rule regarding the risk-retention requirements of the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
A copy of the proposed rule is available at:
As you may recall, section 15G of Dodd-Frank generally requires the
securitizer of asset-backed securities to retain not less than 5% of the
credit risk of the assets collateralizing the asset-backed securities.
Section 15G includes a variety of exemptions from these requirements,
including an exemption for asset-backed securities that are collateralized
exclusively by residential mortgages that qualify as "qualified
residential mortgages" ("QRM"), a term to be defined by rule.
The proposed rule would define QRMs as those loans meeting certain
underwriting standards, such as: (1) maximum front-end and back-end
debt-to-income ratios of 28 percent and 36 percent, respectively; (2) a
maximum loan-to-value (LTV) ratio of 80 percent in the case of a purchase
transaction (with a lesser combined LTV permitted for refinance
transactions); (3) a 20 percent down payment requirement in the case of a
purchase transaction; and (4) credit history restrictions.
The proposed rule also includes investor disclosure requirements regarding
material information concerning the sponsor's retained interests in a
securitization transaction. According to the federal agencies, the
disclosures would provide investors and the agencies with an efficient
mechanism to monitor compliance with the risk-retention requirements of
the proposed rules.
Certain Commercial, Auto ABS:
The proposed rule also has a zero percent risk-retention requirement for
ABS collateralized exclusively by commercial loans, commercial mortgages,
or automobile loans that meet certain underwriting standards. As with
QRMs, the federal agencies state that the underwriting standards for such
ABS were "designed to be robust and to ensure that the loans backing the
ABS are of very low credit risk."
The proposed rule would also exempt Fannie Mae (the Federal National
Mortgage Association) and Freddie Mac (the Federal Home Mortgage Loan
Corporation) as sponsors of mortgage-backed securities for as long as they
are in conservatorship or receivership with capital support from the U.S.
Options for Meeting the 5% Risk Retention:
The proposed rule provides several ways in which a securitizer might meet
the 5% risk retention requirement, including:
(1) "Vertical risk retention": whereby the sponsor or other entity
retains a specified pro rata piece of every class of interests issued in
(2) "Horizontal risk retention": whereby the sponsor or other entity
retains a subordinate interest in the issuing entity that bears the first
losses on the assets, before any other classes of interests;
(3) "L-shaped risk retention": whereby the sponsor essentially uses an
equal combination of vertical risk retention and horizontal risk retention
as a means of retaining the required five percent exposure to the credit
risk of the securitized assets;
(4) "Revolving asset master trusts" or "seller's interest": whereby the
sponsor or other entity holds a separate interest that is pari passu with
the investors' interest in the pool of receivables (unless and until the
occurrence of an early amortization event); or
(5) "Representative sample": whereby the sponsor retains a representative
sample of the assets to be securitized that exposes the sponsor to credit
risk that is equivalent to that of the securitized assets.
The rule is proposed by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation,
the U.S. Securities and Exchange Commission, the Federal Housing Finance
Agency, and the Department of Housing and Urban Development.
The agencies request comments on the proposed rule by June 10, 2011.
Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
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