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Loan originators no longer must have ‘skin in the game’

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Loan originators no longer must have ‘skin in the game’

Brookings Institution,

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US mortgage originators’ due diligence obligations are disappearing.

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Recommendation

After the Great Recession, US regulators attempted to prevent another credit crisis by enacting the Dodd-Frank Act, which included a requirement that mortgage originators hold at least 5% of an initiated mortgage security on their own books. Senior financial expert Robert C. Pozen discusses a recent ruling that invalidates the 5% provision for some participants and argues that the change, along with the easing of other controls, could pose immense future risk to the financial system. getAbstract recommends this concise and informative report to financial professionals.

Summary

One of the provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act – requiring that mortgage originators retain a minimum of 5% of the value of a mortgage debt instrument – seemed a logical attempt to promote a “skin in the game” mentality among lenders. The 5% rule provided a check on originators by ensuring that the initializing broker or lender had thoroughly vetted the borrower before a loan could spread through the financial system via sales to “pool sponsors” and then to investors as part...

About the Author

Robert C. Pozen, a senior fellow at the Brookings Institution, was formerly executive chairman of MFS Investment Management.

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