On August 28, 2013, the SEC and various federal banking and housing agencies re-proposed the rules for retention of credit risk in securitizations that originally were proposed in 2011. The rules would continue to provide several methods of retaining the required risk exposure, as well as limited exceptions for pools of assets that satisfy specified credit criteria. As re-proposed, the required risk could be retained in one of several forms, including vertical, horizontal, and a combined method that replaces the more restrictive L-shaped method that was originally proposed; the representative sample method has been eliminated. Other methods of risk retention would apply only to specific types of assets or transactions, such as asset-backed commercial paper conduits, commercial mortgage-backed securities, and securitizations sponsored by Fannie Mae and Freddie Mac. Newly proposed are specific methods of risk retention for open-market collateralized loan obligations and tender option bond transactions.
The definition of “qualified residential mortgage,” securitizations of which generally would be exempt from risk retention requirements, would be conformed with the recently-adopted definition of “qualified mortgage.” 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 rules would impose a zero percent risk retention requirement on qualified assets in blended pools with overall risk retention of at least 2.5%. Other new features include slightly broadened relief for resecuritizations, as well as new exemptions for seasoned loans and certain federally-guaranteed student loans.
As originally proposed, the credit risk retention rules would have discouraged the issuance of interest-only securities or other ABS sold at a premium by requiring capture of that premium in a “premium capture cash reserve account,” but this concept has been eliminated. Instead, the required risk retention generally would be calculated under a “fair value” approach rather than in accordance with the “par value” of the ABS interests. Retained credit risk exposure could generally not be transferred or hedged, though the re-proposal has added timeframes after which the restrictions on transfer and hedging would expire.
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Sweet-CharlesThis article was originally published by Bingham McCutchen LLP.