July 15, 2010

Asset-Backed Securitizations

Asset-backed securitization rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act will apply to any security collateralized by any type of self-liquidating financial asset that allows the holder of the security to receive payments that depend primarily on cash flow from the asset, including asset-backed securities, mortgage-backed securities, collateralized mortgage, debt and bond obligations, and collateralized debt obligations backed by other asset-backed securities.

Credit Risk Retention and Allocation

The regulations will require securitizers to retain unhedged credit risk in certain percentages depending on the types of underlying assets that are being securitized. This requirement generally will be at least 5 percent, but may be lower for certain asset classes such as qualified residential mortgages or where asset originators meet prescribed underwriting standards. For transactions in which securitizers purchase assets from originators, the regulations will provide for the allocation of retained credit risk between the securitizer and the originator. For commercial mortgage-backed securities, the first-loss risk retention may be held by a third party purchaser that, among other things, specifically negotiates for the purchase of the first-loss position, holds adequate financial resources to back losses and provides due diligence on all assets in a pool before they are securitized.

Exemptions from Risk Retention Requirements

Securitizations involving only qualified residential mortgages—to be defined in the regulations—will be exempt or will have lower loss retention percentages, as will certain transactions involving guaranties by the United States, federal agencies (except by Fannie Mae or Freddie Mac), States or institutions supervised by the Farm Credit Administration. The regulations may provide for additional exemptions or adjustments for classes of assets or institutions.

Due Diligence Reviews and Asset-Level Disclosures

Issuers of asset-backed securities will be required to disclose, for each tranche or class of securities, information regarding the assets backing the security that allows investors to independently perform due diligence on the underlying assets, using a format that facilitates comparison to data for similar types of asset classes. Each issuer of an asset-backed security will be required to perform a review of the assets underlying the asset-backed security and disclose the nature of the review. Securitizers will be required to disclose fulfilled and unfulfilled repurchase requests across all trusts aggregated by the securitizer to allow investors to identify securitizers with clear underwriting deficiencies. Any report accompanying a credit rating of an asset-backed security issued by a nationally recognized statistical rating agency will have to disclose the representations, warranties, enforcement mechanisms available to investors and how they differ from those of similar issuances of securities.

Time-frame for Rules Governing Securitizations

The SEC and federal banking regulators are to prescribe rules governing the asset-backed securitization process, including risk retention and allocation requirements, related standards and exemptions, risk management standards for securitizers and originators, and disclosure requirements regarding underlying assets. The risk retention rules are to be issued within 270 days and will be effective one year after final publication for residential mortgage securitizations and two years thereafter for other securitizations. Certain rules regarding disclosure and related matters will become effective earlier.

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