Securitization After Dodd-Frank: A Summary of the Final Credit Risk Retention Rules
Last month, six federal agencies adopted a final rule implementing the credit risk retention requirement mandated by Section 941 of the Dodd-Frank Act for certain securitization transactions. Specifically, Section 941 of the Dodd-Frank Act added new Section 15G to the Securities Exchange Act of 1934 that directed the agencies to adopt rules requiring sponsors of asset-backed securities to retain at least 5% of the credit risk relating to the assets that underlie such asset-backed securities. This so-called “skin in the game” requirement is intended to provide sponsors with a meaningful incentive to monitor and control the quality of securitized assets and align the interests of the sponsor with those of investors.
The risk retention requirement will become effective one year after the date on which the final rules are published in the Federal Register for securitization transactions collateralized by residential mortgages, and two years after the date on which the final rules are published in the Federal Register for any other securitization transaction. Securitizations created before the applicable effective date do not need to comply with the risk retention requirement.