WASHINGTON (CN) – Issuers of asset-backed securities would have to retain liability for at least 5 percent of the credit risk of the security under rules proposed by federal financial regulators.
The rules implement sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The rules also would prohibit the issuer from directly or indirectly hedging the credit risk they are required to retain.
However, the rules do not apply if the securities are backed entirely by residential mortgages and lower risk retention percentages are required for securities backed by commercial loans, commercial mortgages and automobile loans, if the loans meet underwriting standards established by federal banking agencies.
An asset-backed security is one whose value is based on the flow of cash through an underlying transaction such as the repayment of a loan.
The Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, U.S. Securities and Exchange Commission, Federal Housing Finance Agency, and the Department of Housing and Urban Development ask for public comment on the proposed rules by June 10.