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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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