The federal banking agencies announced on October 22 that they have approved a final rule requiring sponsors of securitization transactions to retain risk in those transactions as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The final rule will be effective 1 year after publication in the Federal Register for residential mortgage-backed securitizations and two years after publication for all other securitization types. Publication is expected shortly.
Nutter Notes: The final rule generally requires sponsors of asset-backed securities (“ABS”) to retain not less than 5% of the credit risk of the assets collateralizing the ABS issuance. The rule also includes prohibitions on transferring or hedging the credit risk that the sponsor is required to retain. As required by the Dodd-Frank Act, the final rule defines a “qualified residential mortgage” (“QRM”) and exempts securitizations of QRMs from the risk retention requirement. The QRM definition is aligned with the CFPB’s definition of a qualified mortgage.