15 U.S.C. § 78o–11: Credit risk retention

Summary

Requires securitizers to keep a real financial stake in the credit risk of the assets they package and sell as asset‑backed securities. Key words: "Federal banking agencies" = the OCC, the Fed Board, and the FDIC; "insured depository institution" = a bank as defined in 12 U.S.C. 1813(c); "securitizer" = the issuer or person who organizes and transfers assets into a security; "originator" = the person who makes or creates the loan or asset and then sells it to the securitizer. The agencies had to write joint rules within 270 days after July 21, 2010. The rules must stop securitizers from hedging away the risk they are required to keep. In most cases a securitizer must retain at least 5 percent of the credit risk, though regulators can allow less than 5 percent if the originator meets set underwriting standards. Rules will say how the risk can be held, for how long, and will create asset classes (like residential mortgages, commercial loans, auto loans) with underwriting criteria for low‑risk loans. Securities made only of "qualified residential mortgages" can be exempt if they meet a narrow joint definition. Regulators may grant other limited exemptions (for certain federal or state guaranteed assets and some programs). The agencies will split enforcement: bank regulators enforce for banks and the SEC enforces for nonbanks. The final rules become effective one year after publication for mortgage securities and two years after publication for other asset classes.

Title 15, §78o–11

Commerce and Trade, Source: USLM XML via OLRC

(a)Definitions

In this section

(1)

(2)the term “insured depository institution” has the same meaning as in section 1813(c) of title 12;

(3)the term “securitizer” means—

(A)an issuer of an asset-backed security; or

(B)a person who organizes and initiates an asset-backed securities transaction by selling or transferring assets, either directly or indirectly, including through an affiliate, to the issuer; and

(4)the term “originator” means a person who—

(A)through the extension of credit or otherwise, creates a financial asset that collateralizes an asset-backed security; and

(B)sells an asset directly or indirectly to a securitizer.

(b)Regulations required

(1)In general

Not later than 270 days after July 21, 2010, the Federal banking agencies and the Commission shall jointly prescribe regulations to require any securitizer to retain an economic interest in a portion of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells, or conveys to a third party.

(2)Residential mortgages

Not later than 270 days after July 21, 2010, the Federal banking agencies, the Commission, the Secretary of Housing and Urban Development, and the Federal Housing Finance Agency, shall jointly prescribe regulations to require any securitizer to retain an economic interest in a portion of the credit risk for any residential mortgage asset that the securitizer, through the issuance of an asset-backed security, transfers, sells, or conveys to a third party.

(c)Standards for regulations

(1)Standards

The regulations prescribed under subsection (b) shall—

(A)prohibit a securitizer from directly or indirectly hedging or otherwise transferring the credit risk that the securitizer is required to retain with respect to an asset;

(B)require a securitizer to retain—

(i)not less than 5 percent of the credit risk for any asset—

(I)that is not a qualified residential mortgage that is transferred, sold, or conveyed through the issuance of an asset-backed security by the securitizer; or

(II)that is a qualified residential mortgage that is transferred, sold, or conveyed through the issuance of an asset-backed security by the securitizer, if 1 or more of the assets that collateralize the asset-backed security are not qualified residential mortgages; or

(ii)less than 5 percent of the credit risk for an asset that is not a qualified residential mortgage that is transferred, sold, or conveyed through the issuance of an asset-backed security by the securitizer, if the originator of the asset meets the underwriting standards prescribed under paragraph (2)(B);

(C)specify—

(i)the permissible forms of risk retention for purposes of this section;

(ii)the minimum duration of the risk retention required under this section; and

(iii)that a securitizer is not required to retain any part of the credit risk for an asset that is transferred, sold or conveyed through the issuance of an asset-backed security by the securitizer, if all of the assets that collateralize the asset-backed security are qualified residential mortgages;

(D)apply, regardless of whether the securitizer is an insured depository institution;

(E)with respect to a commercial mortgage, specify the permissible types, forms, and amounts of risk retention that would meet the requirements of subparagraph (B), which in the determination of the Federal banking agencies and the Commission may include—

(i)retention of a specified amount or percentage of the total credit risk of the asset;

(ii)retention of the first-loss position by a third-party purchaser that specifically negotiates for the purchase of such first loss position, holds adequate financial resources to back losses, provides due diligence on all individual assets in the pool before the issuance of the asset-backed securities, and meets the same standards for risk retention as the Federal banking agencies and the Commission require of the securitizer;

(iii)a determination by the Federal banking agencies and the Commission that the underwriting standards and controls for the asset are adequate; and

(iv)provision of adequate representations and warranties and related enforcement mechanisms; and

(F)establish appropriate standards for retention of an economic interest with respect to collateralized debt obligations, securities collateralized by collateralized debt obligations, and similar instruments collateralized by other asset-backed securities; and

(G)provide for—

(i)a total or partial exemption of any securitization, as may be appropriate in the public interest and for the protection of investors;

(ii)a total or partial exemption for the securitization of an asset issued or guaranteed by the United States, or an agency of the United States, as the Federal banking agencies and the Commission jointly determine appropriate in the public interest and for the protection of investors, except that, for purposes of this clause, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation are not agencies of the United States;

(iii)a total or partial exemption for any asset-backed security that is a security issued or guaranteed by any State of the United States, or by any political subdivision of a State or territory, or by any public instrumentality of a State or territory that is exempt from the registration requirements of the Securities Act of 1933 [15 U.S.C. 77a et seq.] by reason of section 3(a)(2) of that Act (15 U.S.C. 77c(a)(2)), or a security defined as a qualified scholarship funding bond in section 150(d)(2) of title 26, as may be appropriate in the public interest and for the protection of investors; and

(iv)the allocation of risk retention obligations between a securitizer and an originator in the case of a securitizer that purchases assets from an originator, as the Federal banking agencies and the Commission jointly determine appropriate.

(2)Asset classes

(A)Asset classes

The regulations prescribed under subsection (b) shall establish asset classes with separate rules for securitizers of different classes of assets, including residential mortgages, commercial mortgages, commercial loans, auto loans, and any other class of assets that the Federal banking agencies and the Commission deem appropriate.

(B)Contents

For each asset class established under subparagraph (A), the regulations prescribed under subsection (b) shall include underwriting standards established by the Federal banking agencies that specify the terms, conditions, and characteristics of a loan within the asset class that indicate a low credit risk with respect to the loan.

(d)Originators

In determining how to allocate risk retention obligations between a securitizer and an originator under subsection (c)(1)(E)(iv), the Federal banking agencies and the Commission shall—

(1)reduce the percentage of risk retention obligations required of the securitizer by the percentage of risk retention obligations required of the originator; and

(2)consider—

(A)whether the assets sold to the securitizer have terms, conditions, and characteristics that reflect low credit risk;

(B)whether the form or volume of transactions in securitization markets creates incentives for imprudent origination of the type of loan or asset to be sold to the securitizer; and

(C)the potential impact of the risk retention obligations on the access of consumers and businesses to credit on reasonable terms, which may not include the transfer of credit risk to a third party.

(e)Exemptions, exceptions, and adjustments

(1)In general

The Federal banking agencies and the Commission may jointly adopt or issue exemptions, exceptions, or adjustments to the rules issued under this section, including exemptions, exceptions, or adjustments for classes of institutions or assets relating to the risk retention requirement and the prohibition on hedging under subsection (c)(1).

(2)Applicable standards

Any exemption, exception, or adjustment adopted or issued by the Federal banking agencies and the Commission under this paragraph shall—

(A)help ensure high quality underwriting standards for the securitizers and originators of assets that are securitized or available for securitization; and

(B)encourage appropriate risk management practices by the securitizers and originators of assets, improve the access of consumers and businesses to credit on reasonable terms, or otherwise be in the public interest and for the protection of investors.

(3)Certain institutions and programs exempt

(A)Farm credit system institutions

Notwithstanding any other provision of this section, the requirements of this section shall not apply to any loan or other financial asset made, insured, guaranteed, or purchased by any institution that is subject to the supervision of the Farm Credit Administration, including the Federal Agricultural Mortgage Corporation.

(B)Other Federal programs

This section shall not apply to any residential, multifamily, or health care facility mortgage loan asset, or securitization based directly or indirectly on such an asset, which is insured or guaranteed by the United States or an agency of the United States. For purposes of this subsection, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal home loan banks shall not be considered an agency of the United States.

(4)Exemption for qualified residential mortgages

(A)In general

The Federal banking agencies, the Commission, the Secretary of Housing and Urban Development, and the Director of the Federal Housing Finance Agency shall jointly issue regulations to exempt qualified residential mortgages from the risk retention requirements of this subsection.

(B)Qualified residential mortgage

The Federal banking agencies, the Commission, the Secretary of Housing and Urban Development, and the Director of the Federal Housing Finance Agency shall jointly define the term “qualified residential mortgage” for purposes of this subsection, taking into consideration underwriting and product features that historical loan performance data indicate result in a lower risk of default, such as—

(i)documentation and verification of the financial resources relied upon to qualify the mortgagor;

(ii)standards with respect to—

(I)the residual income of the mortgagor after all monthly obligations;

(II)the ratio of the housing payments of the mortgagor to the monthly income of the mortgagor;

(III)the ratio of total monthly installment payments of the mortgagor to the income of the mortgagor;

(iii)mitigating the potential for payment shock on adjustable rate mortgages through product features and underwriting standards;

(iv)mortgage guarantee insurance or other types of insurance or credit enhancement obtained at the time of origination, to the extent such insurance or credit enhancement reduces the risk of default; and

(v)prohibiting or restricting the use of balloon payments, negative amortization, prepayment penalties, interest-only payments, and other features that have been demonstrated to exhibit a higher risk of borrower default.

(C)Limitation on definition

The Federal banking agencies, the Commission, the Secretary of Housing and Urban Development, and the Director of the Federal Housing Finance Agency in defining the term “qualified residential mortgage”, as required by subparagraph (B), shall define that term to be no broader than the definition “qualified mortgage” as the term is defined under section 129C(c)(2) of the Truth in Lending Act, as amended by the Consumer Financial Protection Act of 2010, and regulations adopted thereunder.

(5)Condition for qualified residential mortgage exemption

The regulations issued under paragraph (4) shall provide that an asset-backed security that is collateralized by tranches of other asset-backed securities shall not be exempt from the risk retention requirements of this subsection.

(6)Certification

The Commission shall require an issuer to certify, for each issuance of an asset-backed security collateralized exclusively by qualified residential mortgages, that the issuer has evaluated the effectiveness of the internal supervisory controls of the issuer with respect to the process for ensuring that all assets that collateralize the asset-backed security are qualified residential mortgages.

(f)Enforcement

The regulations issued under this section shall be enforced by—

(1)the appropriate Federal banking agency, with respect to any securitizer that is an insured depository institution; and

(2)the Commission, with respect to any securitizer that is not an insured depository institution.

(g)Authority of Commission

The authority of the Commission under this section shall be in addition to the authority of the Commission to otherwise enforce the securities laws.

(h)Authority to coordinate on rulemaking

The Chairperson of the Financial Stability Oversight Council shall coordinate all joint rulemaking required under this section.

(i)Effective date of regulations

The regulations issued under this section shall become effective—

(1)with respect to securitizers and originators of asset-backed securities backed by residential mortgages, 1 year after the date on which final rules under this section are published in the Federal Register; and

(2)with respect to securitizers and originators of all other classes of asset-backed securities, 2 years after the date on which final rules under this section are published in the Federal Register.

Notes & Related Subsidiaries

Editorial Notes

References in Text

The Securities Act of 1933, referred to in subsec. (c)(1)(G)(iii), is title I of act May 27, 1933, ch. 38, 48 Stat. 74, which is classified generally to subchapter I (§ 77a et seq.) of chapter 2A of this title. For complete classification of this Act to the Code, see section 77a of this title and Tables. section 129C(c)(2) of the Truth in Lending Act, as amended by the Consumer Financial Protection Act of 2010, referred to in subsec. (e)(4)(C), probably means section 129C(b)(2) of Pub. L. 90–321, as amended by title X of Pub. L. 111–203, which defines “qualified mortgage” and is classified to section 1639c(b)(2) of this title.

Statutory Notes and Related Subsidiaries

Effective Date

Section effective 1 day after July 21, 2010, except as otherwise provided, see section 4 of Pub. L. 111–203, set out as a note under section 5301 of Title 12, Banks and Banking.

§78o–11 Credit Risk Retention