Six federal agencies have approved the final rule requiring sponsors of securitization transactions to retain risk in those transactions. The rule is an implementation of the risk-retention requirements mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The secretary of the Treasury in his capacity as chairperson of the Financial Stability Oversight Council (FSOC) coordinated the joint rulemaking among the six agencies. The final rule largely adheres to the risk-retention framework cited in the proposal issued by the agencies in August 2013 and requires sponsors of asset-backed securities (ABS) to retain a minimum percentage of risk in the assets used to collateralize issuance of ABS. There is an exemption for qualified mortgages (QMs).
Sponsors Must Retain 5 Percent of Risk
In a press release issued by the Securities and Exchange Commission (SEC), announcement of approval of the final risk-retention rule was jointly issued by the Board of Governors of the Federal Reserve System, the Department of Housing and Urban Development, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the SEC. According to the new rule, sponsors of asset-backed securities will need to retain not less than 5 percent of the credit risk of the assets collateralizing the ABS issuance. In addition, the rule prohibits transferring or hedging the credit risk that the ABS sponsor is required to retain.
QM and QRM Defined
The rule provides definitions of a QM and a Qualified Residential Mortgage (QRM) and exempts securitizations of such qualified mortgages from the risk-retention requirement. The final rule utilizes the Consumer Financial Protection Bureau (CFPB) definition of a QM in defining a QRM and also requires that the participating agencies review the QRM definition as to residential mortgages no later than four years after the effective date of the rule and every five years thereafter. Each of the agencies can request a review of the definition at any time. The rule does not require any risk-retention percentage for securitizations of commercial mortgages, commercial loans or automobile loans if they meet specific standards for high-quality underwriting.
Mortgage Bankers Association Weighs In
The president and CEO of the Mortgage Bankers Association (MBA), David Stevens, called the final rule approval a positive step for the industry: We are pleased with the final risk retention rule as voted on by the FDIC today. Its positive for the housing market that the final QRM definition will generally mirror the qualified mortgage rule that lenders are operating under today. He further noted that the 5 percent retention requirement was not likely to burden the credit market.
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Peyman Khosravani is a global blockchain and digital transformation expert with a passion for marketing, futuristic ideas, analytics insights, startup businesses, and effective communications. He has extensive experience in blockchain and DeFi projects and is committed to using technology to bring justice and fairness to society and promote freedom. Peyman has worked with international organizations to improve digital transformation strategies and data-gathering strategies that help identify customer touchpoints and sources of data that tell the story of what is happening. With his expertise in blockchain, digital transformation, marketing, analytics insights, startup businesses, and effective communications, Peyman is dedicated to helping businesses succeed in the digital age. He believes that technology can be used as a tool for positive change in the world.
