Passed in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act represents Congress’s chief response to the financial crisis. The law, whose many regulations are still in the process of being finalized, will impact nearly every aspect of the securitization industry. ASF staff and membership are committed to working with the regulators crafting fair and transparent final rules.
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Section 621 of the Dodd-Frank Act requires the SEC to promulgate rules intended to prohibit material conflicts of interest in certain securitizations. The intent of Section 621 is to eliminate incentives for market participants to intentionally design asset-backed securities to fail or default. The SEC issued proposed rules for Section 621 in September 2011, but has not yet issued final rules.
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Title VII of the Dodd-Frank Act addresses the regulation of over-the-counter derivatives. Several regulations proposed pursuant to this title may affect how certain securitizations are structured and traded on the secondary market.
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Section 942 of the Dodd-Frank Act grants the SEC authority to issue rules relating to asset-backed security offering and reporting data requirements, as well as regulations relating to certain threshold requirements for suspension of duty to file certain reports required by the Securities Exchange Act.
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Section 945 of the Dodd-Frank Act requires the SEC to issue rules relating to due diligence performance concerning the registration statement filed by the issuer of an asset-backed security. Section 932 contains due diligence provisions relating to rating agencies, providers of third-party due diligence services for asset-backed securities, and issuers and underwriters of asset-backed securities.
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Section 939F of the Dodd-Frank Act, the so-called Franken Amendment, requires the SEC to carry out a study of the credit rating process for structured finance products, and the feasibility of establishing a system in which a self-regulatory organization assigns rating agencies to determine the credit ratings of structured finance products. The SEC is required to implement a system of assigned credit ratings unless it determines through the course of its study that "an alternative system would better serve the public interest and the protection of investors."
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Title II of the Dodd-Frank Act establishes the orderly liquidation authority (OLA) through which the FDIC may seize and resolve certain financial institutions designated systemically important by the FSOC. Discrepancies between the OLA process and the U.S. bankruptcy code have raised questions of significant importance to securitization market participants.
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Section 1411 of the Dodd-Frank Act requires the CFPB to establish certain ability-to-repay requirements under Regulation Z, along with establishing a definition of a “qualified mortgage” (QM) as a standard for complying with the ability-to-repay requirements. The QM definition will also critically impact the joint risk retention rulemaking of six other regulatory agencies, as the “qualified residential mortgage” (QRM) definition of risk retention cannot be broader than the CFPB's QM definition.
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Section 939A of the Dodd-Frank Act requires federal agencies to review any regulation that references the use of credit ratings, and to remove and substitute such references as each agency determines to be appropriate. Portions of Title I require the federal agencies to establish new regulations relating to capital adequacy to replace previous regulations, some of which were reliant on credit ratings.
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Section 939(h) of the Dodd-Frank Act requires the SEC to undertake a study on, among other things, the feasibility and desirability of standardizing various aspects of the credit rating process.
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Rule 436(g) under the Securities Act of 1933 excluded NRSROs from being treated as “experts” when their ratings were included in a registration statement. The repeal of Rule 436(g) by Section 939G of the Dodd-Frank Act caused widespread concerns among securitization market participants as rating agencies refused to consent with the inclusion of their ratings in registration statements. In response to this concern, the SEC has granted indefinite no-action relief providing that ratings disclosure under Regulation AB not be required.
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Section 943 of the Dodd-Frank Act mandates that the SEC issue rules addressing representations and warranties in asset-backed securities offerings. The SEC has finalized rules generally requiring rating agencies to include a disclosure report relating to the representations, warranties and enforcement mechanisms available to investors in any credit rating they issue, and requiring any securitizer to disclose fulfilled and unfulfilled repurchase requests across all trusts aggregated by that securitizer.
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Section 941 of the Dodd-Frank Act requires six federal regulators to jointly draft rules mandating that securitizers generally retain not less than 5% of the credit risk of any asset-backed security they issue, excluding securities backed by certain to-be-defined qualifying products, such as qualified residential mortgages (QRMs) and qualifying auto loans (QALs). Provisions contained in the proposed rules, such as the premium capture cash reserve account, among others, present substantial problems to asset-backed securities issuers. The regulators have not yet finalized the risk retention rules.
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Section 1077 of the Dodd-Frank Act requires the CFPB to conduct a study on private education loans, including addressing questions raised by Congress in the statute. Additionally, Congress and the Obama Administration have launched a number of initiatives seeking to assist student loan borrowers.
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Section 619 of the Dodd-Frank Act requires several regulators to jointly draft rules intended to prohibit proprietary trading activities and certain private fund investments. The proposed Volcker Rule, released November 2011, relies on certain definitions that appear to scope standard securitization vehicles into many restrictions not intended by Congress. The proposal would significantly affect the means through which asset-backed securities are funded and traded. The regulators have not yet finalized the Volcker Rule.
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Over the course of 2009 and early 2010, the pieces of legislation that would become the Dodd-Frank Act were debated in both houses of Congress and in conference committee.
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Since the passage of the Dodd-Frank Act, certain lawmakers and policymakers have initiated efforts to repeal the legislation in Congress and the court system.
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