In accordance with the risk-retention requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010, six federal agencies are seeking public comment on a proposed rule that would require sponsors of asset-backed securities (“ABS”) to retain at least 5 percent of the credit risk of the assets underlying the securities and would not permit sponsors to transfer or hedge that credit risk. The rule would provide sponsors with various options including: (i) retention of risk by holding at least 5 percent of each class of ABS issued in a securitization transaction (also known as vertical retention); (ii) retention of a first-loss residual interest in an amount equal to at least 5 percent of the par value of all ABS interests issued in a securitization transaction (horizontal retention); (iii) an equally-divided combination of vertical and horizontal retention; (iv)
retention of a representative sample of the assets designated for securitization in an amount equal to at least 5 percent of the unpaid principal balance of all the designated assets; and (v) for commercial mortgage-backed securities, retention of at least a 5 percent first-loss residual interest by a third party that specifically negotiates for the interest, if certain requirements are met.