Tuesday, April 5, 2011

SEC Proposes Credit Risk-Retention Rules

MARCH 30, 2011


WASHINGTON (Dow Jones)--The Securities and Exchange Commission voted unanimously Wednesday to issue draft proposals forcing firms that package loans and other assets into securities to hold a portion of the credit risk on their balance sheets.

The "risk-retention" rules, mandated by the Dodd-Frank financial law, will hit every corner of the securitization markets, from car loans to mortgages. The law requires banks and other issuers of securitized assets broadly to retain 5% of the credit risk on the theory that they will adopt more prudent lending standards because they will have "skin in the game." Issuers that pool assets that meet certain conservative lending standards will be exempted from the risk-retention requirement.

Wednesday's proposal is identical to draft rules issued by five other regulators, including the Federal Reserve and the Federal Deposit Insurance Corp., earlier this week. The Dodd-Frank law directs six federal regulators to write the rules jointly.

Under the proposal, certain "safe" residential mortgages that meet a 20% downpayment requirement will be excluded from the risk retention rules. Issuers of securitized assets backed by certain commercial loans, commercial mortgages and car loans that meet underwriting standards set forth by federal bank regulators will also be exempted.

In remarks at the meeting, Commissioner Kathleen Casey, a Republican, said she wanted to see stakeholders and the public comment on whether the requirements are too restrictive or permissive and whether the exemption for certain residential mortgages is appropriately crafted.

"This proposal cannot be the final word on risk retention regulation," she said. "This market is too fundamental to our economy to get risk retention wrong. Thus, the rules that we ultimately adopt must support or, at a minimum, not unduly hinder the securitization market."

Meanwhile, Commissioner Luis Aguilar, a Democrat, requested that people comment on whether securitizers could skirt the proposed rules.

The proposal is now open for public comment until June 10. A second vote by the commission and approval by the five other regulators is required before it can be made final.

-By Jessica Holzer; jessica.holzer@dowjones.com

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