Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Six federal agencies approved a final rule requiring sponsors of securitization transactions to retain risk in those transactions.  The final rule implements the risk retention requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The final rule is being issued jointly by the Board of Governors of the Federal Reserve System, the Department of Housing and Urban Development, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.

According to the regulators, the final rule largely retains the risk retention framework contained in the proposal issued by the agencies in August 2013 and generally requires sponsors of asset-backed securities, or ABS, to retain not less than five percent of the credit risk of the assets collateralizing the ABS issuance.  The rule also sets forth prohibitions on transferring or hedging the credit risk that the sponsor is required to retain.

As required by the Dodd-Frank Act, the final rule defines a “qualified residential mortgage,” or QRM, and exempts securitizations of QRMs from the risk retention requirement.  The final rule aligns the QRM definition with that of a qualified mortgage as defined by the Consumer Financial Protection Bureau.  The final rule also requires the agencies to review the definition of QRM no later than four years after the effective date of the rule with respect to the securitization of residential mortgages and every five years thereafter, and allows each agency to request a review of the definition at any time.  The final rule also does not require any retention for securitizations of commercial loans, commercial mortgages, or automobile loans if they meet specific standards for high quality underwriting.

SEC Commissioner Luis A. Aguilar addressed the point that the QRM definition is linked to CFPB rulemaking, but the CFPB was not tasked by the Dodd-Frank Act to promulgate the rulemaking.  As a result of that linkage, the QRM definition will be subject to change over time at the sole discretion of just one agency—the CFPB—and it may not always be reflective of what the particular agencies involved in this rulemaking may deem appropriate.  However, Commissioner Aguilar noted “[f]or these reasons, today’s rules mandate a periodic review of the QRM definition—four years after the effective date of this final rule, and every five years thereafter. Additionally, any of the agencies who participated in this rulemaking can request a review of the QRM definition at any time. I view this oversight responsibility as an important check to make sure that the QRM definition will continue to be appropriate in the face of the inevitable changes of financial markets, and other unpredictable and unforeseen developments.”

The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securitizations and two years after publication for all other securitization types.


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