Taxpayer Protections and Market Access for Mortgage Finance Act of 2016

To require Fannie Mae and Freddie Mac to engage in credit risk transfer transactions, and for other purposes. 1. Short title This Act may be cited as the Taxpayer Protections and Market Access for Mortgage Finance Act of 2016 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. 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 and increasing credit risk-transfer 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 and types of risk-transfer transactions that the enterprises engaged in during the previous 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; 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 commodity exchange act; consultation (1) Exemption A swap (as such term is defined in section 1a of the Commodity Exchange Act ( 7 U.S.C. 1a (2) Prior consultation requirement Before the execution of a risk-transfer transaction that would be exempt from the Commodity Exchange Act pursuant to paragraph (1), the Director shall consult with the Commodity Futures Trading Commission. (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 (2) First loss The term first-loss (3) Front-end risk transfer The term front-end risk transfer (4) Guarantee fee The term guarantee fee 12 U.S.C. 4547(a) (5) Risk-transfer transaction The term risk-transfer transaction (A) the sale, disposition, retention, or transfer within the private sector of credit risk on any single-family residential mortgage loan or a pool of such 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) (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) , including notes, bonds, other evidences of indebtedness, certificates, securities, and other interests, that are 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 subparagraph (B) of section 856(c)(3) ( 26 U.S.C. 856(c)(3)(B) , 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) (B) in subparagraph (B) of section 856(c)(5) ( 26 U.S.C. 856(c)(5)(B) , 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) 3. Pilot program for small lender risk transfer 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 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 sharing transaction for which both bank and non-bank mortgage originators having under $10,000,000,000 in assets are eligible participants. 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 of the Federal Housing Finance Agency shall require the enterprises jointly to establish a pilot program to increase the amount of risk that is transferred by the enterprises using private mortgage insurance. (b) Program requirements The 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 the enterprises shall purchase under the 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 or issued by both enterprises is not less than $50,000,000,000. (B) Exception The amount of qualifying loans that the enterprises are 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 the enterprises under the pilot program shall be subject to requirements and limitations under State laws. (5) 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 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 Federal Government 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 comparably with other credit risk-transfer structures. (f) Definitions For purposes of this section, the following definitions shall apply: (1) Director The term Director (2) Eligible mortgage insurance provider The term eligible mortgage insurance provider (A) is regulated as a mortgage guaranty insurance company by its State of domicile; (B) provides qualifying mortgage insurance; and (C) satisfies— (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 12 U.S.C. 4502 (4) Qualifying loan The term qualifying loan (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 (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.

Summary: Taxpayer Protections and Market Access for Mortgage Finance Act of 2016 This bill amends the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 to direct the Federal Housing Finance Agency (FHFA) to establish guidelines to require the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) to engage in significant and increasing credit risk transfer transactions. A "risk transfer transaction" provides for: (1) the sale, disposition, retention, or transfer within the private sector of credit risk on any single-family residential mortgage loan or a pool of such loans that back securities on which the enterprise guarantees the timely payment of principal and interest; or (2) 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. The enterprises may set and publish guarantee fees commensurate with the reduced credit risk resulting from any new risk transfer transactions. The bill exempts certain swaps entered into for the purpose of transferring or sharing credit risk in connection with a risk transfer transaction from the Commodity Exchange Act. The FHFA must also require Fannie Mae and Freddie Mac to: (1) establish a five-year pilot program under which each enterprise must annually engage in at least one front-end (before or simultaneous with the acquisition of the loan or security by the enterprise) risk sharing transaction for which both bank and non-bank mortgage originators having under $10 billion in assets are eligible participants, and (2) jointly establish a pilot program to increase the amount of risk that is transferred by the enterprises using private mortgage insurance.