Securitization After Dodd-Frank: A Look at the Proposed Risk Retention Rules
On March 29, five federal banking and housing agencies, as well as the SEC, released proposed rules implementing the credit risk retention requirement mandated by Dodd-Frank for certain securitization transactions. Section 941 of Dodd-Frank added a new Section 15G to the Securities Exchange Act of 1934, which directs regulators to adopt rules that generally require sponsors of asset-backed securities to retain at least 5% of the credit risk relating to the assets that underlie such asset-backed securities. This so-called “skin in the game” requirement is intended to provide sponsors with a meaningful incentive to monitor and control the quality of securitized assets and align the interests of the sponsor with those of investors. The proposed rules provide a complete exemption for securities collateralized exclusively by “qualified residential mortgages” that meet stringent underwriting standards. Special treatment is also provided for securities that are backed by qualifying commercial loans, commercial real estate loans and automobile loans.