The Dodd-Frank Credit Risk Retention Rules Have Arrived

Recently, we reported hearing from multiple sources that the final adoption of the securitization credit risk retention rules required by the Dodd-Frank Act was imminent. The final text of those rules, which were originally proposed in 2011 and re-proposed in 2013, was released today. The Federal Deposit Insurance Corporation, the Federal Housing Finance Agency and the Office of the Comptroller of the Currency have voted to approve the rules, and the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, and the Housing and Urban Development Department are scheduled to vote tomorrow.

While we are still analyzing the final rules, the most important aspects appear to include the following:

• The basic outlines of the final rules do not deviate far from the 2011 re-proposal, which provided that the required retention of 5 percent of a deal’s credit risk could be retained in one of several forms, including vertical, horizontal and a combined method, with other methods of risk retention that 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.
• The definition of a “qualified residential mortgage” (“QRM”), which generally is exempt from the risk retention requirements, has been conformed with the definition of “qualified mortgage” adopted by the CFPB for purposes of its “ability to repay” rules.
• There is a new exemption for certain community-focused residential mortgages that are not eligible for QRM status, but which are exempt from the CFPB’s ability to repay rules.
• CLO managers will not be exempt from the credit risk retention rules.
• A sponsor that holds an eligible horizontal residual interest will not be subject to any cash flow restrictions.
• No fair value calculation will be required for an eligible vertical interest.

The credit risk retention rules will become effective one year after they are published in the Federal Register with respect to residential mortgage-backed securities, and two years after publication with respect to all other asset classes.

The text of the final rules is available at https://www.fdic.gov/news/board/2014/2014-10-21_notice_dis_a_fr.pdf. Watch RegABII.com and morganlewis.com for a comprehensive update of our complete guide to the credit risk retention rules.