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Risk Retention Rule Finalized for Asset-Backed Securities

Joe Mont | January 30, 2015

Bank regulators, along with the Securities and Exchange Commission, Federal Housing Finance Agency, and U.S. Department of Housing and Urban Development have jointly issued a final rule that imposes credit risk retention requirements on sponsors of asset-backed securities.

The rule requires sponsors to hold at least 5 percent of the credit risk of the assets underlying the securities and prohibits them from transferring or hedging that credit risk. The rule applies to asset-backed securities issued on or after Dec. 24, 2015 if the securities are backed by residential mortgages. It applies to all other classes of asset-backed securities issued on or after Dec. 24, 2016.

The risk retention requirements are intended to address problems in the securitization markets by requiring that securitizers retain an economic interest in the credit risk of the assets they securitize, providing an incentive...

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