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Fed, SEC Approve Risk Retention Rule

QRM Risk Retention Rule [1]The residential mortgage loan risk retention rule, known as the "qualified residential mortgage" (QRM) rule, was approved on Wednesday by the U.S. Federal Reserve Board [2] and the Securities and Exchange Commission (SEC [3]), the last two of six federal agencies to approve the rule, according to the Fed.

The rule [4], which was first proposed in 2011, requires the lenders to retain at least 5 percent of a loan's risk when packing mortgages to sell to investors in the secondary market.

"The final rule before the Board would require sponsors of securitizations to retain an economic interest in the assets that they securitize," Fed chair Janet Yellen said. "Often called 'skin in the game,' risk retention requirements better align the interests of sponsors and investors by providing an economic incentive for sponsors to monitor the quality of securitized assets."

The Fed, the U.S. Department of Housing and Urban Development (HUD [5]), the Federal Deposit Insurance Corporation (FDIC [6]), the Federal Housing Finance Agency (FHFA [7]), the Office of the Comptroller of the Currency (OCC [8]), and the SEC are all issuing the final rule jointly.

The risk retention framework in the proposal the agencies issued in August 2013 is largely retained in the final rule. The sponsors of asset-based securities are generally required to retain at least 5 percent of the credit risk of the assets collateralizing ABS insurance, and the rule prohibits the sponsor from transferring or hedging the credit risk.

The final rule implements guidelines required by the Dodd-Frank Act of 2010. The rule sets the definition of a QRM and aligns that definition with that of a qualified mortgage, as defined by the Consumer Financial Protection Bureau. Securitizations of QRMs are exempt from the risk retention requirement.

Agencies are required to review the definition of QRM no later than four years after the effective date of the rule, with regards to securitization of residential mortgages. From that point, they are required to review the definition every five years. Each agency is allowed to request a review of the definition of QRM at any time.

The final rule for residential mortgage-backed securitizations will go into effect exactly one year after being published in the Federal Register.