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Federal Agencies Reviewing Risk Retention Feedback

Rule proposed as required by section 941 of Dodd-Frank

Dec. 6, 2011

By staff

The feedback to a proposed risk-retention rule generated numerous comments that are being reviewed by several federal agencies.

Six agencies, including the Federal Deposit Insurance
Corp., issued a notice of proposed rulemaking seeking comment on a proposal to implement Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The legislation became law 17 months ago.

The rule proposes to require sponsors of asset-backed securities to retain at least 5 percent of the credit risk of the underlying assets, according to prepared testimony for Acting FDIC Chairman Martin J. Gruenberg. The FDIC chief was testifying Tuesday before
the Senate committee on Banking, Housing and Urban Affairs.

Gruenberg noted that the required credit-risk retention cannot be transferred to a hedge fund.

Risk-retention can be waived on a qualified residential mortgage, or QRM.

"During the comment period, which was extended to Aug. 1, 2011, the agencies received numerous comment letters," Gruenberg stated. "The agencies are in the process of evaluating those comments."

John Walsh, acting comptroller of the currency, also delivered his assessment of the response.

"Most commenters on the QRM criteria expressed great concern that the QRM criteria were too stringent, particularly the 80 percent loan-to-value requirement for purchase money mortgages," Walsh said in his own prepared testimony.

He also noted that some commenters focused on how the proposal failed to directly alter the current risk-retention practices at Fannie Mae and Freddie Mac. He explained that they retain 100 percent of the credit-risk on their sponsored securitizations in the form of a guarantee "and opposed the difference in treatment from private securitizers."

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