Final Dodd-Frank Risk Retention Rule Adopted

On October 22, 2014, six federal agencies approved a final rule requiring sponsors of asset securitization transactions to retain risk in those transactions. The final rule implements the risk retention requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The final rule was jointly issued by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Department of Housing and Urban Development, the Federal Housing Finance Agency and the Securities and Exchange Commission.

The final rule requires sponsors of certain asset-backed securities (ABS) to retain not less than five percent of the credit risk of the assets collateralizing the ABS issuance. The rule also sets forth prohibitions on transferring or hedging the credit risk that the sponsor is required to retain.

As required by the Dodd-Frank Act, the final rule defines a "qualified residential mortgage," or QRM, and exempts QRM securitizations from the risk retention requirement. The final rule is significantly less restrictive than the original proposed rule, which was issued in 2011 and was intended to address certain mortgage-backed securities practices that some observers believed contributed to the financial crisis. The final rule does away with the original proposal that QRMs require at least a 20% down payment.  Instead, the final rule equates the QRM definition with that of a “qualified mortgage,” or QM, as defined by the Consumer Financial Protection Bureau (CFPB) in its Ability to Repay Rule.

The final rule provides that the QRM definition will be revisited four years after the final rule becomes effective and every five years thereafter, or at any other time upon the request of any of the agencies, in order to determine whether the QM definition is still the appropriate standard.

The final rule also exempts certain securitizations from the risk retention rule, including government-sponsored entity (GSE) securitizations (Fannie Mae and Freddie Mac) and government guaranteed securitizations (Ginnie Mae). 

The effective date of the final rule will be one year after its publication in the Federal Register.