The Board of Governors of the Federal Reserve System issued a report yesterday on the potential effect of credit risk retention requirements on securitization.
The report was part of the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act also requires that the Federal Reserve and other agencies jointly implement risk retention requirements for ABS securitizers or originators.
The report also looked at the impact of the Financial Accounting Statement (FAS) Nos. 166 and 167 on ABS transactions.
It highlighted the considerable variances in market practices as well as performance across securitizations backed by the different asset types. The agencies should consider, according to the report, these differences when developing risk retention requirements to achieve the Dodd-Frank Act's objectives without unnecessarily hindering credit availability.
The study defined and focused on ABCP and eight loan categories. The report noted that ABCP can be backed by different collateral types, although the asset class represents enough of a distinct structure that it warrants separate consideration.
These nine categories, which altogether make up a considerable amount of securitization activity are the following: nonconforming RMBS; CMBS; credit cards; auto loans and leases; student loans (federally guaranteed and privately issued); commercial and industrial bank loans (CLOs), equipment loans and leases; dealer floorplan loans and ABCP.
The Mortgage Bankers Association (MBA) issued a statement supporting the Fed's risk retention report.
Robert Story, Jr. , chairman of the MBA, said that: "The report closely parallels our own recommendations that we made to the Fed, principally that financial regulators ought to tailor risk retention requirements to specific asset classes and recognize risk retention practices that already exist."
The MBA, Story said, is particularly pleased that the Fed recognized that the "one-size-fits-all risk" retention requirements if applied across the board to all asset classes will probably not improve the securitization process. In fact, they probably won't enough to protect investors from losses from poorly underwritten loans.
"We would urge the regulatory agencies that have been tasked with implementing the risk retention provisions of the Dodd-Frank Act to incorporate the suggestions in the Fed's report and we look forward to working with them to ensure that the risk retention requirements for residential and commercial mortgage-backed securities are tailored specifically to the unique characteristics of these markets," Story said.
To access full report, please click this link.