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

(a) Definitions (1) "Federal banking agencies" means the Office of the Comptroller of the Currency, the Federal Reserve Board, and the FDIC. (2) "Insured depository institution" has the meaning given in section 1813(c) of title 12. (3) "Securitizer" means (A) whoever issues an asset-backed security, or (B) whoever organizes and starts an asset-backed securities deal by selling or transferring assets — directly or through an affiliate — to the issuer. (4) "Originator" means someone who (A) creates, through lending or otherwise, the financial asset that backs an asset-backed security, and (B) sells that asset, directly or indirectly, to a securitizer. (b) Regulations required (1) In general: within 270 days of July 21, 2010, the federal banking agencies and the SEC had to jointly write rules requiring a securitizer to keep ("retain") an economic stake in the credit risk of any asset it sells off by issuing an asset-backed security. (2) Residential mortgages: within the same 270 days, the federal banking agencies, the SEC, the Secretary of Housing and Urban Development, and the Federal Housing Finance Agency had to jointly write similar retention rules specifically for residential mortgage assets sold off through an asset-backed security. (c) Standards for regulations (1) The rules from subsection (b) must (A) stop a securitizer from directly or indirectly hedging away, or otherwise transferring, the risk it is required to keep; (B) require the securitizer to retain (i) at least 5% of the credit risk for any asset that is not a "qualified residential mortgage," or is one but is bundled into a security backed by some non-qualified mortgages, or (ii) less than 5% of the risk for a non-qualified-mortgage asset if the loan's originator met the underwriting standards described in paragraph (2)(B); (C) spell out (i) which forms of risk retention count, (ii) the minimum time the risk must be kept, and (iii) that no retention is required at all if every asset backing the security is a qualified residential mortgage; (D) apply whether or not the securitizer is an insured depository institution; (E) for commercial mortgages, specify allowed retention types, forms, and amounts, which the agencies may decide can include (i) retaining a set share of the asset's total credit risk, (ii) letting a third-party buyer hold the first-loss position if it specifically negotiated for it, has enough financial resources to cover losses, did due diligence on the assets, and meets the same retention standards as the securitizer, (iii) a determination that the underwriting standards and controls are adequate, or (iv) adequate representations, warranties, and enforcement mechanisms; (F) set appropriate retention standards for collateralized debt obligations and similar instruments backed by other asset-backed securities; and (G) provide for (i) a full or partial exemption for any securitization, where appropriate in the public interest and for investor protection, (ii) a full or partial exemption for securities issued or guaranteed by the United States or a federal agency — except that, for this purpose, Fannie Mae and Freddie Mac do not count as federal agencies, (iii) a full or partial exemption for state, local, or territorial government securities exempt from Securities Act registration, or for qualified scholarship funding bonds, and (iv) rules for splitting retention duties between a securitizer and an originator when the securitizer buys assets from that originator. (2) Asset classes: (A) the rules must set up separate asset classes — residential mortgages, commercial mortgages, commercial loans, auto loans, and any others the agencies decide fit — each with its own rules. (B) For each class, the rules must include underwriting standards, set by the federal banking agencies, spelling out which loan terms, conditions, and features count as low credit risk. (d) Originators — in deciding how to split retention duties between a securitizer and an originator under subsection (c)(1)(E)(iv), the agencies must (1) reduce the securitizer's required retention percentage by however much the originator is required to retain, and (2) consider (A) whether the assets sold to the securitizer show low-credit-risk terms and features, (B) whether the securitization market's form or volume of transactions encourages careless loan origination, and (C) the potential effect of the retention rules on consumers' and businesses' access to reasonable credit — which may not include simply transferring the risk to a third party. (e) Exemptions, exceptions, and adjustments (1) The federal banking agencies and the SEC may jointly create exemptions, exceptions, or adjustments to these rules — including for whole classes of institutions or assets — covering both the retention requirement and the anti-hedging rule in subsection (c)(1). (2) Any such exemption, exception, or adjustment must (A) help keep underwriting standards high for securitizers and originators, and (B) encourage sound risk management, improve reasonable credit access for consumers and businesses, or otherwise serve the public interest and investor protection. (3) Certain institutions and programs are exempt outright: (A) Farm Credit System institutions — including the Federal Agricultural Mortgage Corporation — are exempt from this whole section. (B) Residential, multifamily, or health-care-facility mortgage loans, or securitizations based on them, that are insured or guaranteed by the United States or a federal agency are exempt — but Fannie Mae, Freddie Mac, and the Federal Home Loan Banks do not count as federal agencies for this purpose. (4) Qualified residential mortgage exemption: (A) the federal banking agencies, the SEC, HUD, and the FHFA must jointly issue rules exempting "qualified residential mortgages" from the retention requirement. (B) They must jointly define that term, considering underwriting and product features shown by historical data to lower default risk, such as (i) documenting and verifying the borrower's finances, (ii) standards for the borrower's leftover income after monthly obligations and for debt-to-income ratios, (iii) limiting payment shock on adjustable-rate mortgages, (iv) mortgage insurance or other credit enhancements obtained at origination that reduce default risk, and (v) restricting risky features like balloon payments, negative amortization, prepayment penalties, and interest-only payments. (C) The definition cannot be broader than the "qualified mortgage" definition under the Truth in Lending Act, as amended by the Consumer Financial Protection Act of 2010, and its regulations. (5) Condition on the exemption: the rules under paragraph (4) must say a security backed by tranches of other asset-backed securities can never qualify for this exemption. (6) Certification: for each all-qualified-residential-mortgage security, the SEC must require the issuer to certify that it evaluated its own internal controls for making sure every underlying asset really is a qualified residential mortgage. (f) Enforcement — the rules under this section are enforced by (1) the relevant federal banking agency, for a securitizer that is an insured depository institution; and (2) the SEC, for a securitizer that is not. (g) Authority of Commission — the SEC's authority under this section adds to, and does not replace, its normal power to enforce the securities laws. (h) Authority to coordinate on rulemaking — the Chairperson of the Financial Stability Oversight Council must coordinate all joint rulemaking required by this section. (i) Effective date of regulations — the rules issued under this section take effect (1) for securitizers and originators of residential-mortgage-backed securities, 1 year after the final rules are published in the Federal Register; and (2) for securitizers and originators of every other class of asset-backed securities, 2 years after the final rules are published.