Wednesday, May 18, 2011

Senate Hearings Reveal Growing Consensus for Reproposal of Dodd-Frank Risk Retention Regulations

Hearings by the Senate Securities Subcommittee on the proposed regulations to implement the securitization risk retention provisions of Dodd-Frank revealed a strong sentiment to repropose this massive rulemaking effort. Ranking Member Mike Crapo (R-ID) noted that early feedback on the joint SEC and banking regulator proposals indicated that more work needs to be done, thereby warranting a reproposal. It is critically important that the regulators get this right, said Senator Crapo, because securitization is vitally important to the financial markets and, more broadly, to the US economy. He emphasized that the securitization regulations must be strong and at the same time flexible enough to adapt to changing market conditions. Subcommittee Chair Jack Reed (D-RI) emphasized that there huge implications at stake in the securitization rulemaking, especially in light of legislative efforts underway to reform or wind down the government-sponsored enterprises. Senator Reed said that the final regulations must ensure that securitization is a vital part of the financial landscape.

The risk retention proposal is massive; comprising nearly 400 printed pages and asking respondents to address almost 200 questions. It would broadly apply new risk retention requirements to all sponsors of securitizations of mortgages and other assets.

Responding to Senator Crapo, Lisa Pendergast, President of the Commercial Real Estate Finance Council, said that the risk retention regulations should be reproposed using information from the recent SEC forums on securitization. Similarly, Tom Deutsch, Executive Director of the American Securitization Forum (ASF) called on the SEC and the banking agencies to repropose the risk retention regulations.

The ASF head anticipates that the SEC and the banking agencies will receive thousands of pages of comments on the proposals from industry groups, individual market participants, academics, and members of Congress. Given the diversity and complexity of the securitization market and the highly technical nature of the proposed risk retention regulations, the Forum believes that revisions made by the joint regulators in response to these comments will most certainly justify an opportunity for further review by all securitization market participants prior to adoption. Thus, the Forum urges the joint regulators to revise the proposed regulations to address the concerns described in the comment letters and repropose the regulations implementing Section 941 of Dodd-Frank for further consideration and public comment prior to adoption.

On the separate issue of regulatory arbitrage, the ASF chief noted that securitization transactions in Europe are subject to their own risk retention requirements set forth in the European Union Directive 2006/48/EC, Article 122a. The structure of the European risk retention regime is fundamentally different than US regulation, he noted.

While U.S. regulation applies to issuers of ABS, the European rules apply to European Economic Area credit institutions that invest in asset-backed securities. Ultimately, this could have the peculiar result of application of both risk retention regimes, which is further confused by the regulations’ differing requirements. Mr. Deutsch emphasized that harmonization among the two sets of regulations will be critical to a functioning and efficient securitization market.

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