U.S. financial regulators proposed a new version of a rule Wednesday, which requires firms that put together securitization transactions to retain some of the risk in those deals.
One of the weaknesses exposed in the financial crisis was securitization sponsors laying off all of the risk in their deals to others. In response, regulators are seeking to ensure that firms retain some of the risk to give them a stake in the future of the securities they help issue.
The proposed rule would provide sponsors of asset-backed securities (ABS) with several options to satisfy the risk retention requirements. This represents a revision of the regulators’ original proposal, which was first issued in 2011, by allowing compliance with the risk retention requirements to be based on both the fair value of the securities and their par value.
The new proposal also requests comments on an alternative definition of “qualified residential mortgages” (QRM), which are exempt from risk retention requirements, that would include certain underwriting standards in addition to the qualified mortgage criteria.
Similar to the original proposal, securitizations of commercial loans, commercial mortgages, and low risk auto loans, would not be subject to risk retention requirements, they note.
The regulators, which include the Federal Reserve Board, the Department of Housing and Urban Development, the Federal Deposit Insurance Corp., the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission, are requesting comment on the proposal by October 30.