Risk Retention Rule Finalized for Asset-Backed Securities

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 to monitor and ensure the quality of the underlying assets.

The final rule provides sponsors with various options for meeting the risk retention requirements and includes several exemptions, among them for mortgage-backed securities collateralized by residential mortgages that meet the standard for “qualified residential mortgage,” based on qualified mortgage criteria established by the Consumer Financial Protection Bureau. The final rule expands the exemption beyond that definition by including a residential mortgage exemption that includes all residential mortgage loans made by nonprofit, community-focused mortgage lenders, as well as loans on three- to four-family owner-occupied residential buildings that otherwise meet the QM standards. Both these categories of loans are currently outside the scope of the QM definition issued by the CFPB.

The rule also includes a reduced risk retention requirement for asset-backed securities collateralized by commercial loans, commercial real estate loans, or automobile loans that meet underwriting standards designed to ensure that the loans backing the securities are of very low credit risk.