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Agencies Publish Risk-Retention Proposal. On March 29, the Federal Reserve Board announced a proposed rule that would require sponsors of asset-backed securities (ABS) to retain at least five percent of the credit risk of the assets underlying the securities. The rule will be proposed jointly with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development.
In drafting the proposed rule, the agencies sought to provide options to sponsors for meeting the risk-retention requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) while at the same time ensuring that the amount of credit risk retained is meaningful. Exemptions to the proposed rule include U.S. government-guaranteed ABS and mortgage-backed securities that are collateralized exclusively by residential mortgages that qualify as "qualified residential mortgages" (QRMs). The proposed rule would establish a definition of QRMs incorporating criteria designed to ensure that such QRMs are of very high credit quality. Such criteria would include borrower credit history, payment terms, down payment for purchased mortgages and loan-to-value ratio. In addition, under the rule Fannie Mae and Freddie Mac would be permitted to satisfy their risk-retention requirements as sponsors through their 100 percent guarantees of principal and interest for as long as they are in conservatorship or receivership with capital support from the U.S. government.
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