The FDIC, Federal Reserve, OCC, SEC, HUD and FHFA issued a final rule that implements the securitization risk retention requirements required by the Dodd-Frank Act.
The rule requires a sponsor of an asset-backed security (ABS) issuance to retain an economic interest equal to at least 5% of the aggregate credit risk of the assets collateralizing such an issuance. Certain types of ABS, including ABS secured by qualified residential mortgages (as defined by the CFPB), are exempt from the rule. In addition, for certain ABS collateralized by commercial, commercial real estate or automobile loans that meet specified underwriting standards, the rule reduces—in some situations to zero—the risk retention requirements.
The rule also permits a sponsor to allocate its risk retention obligation to the originator of the securitized assets if the originator contributed at least 20% of total assets in the securitization, subject to certain conditions, and if the originator agrees to do so. Other than this very narrow provision, institutions that merely originate or sell loans that are securitized and are not securitization sponsors do not have obligations related to this rule arising from such originations or sales.
Furthermore, the rule prohibits the hedging and transfer of risk retention.