In April 2021, the PRA published a statement on the regulatory treatment of retail residential mortgage loans under the Mortgage Guarantee Scheme (MGS). The PRA is aware that there are mortgage insurance schemes with similar contractual features to MGS where an insurer in the private sector guarantees a portion of the first losses net of recoveries on retail residential mortgage loans eligible for the schemes.
Schemes with similar contractual features to MGS
This statement does not provide an exhaustive commentary of the regulatory requirements for these loans, firms should review the relevant legislation and, if necessary, seek independent advice to satisfy themselves that they meet all applicable requirements. In particular, the UK Capital Requirements Regulation (CRR) requires firms to obtain a legal opinion on the effectiveness and enforceability of credit protection afforded by a guarantee.footnote  The PRA considers this requirement to be capable of being satisfied on the basis of a legal opinion obtained jointly by firms. The PRA expects firms to assess their compliance, and where they are not compliant, develop and implement remediation plans to ensure compliance by no later than Tuesday 30 April 2024.
The PRA’s approach to capital
The PRA’s approach to capital, as described in the MGS statement, would be applicable to such private mortgage insurance schemes with similar contractual features to MGS.
The PRA’s approach to notification, disclosure, and reporting requirements
With reference to the PRA’s approach to ‘Significant Risk Transfer Notification’, ‘Private Securitisation Notification to the PRA’, ‘Disclosure’, and ‘Regulatory Reporting’ requirements, the treatment reserved for MGS loans in the MGS statement is extended to retail residential mortgage loans made under private mortgage insurance schemes with similar contractual features to MGS.
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. The PRA recognises that a firm may find applying this notification requirement to each private retail residential mortgage loan to be unduly burdensome. In this case, a firm should consider applying for a modification by consent in accordance with section 138A FSMA to notify the PRA only once (for the whole scheme), following completion of the initial private retail residential mortgage loan securitisation transaction. The PRA’s direction, which can be found on the PRA’s waivers and modifications webpage, modifies the relevant PRA rule to require a single notification within one month of underwriting loans under the private retail residential mortgage scheme. The PRA may periodically seek information on a firm’s overall use of private retail residential mortgages to satisfy itself that commensurate risk transfer is achieved. The PRA draws firms’ attention to the expectations it has set out in Supervisory Statement 9/13 ‘Securitisation – Significant Risk Transfer.’
Private securitisation notification to the PRA
Article 7 of the Securitisation Regulation requires the originator, sponsor, and securitisation special purpose entity (SSPE) of a securitisation to make available certain information to the PRA and Financial Conduct Authority (FCA) with regard to each individual securitisation. In line with Regulation 25 of The Securitisation Regulations 2018, the PRA hereby directs that participating firms submit one notification with regard to private retail residential mortgage securitisations, detailing the estimated aggregate scheme size.
The PRA recognises the potentially disproportionate burden associated with the firm obligation to submit regulatory templates under the Disclosure Binding Technical Standards (BTS). In this case, the PRA is not minded to enforce the use of the regulatory disclosure templates if a firm has provided to the holder of the guaranteed position information which is substantively the same as that prescribed by the disclosure template(s). For example, where a firm decided to provide the information to the holder of the guaranteed position using the BTS template(s) format but within a single template (ie all information within one template with rows for each loan) instead of one template per loan, the PRA is not minded to enforce.
The PRA recognises that a firm may consider that the burden associated with reporting C14 and C14.01 templates under the Reporting (CRR) Part of the PRA Rulebook for each private retail residential mortgage on a loan-by-loan basis is unduly burdensome in the firm’s circumstances. In this case, a firm should consider applying for a modification by consent in accordance with section 138A FSMA to report on an aggregated basis for private retail residential mortgage securitisations. The PRA’s direction, which can be found on the PRA’s waivers and modifications webpage, modifies the relevant PRA rule to require reporting on an aggregated basis for all transactions subject to the same private mortgage insurance scheme.
CRR Articles 213(3) and 245(4)(g).