Unless an exemption applies, “neither the retaining sponsor nor any of its affiliates may pledge as security for any liability (including a loan, repurchase agreement or other financial transaction) any share of ABS that the sponsor is required to retain in relation to the securitization transaction by subpart B of this part unless such commitment pertains to the sponsor or affiliate, as applicable. [emphasis added]”
For RMBS, transfer restrictions and collateral expire on the date which is (1) the later of: (a) five years after the closing date of the securitization or (b) the date on which the whole outstanding principal balance of the securitized assets is reduced to 25 the share of the unique principal outstanding on the securitization closing date, but (2) in any case no later than seven years from the securitization closing date. A Sponsor that retains Item B can also transfer it to a Qualifying Third Party Buyer five years after the closing date.
Sponsors of RMBS securitisations for which no exemption applies wishing to pledge the remaining securities from an RMBS transaction as collateral for non-recourse funding where they’ve the correct, but not the duty, to purchase back the collateral, may give you the chance to avoid realizing losses in accordance with GAAP because such a transaction can’t be considered a “true sale” by their accounting firm; nevertheless, they achieve this at their very own risk, as this practice is expressly prohibited by Section 15G – and the potential consequences are severe. In addition, lenders who facilitate these transactions may face regulatory liability unless they first confirm that their non-recourse loans are unsecured.
Section 15G accommodates quite a lot of exceptions, including an exception for asset-backed securities which can be backed only by residential mortgages that qualify as “Qualified Residential Mortgages” (“QRM”). While Section 15G has been in effect since February 23, 2015, it defines QRM as a “Qualified Mortgage” as defined in Section 129C of the Truth-in-Lending Act (“QM”).
The Consumer Financial Protection Bureau (“CFPB”) modified the final definition of QM within the Implementing Regulation to the Lending Act (“Regulation Z”), which entered into force on October 1, 2022. By abandoning the target test (debt to income ratio < 43% calculated in accordance with Appendix Q) of the CFPB clarified that each QM loans containing a straightforward presumption of conformity and Non-QM loans using bank statements to confirm income or assets must solicit deposits into the buyer's checking account to be able to confirm that the deposits are income and never e.g. loan proceeds. Raising deposits creates an additional layer of risk and uncertainty when a consumer has a linked checking account. How can a creditor distinguish and prove which a part of the deposit is income and an advance payment for expenses (reminiscent of constructing materials)?
