In April 2011, six federal agencies - the Board of Governors of the Federal Reserve System, Department of Housing and Urban Development, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Office of the Comptroller of the Currency, and Securities and Exchange Commission (the “Agencies”) – jointly published a proposed rule to implement the credit risk retention or so-called qualified residential mortgage (“QRM”) rule pursuant to section 941 of the Dodd-Frank Act, which amended section 15G of the Securities Exchange Act of 1934.1 On August 27, 2013, the Agencies issued a second proposed rule modifying the original proposal.2 Comments are due on the second proposal October 30, 2013.
Congress intended that section 15G address problems in the securitization markets by requiring that securitizers3 generally retain an economic interest in the credit risk of the assets they securitize, i.e., that securitizers retain “skin in the game.” As with the original proposal, the new proposal is based on the understanding that when properly structured, securitization provides economic benefits that can lower the cost of credit to households and businesses; however, when incentives are not properly aligned and there is a lack of discipline in the credit origination process, securitization can result in harmful consequences to investors, consumers, financial institutions, and the financial system. In revising the QRM proposal, the Agencies sought to minimize the potential for the proposed rule to negatively affect the availability and costs of credit to consumers and businesses.
The newly proposed QRM rule takes into account the comments received on the original proposal. The modified proposed rule includes several noteworthy provisions, including the originally proposed five percent risk retention requirement; a modified requirement that risk retention be based on the fair value (rather than par value) of the assets underlying the securitization; more flexible risk retention structural options; and several exemptions from the risk retention requirement, including the complete exemption, consistent with the original proposal, for asset-backed securities (“ABS”) collateralized solely by qualified residential mortgages (“QRMs”).
A. General Risk Retention Requirement
Consistent with the original proposal, the new proposal would apply a minimum five percent base risk retention requirement to all securitization transactions4 that are within the scope of section 15G, regardless of whether the sponsor5 is an insured depository institution, a bank holding company or