Legislation to give regulators new powers to protect the financial system from failures of large institutions also imposes high credit risk retention requirements on MBS and ABS securitizations.

The Financial Stability Improvement Act legislation that House Financial Services Committee chairman Barney Frank, D-Mass., worked out with Treasury secretary Timothy Geithner requires creditors to retain 10% or more of the credit risk when they sell or securitize loans. "Regulators can adjust the level of risk retention above or below 10%, but not lower than 5%," according to a summary of the bill.

The bill also gives the federal banking regulators and the Securities and Exchange Commission the flexibility to make exemptions or adjustments to the risk retention requirement if it is "consistent with the purpose of ensuring high quality underwriting" and improves consumer access to credit on reasonable terms.

The House passed a mortgage reform bill in May that requires securitizers to retain 5% of the credit risk. But the bill (H.R. 1728), specifically exempts government guaranteed mortgages and loans purchased or securitized by Fannie Mae and Freddie Mac from the credit risk retention requirement.

The bill Frank unveiled to deal with "too big to fail" institutions does not appear to include such an exemption.

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