Risk Retention Proposal is Open for Comments

After a proposal earlier this week that would require sponsors of asset-backed securities to retain at least 5% of the credit risk of the assets underlying the securities, six federal agencies are now seeking comments on the proposed rule.

The rule would offer lenders several options for meeting the 5% risk retention requirements, according to the Federal Reserve Board. They include:

  • retention of risk by holding at least 5% of each class of ABS issued in a securitization transaction (also known as vertical retention);
  • retention of a first-loss residual interest in an amount equal to at least 5% of the par value of all ABS interests issued in a securitization transaction (horizontal retention);
  • an equally-divided combination of vertical and horizontal retention;
  • retention of a representative sample of the assets designated for securitization in an amount equal to at least 5% of the unpaid principal balance of all the designated assets; and
  • for commercial mortgage-backed securities, retention of at least a 5% first-loss residual interest by a third party that specifically negotiates for the interest, if certain requirements are met.

Residential mortgages that fall under the requirements of a Qualified Residential Mortgage, or QSR, would be exempt from the risk retention rule.

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“The proposed rule would also recognize that the 100% guarantee of principal and interest provided by Fannie Maeand Freddie Mac meets their risk-retention requirements as sponsors of mortgage-backed securities for as long as they are in conservatorship or receivership with capital support from the U.S. government.

The request for comments will be open through June 10, 2011.

See the request for comments.

Written by Elizabeth Ecker