What does the Dodd-Frank Wall Street Reform and Consumer Protection Act specify regarding a securitizer retaining credit risk in a securitization transaction?

Question

What will be an ideal response?

Answer 1

Because of the turmoil that occurred in the securitization market and related sectors of the financial market, in July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act.The key features of the act that impact securitizations are

1 . The requirement that "securitizers" retain a portion of the transaction's credit risk.
2 . Requirements regarding reporting standards and disclosure for a securitization transaction.
3 . The representations and warranties required to be provided in securitization transactions and the mechanisms for enforcing them.
4 . Due diligence requirements with respect to loans underlying securitization transactions.

The specifics regarding how the above requirements should be handled were not set forth in the act. Instead, Congress delegated that responsibility and its implementation to three federal banking agencies (Federal Reserve Board, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation) and the Securities and Exchange Commission (SEC). With respect to nonagency RMBS, joint rules are to be specified by the three federal banking agencies, the Federal Housing Finance Agency (FHFA), and the Department of Housing and Urban Development (HUD).

The rules dealing with the amount and form of credit risk that securitizers must retain differ for securitization that do not have "qualified residential mortgages" and those that have entirely such mortgages. For securitizations consisting entirely of "qualified residential mortgages," there are no risk retention requirements. The definition of what constitutes a "qualified residential mortgage" was delegated to the three federal banking agencies, SEC, FHFA, and HUD that takes into account the underwriting and product features of the loans and their historical performance.
Securitizers that are required to retain credit risk are not permitted to hedge (directly or indirectly) or transfer the credit risk.