The conference report of the Dodd-Frank Wall Street Reform and Consumer Protection Act includes significant changes to creation and regulation of asset-backed securities (“ABS”) (see Title IX, Subtitle D, starting on page 186 of this PDF version of Title IX). The three most significant areas in the bill deal with (1) risk-retention requirements, (2) disclosure and reporting requirements, and (3) representations and warranties in ABS offerings.
Risk-Retention Requirements
Under the bill, the Federal banking agencies must publish rules to require securitizers of ABS to retain an economic interest in at least 5% of the credit risk for any asset that the securitizer conveys to the a third party. This requirement is intended to keep a securitizer’s “skin in the game,” so that the securitizer has a disincentive to take unnecessary risks. There may be exceptions or exemptions, prescribed by rule or regulation, to this risk-retention requirement for securitizations (i) of “qualified residential mortgages,” when the securitizer certifies to the SEC as to the effectiveness of the securitizer’s internal controls for ensuring that all of the assets are actually qualified residential mortgages, (ii) that are in the public interest and for the protection of investors, (iii) of assets issued or guaranteed by the United States or an agency of the United States (other than Fannie Mae or Freddie Mac), (iv) of assets issued or guaranteed by any state (or political subdivision), which are also exempt from the registration requirements under the Securities Act, and (v) of other assets, including any loan or other financial asset made, insured, guaranteed, or purchased by an institution that is supervised by the Farm Credit Administration.
