Evan Drutman was quoted in a Compliance Week article discussing controversial new regulatory proposals that financial firms retain some of the credit risk or “skin in the game” for the collateralized securities they issue. According to the article, one general complaint from the industry has been that the proposed rules leave too many details unclear about calculating credit risk or granting exemptions. Furthermore, Drutman argued, risk retention may not be the most effective way to fix underwriting problems in mortgage lending practices: “The greatest risks to an originator are its representations and warranties, especially in mortgage loans, where there are no guarantees that borrowers did not falsely misrepresent the information given to qualify for loans.”
He also noted the financial industry’s unhappiness with another detail of the proposed rule: that ABS issuers can no longer sell the interest-only tranche of their securities in the secondary market.
Drutman predicted credit risk retention is not going away. “There is something about it that resonates with regulators,” he said.
In the article, Drutman also cited a recent U.S. appellate court ruling that struck down the SEC's rule for shareholder proxy access; the court found that the SEC failed to do a proper cost-benefit analysis of the rule. “Litigation is the wild card that market players can look into playing,” he said.