In addition to Regulation AB II, there are many other recent or pending major rulemakings that are of major importance to the ABS markets. Among these are the proposed securitization credit risk retention rules required by the Dodd-Frank Act. These rules were originally proposed in 2011 and re-proposed in 2013 by the SEC and various federal banking and housing agencies. According to multiple sources, final adoption of these rules may come as early as late October.
As currently proposed, the credit risk retention rules would provide several methods of retaining the required risk exposure, as well as limited exceptions for pools of assets that satisfy specified credit criteria. The required risk could be retained in one of several forms, including vertical, horizontal, and a combined method, which other methods of risk retention would apply only to specific types of assets or transactions, such as ABCP conduits, CMBS, Fannie Mae and Freddie Mac securitizations, open-market CLOs and tender option bond transactions. “Qualified residential mortgages” generally would be exempt from the risk retention requirements. As currently proposed, the definition of “qualified residential mortgage” would be conformed with the definition of “qualified mortgage” adopted by the CFPB for purposes of its “ability to repay” rules. In addition to completely exempting any asset pool containing a single class of qualified assets (i.e., qualified commercial loans, commercial real estate loans and consumer auto loans), the proposed rules would impose a zero percent risk retention requirement on qualified assets in blended pools with overall risk retention of at least 2.5 percent, and would exempt certain seasoned loans and certain federally-guaranteed student loans.
For more on these rules as proposed, see Morgan Lewis’s Guide to the Re-Proposed Credit Risk Retention Rules.