Credit Risk Retention (Regulation RR)
When a bank originates a mortgage and immediately sells it into a securitization trust, it has no skin in the game — if the loan goes bad, the loss falls on investors, not the originator. The 2008 financial crisis demonstrated at scale what that misalignment produces. Credit risk retention — sometimes called the "skin in the game" rule — is Congress's answer: securitizers must retain at least 5% of the credit risk in any securitization they create, aligning their incentives with investors and preventing the assembly-line originate-to-distribute model that contributed to the subprime collapse.
Regulation RR (12 CFR Part 244) is the Federal Reserve Board's implementation of Section 15G of the Securities Exchange Act of 1934, added by the Dodd-Frank Act (2010). Six federal agencies jointly adopted a harmonized rule in 2014; the Fed's version applies to bank holding companies and state member banks. The rule covers asset-backed securities (ABS) across mortgage, commercial real estate, auto, student loan, and CLO markets, with a layered system of required retention forms, permissible exemptions, and strict anti-hedging provisions.
Legal Authority
- 15 U.S.C. § 78o-11 — Securities Exchange Act § 15G (added by Dodd-Frank § 941): requires federal banking regulators and the SEC to jointly establish credit risk retention requirements for securitizers; requires securitizers to retain not less than 5% of credit risk; directs agencies to establish exemptions for QRM and other low-risk asset classes
- 12 CFR Part 244 — Federal Reserve Board's Regulation RR implementing § 15G for bank holding companies and state member banks
- Dodd-Frank Act § 941 (2010) — The statutory basis for the risk retention requirement; enacted in response to the originate-to-distribute model's role in the 2008 financial crisis
Key Mechanics
Regulation RR requires a securitizer to retain at least 5% of the credit risk of ABS it sponsors, in one of several permissible forms: vertical retention (5% of each class of ABS interest), horizontal retention (5% first-loss position), L-shaped retention (combination), or sponsor's interest (holding seller's interest in residential mortgage pools). The retention interest must be held for the life of the deal and cannot be hedged away — anti-hedging provisions prohibit the retaining party from offsetting its economic exposure to the retained interest. Key exemptions include Qualified Residential Mortgages (QRM) (which regulators ultimately defined the same as the CFPB's QM standard), QCLOs (qualified commercial loans), and resecuritizations backed by U.S. government-guaranteed assets (Ginnie Mae, Fannie Mae, Freddie Mac). The CLO market operates under a separate "open market CLO" exception that has been the subject of extensive litigation.
Current Rule (2026)
| Parameter | Value |
|---|---|
| Citation | 12 CFR Part 244 |
| Issuing agency | Federal Reserve Board (jointly with OCC, FDIC, SEC, FHFA, HUD) |
| Statutory authority | 15 U.S.C. § 78o-11 (Dodd-Frank Act § 941); 12 U.S.C. § 221 |
| Base retention requirement | 5% of the credit risk of securitized assets |
| Effective date | December 24, 2015 (residential mortgage-backed securities); December 24, 2016 (all other ABS) |
| Last major amendment | 79 FR 77764 (December 24, 2014) — joint final rule |
What This Rule Does
Regulation RR requires any securitizer — the entity that organizes and initiates a securitization by selling or transferring assets into the issuing entity — to retain an economic interest equal to at least 5% of the credit risk of the securitized assets. The rule prevents the securitizer from hedging or transferring away that retained interest for the life of the obligation (or, for certain structures, for a specified holding period), binding the originating institution to the performance of the loans it packaged and sold.
The 5% retention can be structured in several ways. The most straightforward is an eligible vertical interest — retaining 5% of each class of securities issued by the trust, from the senior AAA tranche down to the equity. Alternatively, a securitizer may hold an eligible horizontal residual interest — retaining the most subordinate 5% of the capital structure, which is the first-loss position. A combination of the two is also permissible. For revolving pool securitizations (credit card ABS, auto floor plan), retention takes the form of a seller's interest in the receivables pool. For commercial mortgage-backed securities (CMBS), a specialized structure applies — the B-piece buyer who holds the horizontal interest must satisfy particular qualifications and review requirements (§ 244.7).
The rule's anti-hedging provisions are its teeth. A retaining sponsor may not sell, transfer, or hedge the retained interest against credit risk of the securitized assets (§ 244.12). CDS protection referencing the specific pool, short positions in the issuing entity's securities, and any instrument whose value moves inversely to the retained position are prohibited. The prohibition lasts for as long as the sponsor is required to retain — typically until the ABS interests mature or the pool balance falls below specified thresholds.
Key Provisions
- § 244.3 — Base requirement: 5% credit risk retention for any securitization transaction; applies to the sponsor (the entity that organizes and initiates the transaction), not the originator, though retention may be allocated to originators under § 244.11
- § 244.4 — Standard retention options: eligible vertical interest (5% of each tranche), eligible horizontal residual interest (first-loss 5%), or combination; the horizontal option requires a cash reserve account or premium capture account to prevent gaming the structure
- § 244.5 — Revolving pool securitizations (credit cards, auto fleet): seller's interest retained in the revolving pool satisfies retention as long as it equals or exceeds 5% of the outstanding ABS balance
- § 244.6 — Eligible ABCP conduits (asset-backed commercial paper): sponsor-level retention satisfied if the conduit has 100% liquidity coverage and the liquidity provider retains 5% in the underlying asset pool
- § 244.7 — CMBS: the B-piece buyer (the entity that purchases the most subordinate commercial real estate ABS) may satisfy retention on behalf of the sponsor if it meets eligibility criteria — must independently review each underlying loan, not have acquired the B-piece from the sponsor at a discount, and hold it without hedging for five years
- § 244.8 — Fannie Mae and Freddie Mac ABS: retention is satisfied if the GSE fully guarantees timely payment of principal and interest (while in conservatorship, as permitted by FHFA)
- § 244.9 — Open market CLOs: the CLO manager satisfies the 5% requirement by retaining an eligible horizontal or vertical interest; the rule's application to CLOs was heavily litigated — a D.C. Circuit ruling in 2018 (Loan Syndications and Trading Ass'n v. SEC) held that "open market CLOs" where the manager buys loans from third parties do not involve "securitizers" subject to the rule; subsequent agency guidance has addressed the resulting ambiguity
- § 244.10 — Qualified tender option bonds (municipal securities): a specialized structure satisfying retention through a residual equity interest retained by the sponsor
- § 244.11 — Allocation to originators: a sponsor may reduce its own retention by the amount retained by an originator, pro-rated by the originator's share of securitized assets — this allows large originators (auto manufacturers' finance arms, bank mortgage originators) to share retention responsibility with the securitizer
Exemptions
The rule's Subpart D (§§ 244.13–244.21) carves out categories where retention is reduced to zero or substantially reduced:
- Qualified residential mortgages (QRM) — conforming, high-quality home mortgages meeting underwriting standards defined in § 244.13; after years of debate, regulators aligned QRM with the CFPB's qualified mortgage (QM) definition — if a loan meets QM standards, it qualifies for zero retention; this exemption covers the bulk of conventional mortgage origination
- Qualifying commercial loans, CRE loans, and auto loans — fully amortizing loans meeting detailed underwriting criteria (verified borrower financials, loan-to-value limits, debt service coverage) qualify for zero retention under §§ 244.15–244.18; designed to ensure retention applies to complex structured products and riskier loans, not standard bank lending
- Government-guaranteed loans — ABS where every asset is guaranteed by the U.S. government or an agency (SBA 7(a) loans, USDA-guaranteed rural development loans) are exempt
- Foreign-related transactions — safe harbor under § 244.20 for securitizations where no more than 10% of the assets were sold to U.S. persons and the retention is governed by substantially equivalent foreign law (e.g., EU risk retention rules)
How It Affects You
If you work at a bank, insurance company, or asset manager investing in ABS: The rule reshapes deal structure negotiations — every new ABS transaction must identify who holds the retained interest, in what form, and for how long. In mortgage securitizations, the QRM exemption means vanilla conforming loans (bought by Fannie/Freddie or meeting QM standards) come to market without a sponsor holding a residual position; for non-QM or non-agency product, the 5% horizontal or vertical piece must be placed or retained by the originator/securitizer before settlement. For CMBS, the B-piece buyer who satisfies the rule is typically one of a small number of specialized distressed-debt and real estate investors; their role in deal structure — and their ability to renegotiate loan terms during their mandatory review period — has become a significant factor in CMBS execution. For CLO investors: the post-litigation ambiguity around open-market CLOs means deal documentation and manager representations matter; review whether the CLO manager has structured its retention to comply with the letter of the post-LSTA guidance.
If you are a community bank, credit union, or small originator: The rule's originator-allocation provision (§ 244.11) allows your institution to take on a share of the retained interest proportional to your loans in the pool — which sounds like a burden but can also be a selling point: being a skin-in-the-game originator signals quality underwriting. More practically, if you originate QM-compliant conforming mortgages that are sold to the GSEs (Fannie/Freddie), you face zero retention risk on those loans — they fall outside the rule's scope by virtue of the QRM exemption aligned with QM.
If you are in the CLO market (manager, investor, or leveraged loan originator): The 2018 D.C. Circuit decision in LSTA v. SEC significantly narrowed the rule's reach for open-market CLOs, finding that managers who buy loans on the open market rather than originating them are not "securitizers" subject to mandatory retention. Many CLO managers restructured to take advantage of this ruling. However, regulators have signaled ongoing scrutiny, and the inter-agency periodic review provision (§ 244.22) requires the agencies to revisit QRM and exemption definitions periodically. The CLO market's rapid growth (now a $1+ trillion market) means any tightening of this exemption would be a significant market event.
Statutory Authority
This rule implements:
- 15 U.S.C. § 78o-11 (Securities Exchange Act § 15G, added by Dodd-Frank § 941) — requires federal regulators to jointly prescribe credit risk retention regulations for securitizers; establishes the 5% floor; authorizes exemptions for high-quality mortgages; prohibits hedging of retained interests; applies to asset-backed securities as defined in the Exchange Act
- 12 U.S.C. § 221 et seq. (Federal Reserve Act) — authority for the Board to regulate bank holding companies and state member banks, the primary entities subject to the Fed's version of Regulation RR
Recent Rulemakings
79 FR 77764 (December 24, 2014) — Joint final rule adopted by the Fed, OCC, FDIC, SEC, FHFA, and HUD after an extensive notice-and-comment process spanning two proposal rounds (2011 and 2013). The 2014 rule significantly liberalized the 2013 proposal by aligning QRM with QM (dropping the proposed 20% down payment requirement for QRM that would have required retention on most mortgages), and adopted the CMBS B-piece buyer as a permissible retention form. The rule became effective December 24, 2015 for RMBS and December 24, 2016 for all other asset classes.
Key litigation: Loan Syndications and Trading Ass'n v. SEC, 882 F.3d 212 (D.C. Cir. 2018) — vacated the rule's application to open-market CLOs, finding CLO managers that acquire loans on the open market are not "securitizers" under § 15G; the decision removed mandatory retention from a large segment of the CLO market.