Credit Risk Retention: Six Federal Agencies Repropose Joint Rules on Credit Risk Retention

Sullivan & Cromwell LLP - October 3, 2013

On August 28, 2013, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission (“SEC”), the Federal Housing Finance Agency (“FHFA”) and the Department of Housing and Urban Development (“HUD” and, collectively, the “Agencies”) issued a second Notice of Proposed Rulemaking (the “revised proposal”) to implement the credit risk retention requirements of Section 941 of the Dodd-Frank Act. Our April 21, 2011 memorandum entitled “Credit Risk Retention: Six Federal Agencies Propose Joint Rules on Credit Risk Retention for Asset-Back Securities” describes Section 941 and the original proposal, which was issued in 2011 (the “original proposal”). The deadline for public comment on the revised proposal is October 30, 2013.

Section 941 of the Dodd-Frank Act amended the Securities Exchange Act of 1934 by adding a new section 15G (“Section 15G”), which generally requires a securitizer or sponsor of asset-backed securities (“ABS”) to retain not less than 5% of the credit risk of the assets collateralizing the ABS issuance. Section 15G exempts certain types of assets from these requirements and authorizes the appropriate Agencies to establish a lower risk retention requirement for other types of assets. In particular, Section 15G exempts securitizations collateralized exclusively by qualified residential mortgages (“QRMs”) from the risk retention requirements and directs the Agencies to develop a definition that takes into consideration underwriting and product features that historical loan performance data indicate result in a lower risk of default. The Agencies’ definition of QRM may be no broader than the definition of qualified mortgage (“QM”) under section 129C(c)(2) of the Truth in Lending Act, as amended by the Dodd-Frank Act, and as implemented by the Consumer Financial Protection Bureau (the “CFPB”).