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Wall Street group to challenge Dodd-Frank risk retention rules

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[November 25, 2014] By Sarah N. Lynch

WASHINGTON (Reuters) - A Wall Street trade group said on Monday it has filed a lawsuit to strike down a new rule that requires banks to retain some risk on their books when they securitize loans, saying the rule could stifle crucial financing to certain companies.

The Loan Syndications and Trading Association (LSTA) said it was concerned about how the "risk retention" rule, which requires banks to retain at least five percent of the loans they originate on their books, is not workable for the market for collateralized loan obligations (CLOs), or bundles of business loans packaged as securities.

In the final rule, regulators required the independent managers of CLOs, rather than the originating banks, to retain the risk.

The regulation "disproportionately punishes an industry that was not involved in the financial crisis," the group said in a statement on Monday.

The new rules are a key provision required by the 2010 Dodd-Frank Wall Street reform law, which is aimed at curbing the amount of risk financial institutions take on when they bundle loans and sell them off to investors.

Previously, banks pumped up loan volumes with little concern about the risks since they planned to securitize the loans and sell them to investors. When subprime mortgage borrowers began defaulting, the securities went bad en masse and the system imploded, sparking the financial crisis of 2007-2009.

Under the new provisions, banks will be forced to better align their interests with investors who buy the securities.

The LSTA filed the first documents in its lawsuit in the U.S. Court of Appeals for the District of Columbia on Nov. 10, but formally announced its plans to the public and its members on Monday. It has until December to file legal briefs in court.

The petition names the Federal Reserve and the Securities and Exchange Commission as defendants in the forthcoming legal challenge. The Fed and SEC are two of six federal agencies that jointly adopted the so-called risk retention rules in October.

Spokespeople for the Federal Reserve and the SEC declined to comment.

(Reporting by Sarah N. Lynch; Editing by Alan Crosby)

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