Regulators Propose Skin in the Game Rule
By V. Gerard Comizio, Kevin L. Petrasic, Lawrence D. Kaplan & Amanda M. Jabour
Section 941(b) of the Dodd-Frank Act, codified as new Section 15G to the Securities Exchange Act of 1934, requires six Federal agenciesthe U.S. Department of the Treasury, Federal Reserve Board, Federal Deposit Insurance Corporation, U.S. Securities and Exchange Commission, Federal Housing Finance Agency, and Department of Housing and Urban Development (collectively, the Agencies) jointly to prescribe regulations requiring increased credit risk retention for securitizers of asset-backed securities and limiting the hedging or transferring of securitizers retained risk. Section 15G generally requires securitizers of asset-backed securities (ABS) to retain an unhedged five percent economic interest in the credit risk of securitized assets, but authorizes several exemptions from the general risk retention requirement. These include an exemption for securities collateralized by qualified residential mortgages, which must be underwritten pursuant to specific standards established by regulation, as well as exemptions for certain other asset classes.