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    PRA on Regulatory Treatment of Loans Under Mortgage Guarantee Scheme

    April 19, 2021

    PRA published a statement on the regulatory treatment of retail residential mortgage loans under the Mortgage Guarantee Scheme, or MGS. The statement addresses capital, notification, disclosure, and reporting requirements for retail residential mortgage loans, as set out in the UK legislation. The legislation being referred to constitutes the Capital Requirements (Amendment) (EU Exit) Regulations 2019 and the Securitization (Amendment) (EU Exit) Regulations 2019. The approach a firm uses for credit risk purposes for its UK retail residential mortgage loans—the standardized approach or the internal ratings-based, or IRB, approach—will determine how a firm calculates capital requirements for Mortgage Guarantee Scheme loans.

    Under the Mortgage Guarantee Scheme, participating firms are exposed to 5% of the first loss on a Mortgage Guarantee Scheme loan. Given that firms retain the whole of the senior part of the loan, PRA considers this to be equivalent to the firm holding a 5% "vertical slice" of the underlying mortgage loan outside of the guarantee structure. Firms should calculate the capital requirements for that part of a Mortgage Guarantee Scheme loan as an exposure to the underlying mortgage loan using the IRB approach or standardized approach, as applicable. The 5% vertical slice of each Mortgage Guarantee Scheme loan outside the guarantee should be included in the calculation of the 10% loss given default (LGD) floor set out in Article 164(4) of the UK CRR. When applying the Securitization Internal Ratings Based Approach (SEC-IRBA), firms should calculate the IRB capital requirements for each Mortgage Guarantee Scheme loan. The guaranteed portion of the loan would be treated as an exposure to the UK government. In cases where firms choose not to recognize the guarantee for calculating capital requirements or where the significant risk transfer test is not met, firms should calculate capital requirements as if the guarantee did not exist and as if the underlying loan exposure had not been securitized as per Article 247(2) of the UK CRR. 

    The approach of PRA to capital would be applicable to mortgage insurance schemes with similar contractual features to Mortgage Guarantee Scheme, but the approach to reporting, notification, and disclosure only applies to Mortgage Guarantee Scheme and not to other securitization programs. The statement provides the following information on notification, disclosure, and reporting requirements for residential mortgage loans under the Mortgage Guarantee Scheme:

    • Significant Risk Transfer Notification—Rule 3.1 of the Credit Risk Part of the PRA Rulebook requires firms to post-notify each individual transfer of significant credit risk. PRA recognizes that firms may find applying this notification requirement to each Mortgage Guarantee Scheme loan to be unduly burdensome. In this case, firms should consider applying for a modification by consent to notify PRA only once (for the whole program), following completion of the initial MGS loan securitization transaction. 
    • Private Securitization Notification to PRA—In line with Regulation 25 of The Securitization Regulations 2018, PRA hereby directs that participating firms submit one notification with regard to Mortgage Guarantee Scheme securitizations, detailing the estimated aggregate program size. PRA will reflect this modification as part of a broader update of the direction on its webpage in due course.
    • Disclosure—PRA notes the potentially disproportionate burden associated with the firm obligation to submit regulatory templates under the Disclosure Binding Technical Standards when HM Treasury (the sole holder of the guaranteed position) has requested that information be submitted in another format to meet system requirements. In this case, PRA is not minded to enforce the use of the regulatory disclosure templates if firms have provided to HM Treasury the information that is substantively the same as that prescribed by the disclosure templates. 
    • Regulatory reporting—PRA is not minded to enforce where a firm reports C14 and C14.1 COREP templates on an aggregated basis for Mortgage Guarantee Scheme securitizations in respect of the reporting dates that fall within 2021. Subject to outcome of the PRA consultation on CRR rules on reporting, firms that wish to continue reporting on an aggregated basis will need to have secured a modification to the relevant CRR rule in the PRA Rulebook. PRA will consider and may, where appropriate, publish a modification by consent direction in due course.

     

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    Keywords: Europe, UK, Banking, Securities, Mortgage Guarantee Scheme, Regulatory Capital, CRR, Securitization Regulation, Basel, Reporting, Credit Risk, IRB Approach, Standardized Approach, PRA Rulebook, Disclosures, RRE, PRA

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