Private Lenders to Keep 5 Percent of Risk Under New U.S. Rules

Private lenders will be required to keep at least a 5 percent stake in loans they package and sell under an agreement reached by House and Senate lawmakers who are negotiating the financial-regulatory bill.

Lawmakers said the goal of the risk retention rule, also known as the skin-in-the-game provision, is to raise the quality of loans by keeping companies tied to the loans they make. Lax underwriting on subprime mortgages helped fuel the mortgage market collapse in 2007.

The measure would affect credit-card debt, auto loans, mortgages and other securitized debt. Issuers of asset-backed debt and the originators who supply them with pools of loans would be forced to retain at least 5 percent of the credit risk.

Lawmakers exempted many mortgages from the rules after lobbying by brokers and community banks, who said forcing lenders to keep loans on their books would tie up capital and lead to higher interest rates.

Originators of long-term, fixed-interest-rate mortgages would be among those that would not be required to retain risk. The exemption would not apply to mortgages with risky features such as negative amortization, interest-only payments and balloon payments.

In addition, loans guaranteed by the Federal Housing Administration, U.S. Department of Agriculture and U.S. Department of Veterans Affairs would not be required to retain risk. Combined, the agencies last year guaranteed more than 30 percent of new U.S. mortgages as private lenders fled the market after the collapse of the housing bubble.

Fannie and Freddie

Loans guaranteed by Fannie Mae and Freddie Mac, the mortgage companies taken over by the government, are not specifically exempted in the legislation. The two companies, which own or guarantee more than half of U.S. home loans, have tightened underwriting standards in the past year and many of the loans they guarantee are likely to fall under the qualified mortgage exemption.

The goal is to allow government agencies to promote lending in the absence of private capital, FHA Commissioner David Stevens said.

“The reason why you ultimately exempt the government programs is that we serve this countercyclical role in the market,” Stevens said in an interview. “The capital has got to be there when the market needs it most.”

The rule will curtail lending to consumers, said Tom Deutsch, executive director of the American Securitization Forum, a New York trade group that represents issuers, investors and other participants in the market.

“Some credit will become more expensive because of these rules,” Deutsch said in an interview.

To contact the reporter on this story: Lorraine Woellert in Washington at

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