This client report assesses the overall structure and impact of a lengthy NPR to implement provisions in the Dodd-Frank Act that require securitizers generally to hold a five percent position in the credit risk related to asset-backed securities (ABS). Forthcoming reports will analyze specific proposals germane to major asset classes. Consistent with the law, the NPR defines who is to hold this position, how it is to be calculated and defined, when it may be eliminated or reduced and how express exemptions (e.g., for “qualified residential mortgages” or QRMs) are implemented. In general, the NPR seeks to provide stringent treatment for the risk retention to ensure that it is a meaningful position that aligns securitizer incentives with those of investors, as intended by the statute. However, the variety of covered ABS originators and securitizers means that these requirements will have different implications in each affected asset class. In general, ABS volume in several asset classes could drop dramatically, affecting credit availability in such assets and, perhaps, sharply increasing the role of government securitization vehicles where these exist. Because the risk-retention requirements are generally more costly to bank securitizers than non-banks, non-bank securitization channels (generally moribund since the crisis) could redevelop, possibly posing a renewed round of secondary-market risk.
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