Some low-risk home loans that meet certain underwriting guidelines will no longer be eligible for an exemption from a broader rule requiring so-called skin-in-the-game if House Financial Services Committee Chairman Barney Frank gets his way as lawmakers put the final touches on new rules for Wall Street.
The skin-in-the-game provision forces loan originators and securitizers to retain in their portfolios at least 5 percent of the value of loans, rather than shifting all of the risk down the food chain as the debt gets resold.
Senator Mary Landrieu, a Louisiana Democrat, successfully added an exemption for certain low-risk residential mortgages in the Senate version of the bill, in the process of being merged with a version from the House of Representatives before being sent to President Barack Obama for his signature into law.
Frank, who chairs the panel in charge of the merger process, formally announced on Monday that he would seek to strip out the exemption.
Proponents say forcing those who make the loans to retain some of the risk creates an incentive that should help make sure the underlying loans are ones that can be repaid.
Landrieu had sought an exemption on grounds that the risk retention requirements make it harder to get credit and the low-risk loans should not be penalized.
Frank also wants to scrap a provision backed by Republican Senator Mike Crapo of Idaho that would require U.S. regulators to consider alternate forms of risk retention for the commercial mortgage-backed securities market.
The plan to scrap the two provisions is a blow to the Mortgage Bankers Association, which opposes the risk retention requirements and backed the exemption provisions.
Frank's proposal would still have to be approved by other House members on the merger panel and then by Senate members of the panel.
(Reporting by Corbett B. Daly; Editing by Dan Grebler)