loan, primary mortgage guaranty insurance for such qualifying loan that—
(A) is placed at the time the qualifying loan is originated;
(B) guarantees or insures that portion of the unpaid principal balance of the qualifying loan that is in excess of 50 percent of the value of the property securing the mortgage; and
(C) is provided by an eligible mortgage insurance provider.
Nothing in this Act or the amendments made by this Act shall be affected solely by termination of the conservatorship of an enterprise pursuant to section 1367 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617).