On October 22, 2014, six federal agencies adopted the final Credit Risk Retention Rule under Section 941 of the Dodd-Frank Act. The final rule will require sponsors of securitizations to retain an economic interest in the assets that they securitize.

When members of the Federal Reserve voted unanimously to adopt the final rule, they expressed hope that its implementation will address concerns about the risk taking that contributed to the financial crisis. According to Chair Janet Yellen, “Often called “skin in the game,” risk retention requirements better align the interests of sponsors and investors by providing an economic incentive for sponsors to monitor the quality of securitized assets.”

Pursuant to the Dodd-Frank Act, the final rule is being issued jointly by the SEC, FDIC, Federal Reserve, OCC, FHFA, and HUD. The final rule generally requires sponsors of asset-backed securities to retain not less than five percent of the credit risk underlying the securities and does not permit sponsors to transfer or hedge that credit risk.

The rule also provides exemptions for certain securitizations, including securitizations of qualified residential mortgages (QRM). Further, the rule aligns the QRM definition with that of a qualified mortgage as defined by the CFPB. The final rule requires the agencies to review the definition of QRM within four years after the effective date of the rule with regard to the securitization of residential mortgages and every five years thereafter.

The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securitizations and two years after publication for all other securitization types.