Extensions of Credit by Federal Reserve Banks, 65014-65017 [E9-29296]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 74, Number 235 (Wednesday, December 9, 2009)]
[Rules and Regulations]
[Pages 65014-65017]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-29296]


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FEDERAL RESERVE SYSTEM

12 CFR Part 201

[Regulation A; Docket No. R-1371]


Extensions of Credit by Federal Reserve Banks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: This final rule amends Regulation A to provide a process by 
which the Federal Reserve Bank of New York may determine the 
eligibility of credit rating agencies in the Term Asset-backed 
Securities Loan Facility. The final rule does not apply to discount 
window lending or other extensions of credit provided by the Federal 
Reserve System. In addition, the final rule only applies to asset-
backed securities that are not backed by commercial real estate. The 
amendment does not represent a change in the stance of monetary policy.

DATES: Final rule is effective on January 8, 2010.

FOR FURTHER INFORMATION CONTACT: William R. Nelson, Senior Associate 
Director (202/452-3579), Division of Monetary Affairs; Christopher W. 
Clubb, Senior Counsel (202/452-3904), Legal Division; for users of 
Telecommunication Devices for the Deaf (TDD) only, contact 202/263-
4869.

SUPPLEMENTARY INFORMATION: 

I. Background

    Proposed Rule. On October 8, 2009, the Board of Governors of the 
Federal Reserve System (the ``Board'') published for public comment a 
notice of proposed rulemaking (``NPRM'') that would amend Regulation A 
to provide a process by which the Federal Reserve Bank of New York 
(``FRBNY'') may determine the eligibility of credit rating agencies in 
the Term Asset-backed Securities Loan Facility (``TALF'').\1\ The Board 
has determined the terms and conditions for TALF borrowing and

[[Page 65015]]

eligible collateral, including minimum credit ratings and the set of 
credit rating agencies whose ratings may be accepted for purposes of 
TALF by FRBNY. Since TALF was established, the Board and FRBNY have 
accepted credit ratings from three credit rating agencies (Standard & 
Poor's, Moody's Investors Service, and Fitch Ratings). The proposed 
amendment was designed to provide FRBNY with a consistent framework for 
determining the eligibility for use in TALF of ratings issued by 
individual credit rating agencies when used in conjunction with a 
separate asset-level risk assessment process.
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    \1\ Proposed rule, 74 FR 51806 (Oct. 8, 2009). The TALF is a 
funding facility to help market participants meet the credit needs 
of households and businesses by supporting the issuance of new 
asset-backed securities (ABS) collateralized by loans of various 
types to consumers and businesses of all sizes. The TALF was 
established under section 13(3) of the Federal Reserve Act, which 
permits the Board of Governors of the Federal Reserve Board, in 
unusual and exigent circumstances, to authorize Reserve Banks to 
extend credit to individuals, partnerships and corporations that are 
unable to obtain adequate credit accommodations. For the terms and 
conditions and frequently asked question of the TALF, refer to 
https://www.federalreserve.gov/monetarypolicy/talf.htm.
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    The NPRM proposed an objective minimal experience-based approach 
specific to the types of assets accepted as collateral in TALF. As a 
threshold requirement, the proposed rule would permit FRBNY to accept 
only a credit rating issued by a credit rating agency that is 
registered with the Securities and Exchange Commission as a 
``nationally recognized statistical rating organization'' (NRSRO) for 
issuers of asset-backed securities (ABS) pursuant to the Credit Rating 
Agency Reform Act of 2006 (CRARA).\2\ The proposed rule also would 
require that the NRSRO had issued ratings on at least ten transactions 
within a specified asset category since September 30, 2006. The asset 
categories are:
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    \2\ CRARA (Pub. L. 109-291, 120 Stat. 1327) is primarily 
codified at 15 U.S.C. 78o-7.
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     Category 1--auto loans, floorplan loans, and equipment 
loans TALF sectors;
     Category 2--credit card receivables and insurance premium 
finance loans TALF sectors;
     Category 3--mortgage servicing advance receivables TALF 
sector; \3\ and
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    \3\ The proposed rule would permit an NRSRO to aggregate ratings 
on residential mortgage-backed securities (not currently included in 
the TALF) for purposes of meeting the ten-transaction requirement 
for Category 3 (mortgage servicing advance loans TALF sector).
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     Category 4--student loans TALF sector.

In addition, the proposed rule would allow FRBNY to accept credit 
ratings only from a credit rating agency that has a current and 
publicly available rating methodology specific to ABS in the particular 
TALF asset sector (as defined in the TALF haircut schedule) for which 
the credit rating agency wishes its ratings to be considered for TALF.
    The proposed rule also described the process whereby FRBNY would 
determine whether an NRSRO becomes eligible to have its ratings 
accepted for TALF ABS. In addition, under the proposed rule, FRBNY 
could, at any time, review the continued use of ratings from a credit 
rating agency in one or more TALF ABS sectors and determine that such 
credit ratings were no longer acceptable if the credit rating agency no 
longer met the eligibility requirements or conditions. Finally, the 
proposed rule set out two conditions that FRBNY would have to ensure 
were met by an NRSRO in order for the NRSRO to have its credit ratings 
accepted for TALF ABS. First, the NRSRO would have to agree to discuss 
with the Federal Reserve its views of the credit risk of any 
transaction within the TALF asset sector that has been submitted to 
TALF and upon which the NRSRO is being or has been consulted by the 
issuer. Second, the NRSRO would have to agree to provide any 
information requested by the Federal Reserve regarding the credit 
rating agency's continued eligibility under the factors set out in the 
proposed rule, such as continuing to be properly registered as an NRSRO 
with the Securities and Exchange Commission and continuing to have a 
current and publicly available rating methodology specific to ABS in 
the particular TALF asset sector.
    Public comments. The Board received only one comment that was 
responsive to the NPRM.\4\ The comment was from a credit rating agency 
that was supportive of the proposed rule. In particular, the commenter 
supported the objective, experience-based approach adopted by the 
proposal. The commenter also agreed that registration as an NRSRO for 
issuers of ABS should be a threshold requirement, but not the sole 
requirement, for TALF. The commenter also supported the experience and 
publicly available rating methodology requirements of the proposed 
rule. Finally, the commenter endorsed the proposed rule's requirement 
that the NRSRO confer with the Federal Reserve regarding relevant TALF 
credit risk issues and provide requested information regarding the 
NRSRO's continuing eligibility with respect to TALF. The commenter did 
not suggest any changes to the proposed rule.
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    \4\ Another comment was filed by a consumer in the NPRM docket, 
but it did not provide comments responsive to the NPRM. The comment 
letters are available from the Board's Freedom of Information Office 
by calling (202) 452-3684, as well as on the Board's public Web site 
at: https://www.federalreserve.gov/generalinfo/foia/index.cfm?
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    Final rule. After carefully considering the comments received and 
other facts of record, and for the reasons discussed herein and in the 
NPRM, the Board has adopted a final rule in essentially the same form 
as the proposed rule, except for minor clarifying revisions. An NRSRO 
may submit the information necessary for FRBNY to make an eligibility 
determination for the NRSRO under the final rule at any time, including 
prior to the effective date of the final rule. FRBNY may make the NRSRO 
eligible for TALF under the final rule as of the effective date or 
thereafter. The set of NRSROs eligible pursuant to this final rule will 
take effect commencing with the February 2010 TALF subscription.

II. Administrative Law Matters

A. Final Regulatory Flexibility Analysis

    An initial regulatory flexibility analysis (IRFA) was included in 
the NPRM in accordance with the Regulatory Flexibility Act (RFA).\5\ In 
the IRFA, the Board specifically solicited comment, including from 
small entities, on whether the proposed rule would have a significant 
economic impact on a substantial number of small entities. No small 
entities submitted comments regarding quantification of their projected 
costs. The Board expects this rule to affect a number of small 
entities; however, the cost this rule imposes would not appear to have 
a significant economic impact on a substantial number of small 
entities, within the meaning of the RFA.
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    \5\ 5 U.S.C. 601 et seq.
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    Even though this rule does not appear to have a significant 
economic impact on a substantial number of small entities, the Board 
has not formally certified the rule as not having a significant 
economic impact on a substantial number of small entities, as provided 
under section 605(b) of the RFA. Instead, the Board has prepared a 
Final Regulatory Flexibility Analysis (FRFA) as described in the RFA, 5 
U.S.C. 604.\6\
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    \6\ When promulgating a final rule, the RFA requires agencies to 
prepare a FRFA unless the agency finds that the final rule will not, 
if promulgated, have a significant economic impact on a substantial 
number of small entities. 5 U.S.C. 604(a) and 605(b).
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    The RFA requires each FRFA to contain:
     A succinct statement of the need for, and objectives of, 
the rule;
     A summary of the significant issues raised by the public 
comments in response to the initial regulatory flexibility analysis, a 
summary of the assessment of the agency of such issues, and a statement 
of any changes made in the proposed rule as a result of such comments;
     A description of and an estimate of the number of small 
entities to which the rule will apply or an explanation of why no such 
estimate is available;

[[Page 65016]]

     A description of the projected reporting, recordkeeping 
and other compliance requirements of the rule, including an estimate of 
the classes of small entities which will be subject to the requirement 
and the type of professional skills necessary for preparation of the 
report or record; and
     A description of the steps the agency has taken to 
minimize the significant economic impact on small entities consistent 
with the stated objectives of applicable statutes, including a 
statement of the factual, policy, and legal reasons for selecting the 
alternative adopted in the final rule and why each one of the other 
significant alternatives to the rule considered by the agency which 
affect the impact on small entities was rejected.\7\
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    \7\ 5 U.S.C. 604(a).
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    1. Statement of the need for, and objectives of, the final rule. As 
discussed in the preamble above, the Board is adopting this rule to 
govern FRBNY's determination of eligibility of NRSROs and their credit 
ratings for use in TALF. The objective of the final rule is to provide 
for an objective, prudent, and reasonably consistent process for FRBNY 
to determine the eligibility of NRSROs and their credit ratings for 
purposes of TALF ABS. The Board anticipates that implementation of the 
final rule will permit an expansion of the set of NRSROs accepted for 
TALF ABS, while maintaining appropriate protection against credit risk 
for the U.S. taxpayer in connection with TALF.
    2. Significant issues raised by comments in response to the IRFA. 
Commenters did not raise any issues in response to the IRFA. The Board 
is adopting the final rule in essentially the same form as the proposed 
rule.
    3. Description and estimate of classes of small entities affected 
by the final rule. As noted in the IRFA, there are ten NRSROs 
registered with the SEC. Of those ten, the Board's review of publicly 
available information indicates that three NRSROs are not ``small 
entities'' under the RFA because their asset size (or the asset size of 
the NRSRO's parent company) is larger than the level set in the SBA 
regulation. For purposes of this FRFA, the Board will assume that all 
seven of the remaining NRSROs would qualify as ``small entities'' under 
the SBA regulations.
    4. Recordkeeping, Reporting and Other Compliance Requirements. The 
Board believes that the final rule does not establish any reporting, 
recordkeeping, or other compliance requirements that are not already 
part of the NRSRO registration process with the Securities and Exchange 
Commission or involve records that would not otherwise be created in 
the normal and customary course of an NRSRO's business. In addition, 
other than that which is normally required in the credit rating agency 
industry, special expertise should not be required to compile the 
information necessary to submit an eligibility request to FRBNY for use 
of an NRSRO's credit ratings in TALF. Most NRSRO's should have this 
information readily available in the normal and customary course of 
business.
    The conditions required for FRBNY to accept ratings may similarly 
require minimal expenditure of resources by an NRSRO, but the Board 
believes that such information should be readily available in the 
normal and customary course of the business of a credit rating agency. 
FRBNY may request information from an NRSRO for the purpose of 
determining that the NRSRO continues to meet the eligibility 
requirements under the final rule. Also, an NRSRO that has been 
consulted on a transaction in TALF may be requested by FRBNY to discuss 
its views of the particular transaction, but it would not be required 
to conduct any more analysis than it had already conducted in the 
course of its business.
    5. Steps Taken to Minimize the Economic Impact on Small Entities. 
As discussed in the IRFA, the Board considered alternatives to the 
approach adopted in the proposed rule and selected the approach adopted 
in the proposed rule for the reasons set out in the IRFA. The Board did 
not receive any comments suggesting any additional alternatives to the 
approach adopted in the proposed rule. The Board is adopting the final 
rule in essentially the same form as the proposed rule.

B. Paperwork Reduction Act Analysis

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
Ch. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the final 
rule under the authority delegated to the Board by the Office of 
Management and Budget (OMB). The Federal Reserve may not conduct or 
sponsor, and an organization is not required to respond to, this 
information collection unless it displays a currently valid OMB control 
number. The OMB control number will be assigned.
    The collection of information that is revised by this rulemaking is 
found in 12 CFR 201.3(e)(1)(ii) and (iii). This information is required 
to permit FRBNY to determine eligibility of credit rating agencies to 
have their ratings accepted in TALF in accordance with Board standards. 
The respondents are NRSROs, which may be small entities. There is no 
record retention requirement in the final rule.
    The estimated burden per response is two hours. It is estimated 
that there will be ten respondents providing information on a one-time 
basis. Therefore the total amount of annual burden is estimated to be 
20 hours. No comments specifically addressing the burden estimate were 
received.
    The Federal Reserve has a continuing interest in the public's 
opinions of our collections of information. At any time, comments 
regarding the burden estimate, or any other aspect of this collection 
of information, including suggestions for reducing the burden, may be 
sent to: Secretary, Board of Governors of the Federal Reserve System, 
20th and C Streets, NW., Washington, DC 20551; and to the Office of 
Management and Budget, Paperwork Reduction Project (7100--to be 
assigned), Washington, DC 20503.

C. Plain Language

    Each Federal banking agency, such as the Board, is required to use 
plain language in all proposed and final rulemakings published after 
January 1, 2000. 12 U.S.C. 4809. The Board has sought to present the 
final rule, to the extent possible, in a simple and straightforward 
manner.

III. Statutory Authority

    Pursuant to the authority set out in the Federal Reserve Act and 
particularly section 11 (codified at 12 U.S.C. 248(j)), the Board 
adopts the rules set out below.

IV. Text of Final Rules

List of Subjects in 12 CFR Part 201

    Credit.

Authority and Issuance

0
For the reasons set forth in the preamble, the Board is amending 12 CFR 
Chapter II to read as follows:

PART 201--EXTENSIONS OF CREDIT BY FEDERAL RESERVE BANKS (REGULATION 
A)

0
1. The authority citation for part 201 continues to read as follows:

    Authority:  12 U.S.C. 248(i)-(j), 343 et seq., 347a, 347b, 347c, 
348 et seq., 357, 374, 374a, and 461.

0
2. In Sec.  201.3, paragraph (e) is added to read as follows:


Sec.  201.3  Extensions of credit generally.

* * * * *
    (e) Credit ratings for Term Asset-Backed Securities Loan Facility 
(TALF).

[[Page 65017]]

    (1) If the Board requires that a TALF advance, discount, or other 
extension of credit be against collateral (other than commercial 
mortgage-backed securities) that is rated by one or more credit rating 
agencies, the Federal Reserve Bank of New York may only accept the 
ratings of any credit rating agency that:
    (i) Is registered with the Securities and Exchange Commission as a 
Nationally Recognized Statistical Rating Organization for issuers of 
asset-backed securities;
    (ii) Has a current and publicly available rating methodology 
specific to asset-backed securities in the particular TALF asset sector 
(as defined in the TALF haircut schedule) for which it wishes its 
ratings to be accepted; and
    (iii) Demonstrates that it has sufficient experience to provide 
credit ratings that would assist in the Federal Reserve Bank of New 
York's risk assessment on the most senior classes of newly issued 
asset-backed securities in the particular TALF asset sector by having 
made public or made available to a paying subscriber base, since 
September 30, 2006, ratings on at least ten transactions denominated in 
U.S. dollars within the particular category to which the particular 
TALF asset sector is assigned as set out below--
    (A) Category 1--auto, floorplan, and equipment TALF sectors;
    (B) Category 2--credit card and insurance premium finance TALF 
sectors;
    (C) Category 3--mortgage servicing advances TALF sector; and
    (D) Category 4--student loans TALF sector.
    (2) For purposes of the requirement in paragraph (e)(1)(iii) of 
this section, ratings on residential mortgage-backed securities may be 
included in Category 3 (servicer advances).
    (3) The Federal Reserve Bank of New York may in its discretion 
review at any time the eligibility of a credit rating agency to rate 
one or more types of assets being offered as collateral.
    (4) Process.
    (i) Credit rating agencies that wish to have their ratings accepted 
for TALF transactions should send a written notice to the Credit, 
Investment, and Payment Risk group of the Federal Reserve Bank of New 
York including information on the factors listed in paragraph (e)(1) of 
this section with respect to each TALF asset sector for which they wish 
their ratings to be accepted.
    (ii) The Federal Reserve Bank of New York will notify the submitter 
within 5 business days of receipt of a submission whether additional 
information needs to be submitted.
    (iii) Within 5 business days of receipt of all information 
necessary to evaluate a credit rating agency pursuant to the factors 
set out in paragraph (e)(1) of this section, the Federal Reserve Bank 
of New York will notify the credit rating agency regarding its 
eligibility.
    (5) Conditions. The Federal Reserve Bank of New York may accept 
credit ratings under this subsection only from a credit rating agency 
that agrees to--
    (i) Discuss with the Federal Reserve its views of the credit risk 
of any transaction within the TALF asset sector that has been submitted 
to TALF and upon which the credit rating agency is being or has been 
consulted by the issuer; and
    (ii) Provide any information requested by the Federal Reserve for 
the purpose of determining that the credit rating agency continues to 
meet the eligibility requirements under paragraph (e)(1) of this 
section.

    By order of the Board of Governors of the Federal Reserve 
System, December 4, 2009.
Jennifer J. Johnson,
Secretary.
[FR Doc. E9-29296 Filed 12-8-09; 8:45 am]
BILLING CODE 6210-01-P