A Guide to the Credit Risk Retention Rules for Securitizations

November 03, 2014

On October 21 and 22, 2014, pursuant to the requirements of the Dodd-Frank Act, the SEC and various federal banking and housing agencies adopted credit risk retention rules for securitizations. These rules, which were first proposed in 2011 and re-proposed in 2013, provide several methods of retaining the required 5 percent risk exposure.

The credit risk retention rules will apply to sponsors of virtually all securitizations whether the asset-backed securities are publicly or privately offered, and will permit only limited circumstances in which the required risk retention may be held by an originator or other party rather than the sponsor. The required risk may be retained in one of several forms, including vertical, horizontal, and a combined method. Other methods of risk retention apply only to specific types of assets or transactions, such as asset-backed commercial paper conduits, commercial mortgage-backed securities, securitizations sponsored by government-sponsored enterprises such as Fannie Mae and Freddie Mac, open-market collateralized loan obligations and tender option bond transactions. Pools of “qualified residential mortgages,” the definition of which is consistent with the definition of “qualified mortgage” as adopted by the CFPB in its ability-to-repay rules, are exempt, as are pools of certain qualifying commercial loans, commercial real estate loans and consumer auto loans. There are two narrow exemptions for resecuritizations, as well as exemptions for seasoned loans and for certain federally-guaranteed student loans.

The amount of the required risk retention generally will be calculated under a “fair value” approach, with the notable exception of the vertical risk retention option.

The credit risk retention rules will be effective one year after their publication in the Federal Register for ABS backed by residential mortgage loans, and two years after publication for all other securitizations.

Click here for our comprehensive guide to the credit risk retention rules.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Charles Sweet
Reed Auerbach

This article was originally published by Bingham McCutchen LLP.