Risk Retention Issues In Securitization

Section 941 of the Dodd-Frank Act required various agencies to implement rules that require a sponsor of a securitization to retain at least 5% of the credit risk of the assets underlying its asset-backed securities ("ABS"). After years of proposed rules and intensive comment from the securitization industry, the OCC, Federal Reserve, FDIC, SEC, FHFA and HUD jointly issued a final risk retention rule at the end of 2014. Compliance for ABS collateralized by residential mortgages was required to begin on Dec. 24, 2015, and for other classes of ABS compliance is required to begin on Dec. 24, 2016.

Generally, the final rule requires that the sponsor retain 5% of the credit risk of securitized assets (as determined on the closing date of the securitization) and is subject to significant transfer, hedging and financing restrictions. The standard options for retaining the credit risk are (i) holding a vertical interest in the entire capital structure, (ii) holding an eligible