SEC, Banking Agencies Propose Rules on Risk Retention for Securitizations

At an open commission meeting yesterday, the SEC commissioners voted unanimously to release proposed rules on credit risk retention for securitizations. The action, paralleling that taken by five banking agencies this week, follows from a requirement in the Dodd-Frank Wall Street Reform Act. As summarized in the joint agency press release describing the joint agency proposed rule: Credit Risk Retention, the proposal calls for:

• Retention of risk by holding at least 5 percent of each class of Asset Backed Securities (ABS) issued in a securitization transaction (also known as vertical retention).


• Retention of a first-loss residual interest in an amount equal to at least 5 percent of the par value of all ABS interests issued in a securitization transaction (horizontal retention).


• An equally-divided combination of vertical and horizontal retention.


• Retention of a representative sample of the assets designated for securitization in an amount equal to at least 5 percent of the unpaid principal balance of all the designated assets.


• For commercial mortgage-backed securities, retention of at least a 5 percent first-loss residual interest by a third party that specifically negotiates for the interest, if certain requirements are met.

In addition, the proposed rule:

• Defines, and includes an exception for 'qualified residential mortgages' or QRMs that would not be subject to the risk retention requirments,


• Has a zero percent risk-retention requirement for Asset Backed Securities (ABS) collateralized exclusively by commercial loans, commercial mortgages, or automobile loans that meet certain underwriting standards, and


• Recognizes that the 100 percent guarantee of principal and interest provided by Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Mortgage Loan Corporation) meets their risk-retention requirements as sponsors of mortgage-backed securities for as long as they are in conservatorship or receivership with capital support from the U.S. government.

There is a June 10 comment deadline on the joint proposal.

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