Six federal agencies adopted final rules imposing risk retention requirements on originators of certain asset-backed securities, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. As its core provision, sponsors of such securities will be required to retain at least a 5% percent economic interest in the credit risk of the assets underlying such issues. Moreover, the sponsors are not permitted to offset such risk by dividing the credit risk among other parties. There is an exemption from the retention requirement for asset-backed securities securitized by certain enumerated residential mortgages (known as qualified residential mortgages). The definition of a qualified residential mortgage will rely on the definition of the term currently and in the future used by the Consumer Financial Protection Bureau under another federal law (the Truth in Lending Act). Because of concern by the six agencies to rely on the sole actions of one agency, the rules require a periodic review of the Consumer Bureau’s definition—after four years initially and then every five years thereafter. The agencies issuing the final rules are 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. The rules are effective one year after publication in the Federal Register for residential-mortgage-backed securities and two years for all other types. Two months ago, the SEC separately adopted new disclosure, reporting, and offering process requirements for asset-backed securities (click here for details).
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Six federal agencies adopt final rules regarding skin in the game for sponsors of certain asset-backed securities
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