Credit Risk Retention: Six Federal Agencies Propose Joint Rules on Credit Risk Retention for Asset-Backed SecuritiesSullivan & Cromwell LLP - April 21, 2011
Section 15G of the Securities Exchange Act of 1934, added by Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires the Federal banking agencies and the Securities and Exchange Commission to jointly prescribe regulations to require any securitizer to retain an economic interest in a portion of the credit risk for any asset that the securitizer transfers to a third party through the issuance of an asset-backed security. It also requires these agencies, together with the Federal Housing Finance Agency and the Department of Housing and Urban Development, to jointly prescribe regulations to require any securitizer to retain an economic interest in a portion of the credit risk for any residential mortgage asset that the securitizer transfers to a third party through the issuance of an asset-backed security. These agencies have jointly proposed the required regulations for public comment.
The proposed rules provide a menu of seven different alternatives for meeting the risk retention requirements, including some options available for any type of securitization and others specifically designed for certain asset classes. They would also provide a full exemption from the risk retention requirements for securitizations backed by residential mortgages, commercial loans, commercial real estate loans and automobile loans meeting certain precisely specified product and underwriting criteria. Further exemptions are provided for certain government-backed assets and securitizations and certain resecuritizations and offshore transactions.
The rules are required to become effective for residential mortgage securitizations one year after publication of final rules and for other securitizations two years after publication of the final rules in the Federal Register. The deadline for public comment is June 10, 2011.