Treatment by the Federal Deposit Insurance Corporation as Conservator or Receiver of Financial Assets Transferred by an Insured Depository Institution in Connection With a Securitization or Participation After September 30, 2010, 27471-27487 [2010-11680]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 75, Number 94 (Monday, May 17, 2010)]
[Proposed Rules]
[Pages 27471-27487]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-11680]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 360

RIN 3064-AD53


Treatment by the Federal Deposit Insurance Corporation as 
Conservator or Receiver of Financial Assets Transferred by an Insured 
Depository Institution in Connection With a Securitization or 
Participation After September 30, 2010

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking with request for comments.

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SUMMARY: The Federal Deposit Insurance Corporation (``FDIC'') proposes 
to adopt amendments to the rule regarding the treatment by the FDIC, as 
receiver or conservator of an insured depository institution, of 
financial assets transferred by the institution in connection with a 
securitization or a participation after September 30, 2010 (the 
``Proposed Rule''). The Proposed Rule would continue the safe harbor 
for transferred financial assets in connection with securitizations in 
which the financial assets were transferred under the existing 
regulations. The Proposed Rule would clarify the conditions for a safe 
harbor for securitizations or participations issued after September 30, 
2010. The Proposed Rule also sets forth safe harbor protections for 
securitizations that do not comply with the new accounting standards 
for off balance sheet treatment by providing for expedited access to 
the financial assets that are securitized if they meet the conditions 
defined in the Proposed Rule. The conditions contained in the Proposed 
Rule would serve to protect the Deposit Insurance Fund (``DIF'') and 
the FDIC's interests as deposit insurer and receiver by aligning the 
conditions for the safe harbor with better and more sustainable 
securitization practices by insured depository institutions (``IDIs''). 
The FDIC seeks comment on the regulations, the scope of the safe 
harbors provided, and the terms and scope of the conditions included in 
the Proposed Rule.

DATES: Comments on this Notice of Proposed Rulemaking must be received 
by July 1, 2010.

ADDRESSES: You may submit comments on the Proposed Rule, by any of the 
following methods:
     Agency Web Site: https://www.FDIC.gov/regulations/laws/federal/notices.html. Follow instructions for submitting comments on 
the Agency Web Site.
     E-mail: Comments@FDIC.gov. Include RIN 3064-AD53 on the 
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
     Hand Delivery: Comments may be hand delivered to the guard 
station at the rear of the 550 17th Street Building (located on F 
Street) on business days between 7 a.m. and 5 p.m.
    Instructions: All comments received will be posted generally 
without change to https://www.fdic.gov/regulations/laws/federal/propose.html, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Michael Krimminger, Office of the 
Chairman, 202-898-8950; George Alexander, Division of Resolutions and 
Receiverships, (202) 898-3718; Robert Storch, Division of Supervision 
and Consumer Protection, (202) 898-8906; or R. Penfield Starke, Legal 
Division, (703) 562-2422, Federal Deposit Insurance Corporation, 550 
17th Street, NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

    In 2000, the FDIC clarified the scope of its statutory authority as 
conservator or receiver to disaffirm or repudiate contracts of an 
insured depository institution with respect to transfers of financial 
assets by an IDI in connection with a securitization or participation 
when it adopted a regulation codified at 12 CFR 360.6 (the 
``Securitization Rule''). This rule provided that the FDIC as 
conservator or receiver would not use its statutory authority to 
disaffirm or repudiate contracts to reclaim, recover, or recharacterize 
as property of the institution or the receivership any financial assets 
transferred by an IDI in connection with a securitization or in the 
form of a participation, provided that such transfer meets all 
conditions for sale accounting treatment under generally accepted 
accounting principles (``GAAP''). The rule was a clarification, rather 
than a limitation, of the repudiation power. Such power authorizes the 
conservator or receiver to breach a contract or lease entered into

[[Page 27472]]

by an IDI and be legally excused from further performance, but it is 
not an avoiding power enabling the conservator or receiver to recover 
assets that were previously sold and no longer reflected on the books 
and records on an IDI.
    The Securitization Rule provided a ``safe harbor'' by confirming 
``legal isolation'' if all other standards for off balance sheet 
accounting treatment, along with some additional conditions focusing on 
the enforceability of the transaction, were met by the transfer in 
connection with a securitization or a participation. Satisfaction of 
``legal isolation'' was vital to securitization transactions because of 
the risk that the pool of financial assets transferred into the 
securitization trust could be recovered in bankruptcy or in a bank 
receivership. Generally, to satisfy the legal isolation condition, the 
transferred financial assets must have been presumptively placed beyond 
the reach of the transferor, its creditors, a bankruptcy trustee, or in 
the case of an IDI, the FDIC as conservator or receiver. The 
Securitization Rule, thus, addressed only purported sales which met the 
conditions for off balance sheet accounting treatment under GAAP.
    Since its adoption, the Securitization Rule has been relied on by 
securitization participants, including rating agencies, as assurance 
that investors could look to securitized financial assets for payment 
without concern that the financial assets would be interfered with by 
the FDIC as conservator or receiver. Recently, the implementation of 
new accounting rules has created uncertainty for securitization 
participants.

Modifications to GAAP Accounting Standards

    On June 12, 2009, the Financial Accounting Standards Board 
(``FASB'') finalized modifications to GAAP through Statement of 
Financial Accounting Standards No. 166, Accounting for Transfers of 
Financial Assets, an Amendment of FASB Statement No. 140 (``FAS 166'') 
and Statement of Financial Accounting Standards No. 167, Amendments to 
FASB Interpretation No. 46(R) (``FAS 167'') (the ``2009 GAAP 
Modifications''). The 2009 GAAP Modifications are effective for annual 
financial statement reporting periods that begin after November 15, 
2009. The 2009 GAAP Modifications made changes that affect whether a 
special purpose entity (``SPE'') must be consolidated for financial 
reporting purposes, thereby subjecting many SPEs to GAAP consolidation 
requirements. These accounting changes may require an IDI to 
consolidate an issuing entity to which financial assets have been 
transferred for securitization on to its balance sheet for financial 
reporting purposes primarily because an affiliate of the IDI retains 
control over the financial assets.\1\ Given the 2009 GAAP 
Modifications, legal and accounting treatment of a transaction may no 
longer be aligned. As a result, the safe harbor provision of the 
Securitization Rule may not apply to a transfer in connection with a 
securitization that does not qualify for off balance sheet treatment.
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    \1\ Of particular note, Paragraph 26A of FAS 166 introduces a 
new concept that was not in FAS 140, as follows: ``* * * the 
transferor must first consider whether the transferee would be 
consolidated by the transferor. Therefore, if all other provisions 
of this Statement are met with respect to a particular transfer, and 
the transferee would be consolidated by the transferor, then the 
transferred financial assets would not be treated as having been 
sold in the financial statements being presented.''
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    FAS 166 also affects the treatment of participations issued by an 
IDI, in that it defines participating interests as pari-passu pro-rata 
interests in financial assets, and subjects the sale of a participation 
interest to the same conditions as the sale of financial assets. 
Statement FAS 166 provides that transfers of participation interests 
that do not qualify for sale treatment will be viewed as secured 
borrowings. While the GAAP modifications have some effect on 
participations, most participations are likely to continue to meet the 
conditions for sale accounting treatment under GAAP.

FDI Act Changes

    In 2005, Congress enacted 11(e)(13)(C) \2\ of the Federal Deposit 
Insurance Act (the ``FDI Act'')\3\. In relevant part, this paragraph 
provides that generally no person may exercise any right or power to 
terminate, accelerate, or declare a default under a contract to which 
the IDI is a party, or obtain possession of or exercise control over 
any property of the IDI, or affect any contractual rights of the IDI, 
without the consent of the conservator or receiver, as appropriate, 
during the 45-day period beginning on the date of the appointment of 
the conservator or the 90-day period beginning on the date of the 
appointment of the receiver. If a securitization is treated as a 
secured borrowing, section 11(e)(13)(C) could prevent the investors 
from recovering monies due to them for up to 90 days. Consequently, 
securitized assets that remain property of the IDI (but subject to a 
security interest) would be subject to the stay, raising concerns that 
any attempt by securitization noteholders to exercise remedies with 
respect to the IDI's assets would be delayed. During the stay, interest 
and principal on the securitized debt could remain unpaid. The FDIC has 
been advised that this 90-day delay would cause substantial downgrades 
in the ratings provided on existing securitizations and could prevent 
planned securitizations for multiple asset classes, such as credit 
cards, automobile loans, and other credits, from being brought to 
market.
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    \2\ 12 U.S.C. 1821(e)(13)(C).
    \3\ 12 U.S.C. 1811 et. seq.
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Analysis

    The FDIC believes that several of the issues of concern for 
securitization participants regarding the impact of the 2009 GAAP 
Modifications on the eligibility of transfers of financial assets for 
safe harbor protection can be addressed by clarifying the position of 
the conservator or receiver under established law. Under Section 
11(e)(12) of the FDI Act,\4\ the conservator or receiver cannot use its 
statutory power to repudiate or disaffirm contracts to avoid a legally 
enforceable and perfected security interest in transferred financial 
assets. This provision applies whether or not the securitization meets 
the conditions for sale accounting. The Proposed Rule would clarify 
that prior to any monetary default or repudiation, the FDIC as 
conservator or receiver would consent to the making of required 
payments of principal and interest and other amounts due on the 
securitized obligations during the statutory stay period. In addition, 
if the FDIC decides to repudiate the securitization transaction, the 
payment of repudiation damages in an amount equal to the par value of 
the outstanding obligations on the date of receivership will discharge 
the lien on the securitization assets. This clarification in paragraphs 
(d)(4) and (e) of the Proposed Rule addresses certain questions that 
have been raised about the scope of the stay codified in Section 
11(e)(13)(C).
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    \4\ 12 U.S.C. 1821(e)(12).
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    An FDIC receiver generally makes a determination of what 
constitutes property of an IDI based on the books and records of the 
failed IDI. If a securitization is reflected on the books and records 
of an IDI for accounting purposes, the FDIC would evaluate all facts 
and circumstances existing at the time of receivership to determine 
whether a transaction is a sale under applicable state law or a secured 
loan. Given the 2009 GAAP Modifications, there may be circumstances in 
which a sale transaction will continue to be reflected on the books and 
records of the IDI because the IDI or one of its affiliates

[[Page 27473]]

continues to exercise control over the assets either directly or 
indirectly. The Proposed Rule would provide comfort that conforming 
securitizations which do not qualify for off balance sheet treatment 
would have access to the assets in a timely manner irrespective of 
whether a transaction is viewed as a legal sale.
    If a transfer of financial assets by an IDI to an issuing entity in 
connection with a securitization is not characterized as a sale, the 
securitized assets would be viewed as subject to a perfected security 
interest. This is significant because the FDIC as conservator or 
receiver is prohibited by statute from avoiding a legally enforceable 
or perfected security interest, except where such an interest is taken 
in contemplation of insolvency or with the intent to hinder, delay, or 
defraud the institution or the creditors of such institution.\5\ 
Consequently, the ability of the FDIC as conservator or receiver to 
reach financial assets transferred by an IDI to an issuing entity in 
connection with a securitization, if such transfer is characterized as 
a transfer for security, is limited by the combination of the status of 
the entity as a secured party with a perfected security interest in the 
transferred assets and the statutory provision that prohibits the 
conservator or receiver from avoiding a legally enforceable or 
perfected security interest.
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    \5\ 12 U.S.C. 1821(e)(12).
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    Thus, for securitizations that are consolidated on the books of an 
IDI, the Proposed Rule would provide a meaningful safe harbor 
irrespective of the legal characterization of the transfer. There are 
two situations in which consent to expedited access to transferred 
assets would be given--(i) monetary default under a securitization by 
the FDIC as conservator or receiver or (ii) repudiation of the 
securitization agreements by the FDIC. The Proposed Rule provides that 
in the event the FDIC is in monetary default under the securitization 
documents and the default continues for a period of ten (10) business 
days after written notice to the FDIC, the FDIC will be deemed to 
consent pursuant to Section (11)(e)(13)(C) to the exercise of 
contractual rights under the documents on account of such monetary 
default, and such consent shall constitute satisfaction in full of 
obligations of the IDI and the FDIC as conservator or receiver to the 
holders of the securitization obligations.
    The Proposed Rule also provides that in the event the FDIC 
repudiates the securitization asset transfer agreement, the FDIC shall 
have the right to discharge the lien on the financial assets included 
in the securitization by paying damages in an amount equal to the par 
value of the obligations in the securitization on the date of the 
appointment of the FDIC as conservator or receiver, less any principal 
payments made to the date of repudiation. If such damages are not paid 
within ten (10) business days of repudiation, the FDIC will be deemed 
to consent pursuant to Section (11)(e)(13)(C) to the exercise of 
contractual rights under the securitization agreements.
    The Proposed Rule would also confirm that, if the transfer of the 
assets is viewed as a sale for accounting purposes (and thus the assets 
are not reflected on the books of an IDI), the FDIC as receiver would 
not reclaim, recover, or recharacterize as property of the institution 
or the receivership assets of a securitization through repudiation or 
otherwise, but only if the transactions comply with the requirements 
set forth in paragraphs (b) and (c) of the Proposed Rule. The treatment 
of off balance sheet transfers of the Proposed Rule is consistent with 
the prior safe harbor under the Securitization Rule.
    Pursuant to 12 U.S.C. 1821(e)(13)(C), no person may exercise any 
right or power to terminate, accelerate, or declare a default under a 
contract to which the IDI is a party, or to obtain possession of or 
exercise control over any property of the IDI, or affect any 
contractual rights of the IDI, without the consent of the conservator 
or receiver, as appropriate, during the 45-day period beginning on the 
date of the appointment of the conservator or the 90-day period 
beginning on the date of the appointment of the receiver. In order to 
address concerns that the statutory stay could delay repayment of 
investors in a securitization or delay a secured party from exercising 
its rights with respect to securitized financial assets, the Proposed 
Rule provides for the consent by the conservator or receiver, subject 
to certain conditions, to the continued making of required payments 
under the securitization documents and continued servicing of the 
assets, as well as the ability to exercise self-help remedies after a 
payment default by the FDIC or the repudiation of a securitization 
asset transfer agreement during the stay period of 12 U.S.C. 
1821(e)(13)(C).
    The FDIC recognizes that, as a practical matter, the scope of the 
comfort that would be provided by the Proposed Rule is more limited 
than that provided in the Securitization Rule. However, the FDIC 
believes that the proposed requirements are necessary to support 
sustainable securitization. The safe harbor is not exclusive, and it 
does not address any transactions that fall outside the scope of the 
safe harbor or that fail to comply with one or more safe harbor 
conditions. The FDIC believes that its safe harbor should promote 
responsible financial asset underwriting and increase transparency in 
the market.

Previous Rulemakings

    On November 12, 2009, the FDIC issued an Interim Final Rule 
amending 12 CFR 360.6, Treatment by the Federal Deposit Insurance 
Corporation as Conservator or Receiver of Financial Assets Transferred 
by an Insured Depository Institution in Connection With a 
Securitization or Participation, to provide for safe harbor treatment 
for participations and securitizations until March 31, 2010, which was 
further amended on March 11, 2010, by a Final Rule extending the safe 
harbor until September 30, 2010 (as so amended, the ``Transition 
Rule''). Under the Transition Rule, all existing securitizations as 
well as those for which transfers were made or, for revolving trusts, 
for which obligations were issued prior to September 30, 2010, were 
permanently ``grandfathered'' so long as they complied with the pre-
existing Sec.  360.6.
    At its December 15, 2009 meeting, the Board adopted an Advance 
Notice of Proposed Rulemaking (``ANPR'') that sought public comment on 
the scope of amendments to Section 360.6, as well as the requirements 
for the application of the safe harbor. The ANPR and the public 
comments received are discussed below in Sections III and IV.
    The 2009 GAAP Modifications affect the way securitizations are 
viewed by the rating agencies and whether they can achieve ratings that 
are based solely on the credit quality of the financial assets, 
independent from the rating of the IDI. Rating agencies are concerned 
with several issues, including the ability of a securitization 
transaction to pay timely principal and interest in the event the FDIC 
is appointed receiver or conservator of the IDI. Rating agencies are 
also concerned with the ability of the FDIC to repudiate the 
securitization obligations and pay damages that may be less than the 
full principal amount of such obligations and interest accrued thereon. 
Moody's, Standard & Poor's, and Fitch have expressed the view that 
because of the 2009 GAAP Modifications and the extent of the FDIC's 
rights and powers as conservator or receiver, bank securitization 
transactions would have to be linked to the rating of the IDI and are 
unlikely to receive ``AAA'' ratings if the bank is rated below ``A''. 
This view is based in

[[Page 27474]]

part on the ratings agencies' assessment of the delay involved in 
receipt of amounts due with respect to securitization obligations and 
the amount of repudiation damages payable under the FDI Act. 
Securitization practitioners have asked the FDIC to provide assurances 
regarding the position of the conservator or receiver as to the 
treatment of both existing and future securitization transactions to 
enable securitizations to be structured in a manner that enables them 
to achieve de-linked ratings.

Purpose of the Proposed Rule

    The FDIC, as deposit insurer and receiver for failed IDIs, has a 
unique responsibility and interest in ensuring that residential 
mortgage loans and other financial assets originated by IDIs are 
originated for long-term sustainability. The supervisory interest in 
origination of quality loans and other financial assets is shared with 
other bank and thrift supervisors. Nevertheless, the FDIC's 
responsibilities to protect insured depositors and resolve failed 
insured banks and thrifts and its responsibility to the DIF require 
that when the FDIC provides a safe harbor consenting to special relief 
from the application of its receivership powers, it must do so in a 
manner that fulfills these responsibilities.
    The evident defects in many subprime and other mortgages originated 
and sold into securitizations requires attention by the FDIC to fulfill 
its responsibilities as deposit insurer and receiver in addition to its 
role as a supervisor. The defects and misalignment of incentives in the 
securitization process for residential mortgages were a significant 
contributor to the erosion of underwriting standards throughout the 
mortgage finance system. While many of the troubled mortgages were 
originated by non-bank lenders, insured banks and thrifts also made 
many troubled loans as underwriting standards declined under the 
competitive pressures created by the returns achieved by lenders and 
service providers through the ``originate to distribute'' model.
    Defects in the incentives provided by securitization through 
immediate gains on sale for transfers into securitization vehicles and 
fee income directly led to material adverse consequences for insured 
banks and thrifts. Among these consequences were increased repurchase 
demands under representations and warranties contained in 
securitization agreements, losses on purchased mortgage and asset-
backed securities, severe declines in financial asset values and in 
mortgage- and asset-backed security values due to spreading market 
uncertainty about the value of structured finance investments, and 
impairments in overall financial prospects due to the accelerated 
decline in housing values and overall economic activity. These 
consequences, and the overall economic conditions, directly led to the 
failures of many IDIs and to significant losses to the DIF. In this 
context, it would be imprudent for the FDIC to provide consent or other 
clarification of its application of its receivership powers without 
imposing requirements designed to realign the incentives in the 
securitization process to avoid these devastating effects.
    The FDIC's adoption of 12 CFR 360.6 in 2000 provided clarification 
of ``legal isolation'' and facilitated legal and accounting analyses 
that supported securitization. In view of the accounting changes and 
the effects they have upon the application of the Securitization Rule, 
it is crucial that the FDIC provide clarification of the application of 
its receivership powers in a way that reduces the risks to the DIF by 
better aligning the incentives in securitization to support sustainable 
lending and structured finance transactions.
    The Proposed Rule is fully consistent with the position of the FDIC 
in the Final Covered Bond Policy Statement of July 15, 2008. In that 
Policy Statement, the FDIC Board of Directors acted to clarify how the 
FDIC would treat covered bonds in the case of a conservatorship or 
receivership with the express goal of thereby facilitating the 
development of the U.S. covered bond market. As noted in that Policy 
Statement, it served to ``define the circumstances and the specific 
covered bond transactions for which the FDIC will grant consent to 
expedited access to pledged covered bond collateral.'' The Policy 
Statement further specifically referenced the FDIC's goal of promoting 
development of the covered bond market, while protecting the DIF and 
prudently applying its powers as conservator or receiver.\6\
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    \6\ FDIC Covered Bond Policy Statement, 73 FR 43754 et seq. 
(July 28, 2008)
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    The Proposed Rule is also consistent with the amendments to 
Regulation AB proposed by the Securities and Exchange Commission 
(``SEC'') on April 7, 2010 (as so proposed to be amended, ``New 
Regulation AB''). The proposed amendments represent a significant 
overhaul of Regulation AB and related rules governing the offering 
process, disclosure requirements and ongoing reporting requirements for 
securitizations. New Regulation AB would establish extensive new 
requirements for both SEC registered publicly offered securitization 
and many private placements, including disclosure of standardized 
financial asset level information, enhanced investor cash flow modeling 
tools and on-going information reporting requirements. In addition New 
Regulation AB requires certain certifications to the quality of the 
financial asset pool, retention by the sponsor or an affiliate of a 
portion of the securitization securities and third party reports on 
compliance with the sponsor's obligation to repurchase assets for 
breach of representations and warranties as a precondition to an 
issuer's ability to use a shelf registration. The disclosure and 
retention requirements of New Regulation AB are consistent with and 
support the approach of the Proposed Rule.
    To ensure that IDIs are sponsoring securitizations in a responsible 
and sustainable manner, the Proposed Rule would impose certain 
conditions on all securitizations and additional conditions on 
securitizations that include residential mortgages (``RMBS''), 
including those that qualify as true sales, as a prerequisite for the 
FDIC to grant consent to the exercise of the rights and powers listed 
in 12 U.S.C. 1821(e)(13)(C) with respect to such financial assets. To 
qualify for the safe harbor provision of the Proposed Rule, the 
conditions must be satisfied for any securitization (i) for which 
transfers of financial assets were made on or after September 30, 2010 
or (ii) for revolving trusts, for which obligations were issued on or 
after September 30, 2010.
    The FDIC believes that the transitional period until September 30, 
2010, that is currently provided for in the Transitional Rule is 
sufficient to allow sponsors and other participants in securitizations 
to restructure transactions to comply with the new accounting 
requirements, and to properly structure transactions which meet the 
conditions of the Proposed Rules, when final. However, the FDIC is 
requesting public comment on the adequacy of the transitional period 
under the Transitional Rule for potential changes to securitizations to 
comply with the Proposed Rule.

II. The ANPR

    On January 7, 2010, the FDIC published its Advance Notice of 
Proposed Rulemaking Regarding Treatment by the FDIC as Conservator or 
Receiver of Financial Assets Transferred by an IDI in Connection with a 
Securitization or Participation After March 31, 2010 in the Federal 
Register. 75 FR 935 (Jan. 7, 2010). The ANPR

[[Page 27475]]

solicited public comment for 45 days relating to proposed amendments to 
the Securitization Rule regarding the treatment by the FDIC, as 
receiver or conservator of an IDI, of financial assets transferred by 
an IDI in connection with a securitization or participation 
transaction.
    The ANPR set forth specific questions as to which comments were 
sought and, in addition, in order to provide a basis for consideration 
of the questions, the ANPR included a draft of sample regulatory text 
(the ``Sample Text''). The questions posed by the ANPR were grouped 
under the following general categories:
    A. Capital Structure and Financial Assets. These questions included 
whether there should be limitations on the capital structures of 
securitizations that are eligible for safe harbor treatment, including 
whether the number of tranches should be limited and whether external 
credit support should be prohibited or limited.
    B. Disclosure. These questions included whether disclosures for 
private placements should be required to include the types of 
information and level of specificity applicable to public 
securitizations and inquiries as to the degree of disclosure and 
periodic reports that should be required, as well as whether broker, 
rating agency and other fees should be disclosed.
    C. Documentation and Record Keeping. These questions included 
whether securitization documentation should be required to include 
certain provisions relating to actions by servicers, such as requiring 
servicers to act for the benefit of all investors and commence loss 
mitigation within a specified time period, and whether there should be 
limits on the ability of servicers to make advances.
    D. Compensation. These questions included whether a portion of RMBS 
fees should be deferred and paid out over a number of years based on 
the performance of the financial assets and whether compensation to 
servicers should be required to take into account services provided and 
include incentives for servicing and loss mitigation actions that 
maximize the value of financial assets.
    E. Origination and Risk Retention. These questions included whether 
sponsors should be required to retain an economic interest in the 
credit risk of the financial assets, and whether a requirement that 
mortgage loans included in RMBS be originated more than twelve (12) 
months before being transferred for a securitization would be an 
effective way to align incentives to promote sound lending or, 
alternatively, whether a one (1) year hold back of proceeds due to the 
sponsor to fund repurchase requirements after a review of 
representations and warranties would better fulfill the goal of such 
alignment.
    In addition, the ANPR included questions relating to the adequacy 
of the scope of the safe harbor provisions, the effect of the change in 
accounting rules on participation transactions and certain other 
general questions.

III. Summary of Comments

    The FDIC received 36 comment letters on the questions posed by the 
ANPR and on provisions of the Sample Text, and held one teleconference 
with interested parties at which details of the ANPR were discussed. 
The letters included comments from trade associations, banks, law 
firms, rating agencies, consumer advocates and investors, among others.
    Institutional investors and consumer advocates supported many of 
the proposed changes as responsive to the issues demonstrated in the 
current crisis by the prior model of securitization. Certain 
institutional investors commented specifically on the need for greater 
disclosures of loan level data and emphasized the value of disclosures 
and strong representations and warranties as important in allowing 
investors to understand and limit the ongoing risks in a 
securitization. Consumer advocate and investor comments also included 
support for risk retention and greater clarity in servicing 
responsibilities.
    A number of banks, law firms and industry trade organizations 
opposed the new conditions set forth in paragraph (b) of the Proposed 
Rule for a variety of reasons. Their comments in opposition to the 
conditions included disagreement that such requirements would serve to 
promote more long-term sustainability for loans and other financial 
assets originated by IDIs, and objections that the conditions would 
impose additional costs on IDIs and competitively disadvantage IDIs in 
relation to non-regulated securitization sponsors. Several commenters 
stated that the FDIC should not unilaterally adopt new conditions, and 
some urged the FDIC to act only on an interagency basis or following 
final Congressional action.
    These comments reflect a misunderstanding of the purpose of the 
conditions. The conditions are designed to provide greater clarity and 
transparency to allow a better ongoing evaluation of the quality of 
lending by banks and reduce the risks to the DIF from the opaque 
securitization structures and the poorly underwritten loans that led to 
the onset of the financial crisis. In addition, these comments fail to 
recognize that securitization as a viable liquidity tool in mortgage 
finance will not return without greater transparency and clarity 
because investors have experienced the difficulties provided by the 
existing model of securitization. However, greater transparency is not 
solely for investors but will serve to more closely tie the origination 
of loans to their long-term performance by requiring disclosure of that 
performance. Moreover, many of the conditions are supported by New 
Regulation AB and are reflected in proposed financial services 
legislation.
    Several commenters also objected to inclusion of certain 
conditions, especially ongoing requirements or subjective criteria, 
because they would make it more difficult for persons analyzing a 
securitization to conclude at the outset of the securitization whether 
the conditions to the safe harbor have been satisfied. Some commenters 
asserted that, as a result, it would be difficult for the rating 
agencies to de-link the rating of a securitization from the rating of 
the sponsor. While the FDIC is not persuaded that rating agencies, 
which normally evaluate qualitative information, would not evaluate 
compliance with certain subjective criteria, the Proposed Rule has been 
drafted to tie disclosure and various other requirements to the 
contractual terms of the securitization. This should enable both rating 
agencies and investors to assess whether a transaction meets the 
conditions in the Proposed Rule.
    Comment letters also requested that the FDIC confirm that the safe 
harbor is not exclusive and, thus, that the failure of a securitization 
transaction to satisfy one or more safe harbor conditions would not 
make the financial assets transferred to a special purpose issuing 
entity subject to reclamation by a receiver. Commenters also requested 
that the FDIC confirm its agreement with the legal principle that the 
power to repudiate a contract is not a power to avoid asset transfers. 
As indicated above, the FDIC does not view the safe harbor as 
exclusive, but cannot provide comfort as to transactions that are not 
eligible for the safe harbor. The FDIC also recognizes that the power 
to repudiate a contract is not a power to recover assets that were 
previously sold and are no longer reflected on the books and records of 
an IDI.
    Several commenters stated that the new accounting treatment of 
assets transferred as part of a securitization should not be 
determinative of the

[[Page 27476]]

FDIC's treatment of such assets in an insolvency of a bank sponsor and 
that the Proposed Rule should focus instead on a legal analysis in 
determining whether a transfer of assets should be treated as a sale. 
Several commenters also objected to the proposal in the ANPR to treat 
as secured borrowings transfers that did not satisfy the requirements 
for sale accounting treatment. This position is not consistent with 
precedent. The Securitization Rule as adopted in 2000, as well as the 
FDIC's longstanding evaluation of assets potentially subject to 
receivership powers, has addressed only the treatment of those assets 
by looking to their treatment under applicable accounting rules. This 
was explicitly stated in the Securitization Rule. In formulating the 
revised safe harbor, it is appropriate for the FDIC to consider whether 
assets are treated under GAAP as part of the IDI's balance sheet when 
making the determination of how to treat assets in a conservatorship or 
receivership.
    The objections to a safe harbor based on a secured borrowing 
analysis are misplaced. Such safe harbor provides a high degree of 
certainty for securitization transfers that do not meet the 
requirements for off balance sheet treatment under the 2009 GAAP 
Modifications. Prior to the Securitization Rule, securitization 
transactions were typically viewed as either secured transactions or 
sales, and the analysis would rely on a perfected security interest in 
the financial assets that are subject to securitization. As a result, 
under the Proposed Rule, if the securitization does not meet the 
standards for off balance sheet treatment, irrespective of whether the 
transfer qualifies as a sale, the transaction would qualify for 
treatment as a secured transaction if it meets the requirements imposed 
on such transactions under the Proposed Rule. In this way, investors in 
securitization transactions that do not qualify for off balance sheet 
treatment may still receive benefits of expedited access to the 
securitized loans if they meet the conditions specified in the Proposed 
Rule.
    Comments relating to specific questions posed by the ANPR are 
discussed below in the description of the Proposed Rule.

IV. The Proposed Rule

    The Proposed Rule would replace the Securitization Rule as amended 
by the Transition Rule. Paragraph (a) of the Proposed Rule sets forth 
definitions of terms used in the Proposed Rule. It retains many of the 
definitions previously used in the Securitization Rule but modifies or 
adds definitions to the extent necessary to accurately reflect current 
industry practice in securitizations.
    Paragraph (b) of the Proposed Rule imposes conditions to the 
availability of the safe harbor for transfers of financial assets to an 
issuing entity in connection with a securitization. These conditions 
make a clear distinction between the conditions imposed on RMBS from 
those imposed on securitizations for other asset classes. In the 
context of a conservatorship or receivership, the conditions applicable 
to all securitizations would improve overall transparency and clarity 
through disclosure and documentation requirements along with ensuring 
effective incentives for prudent lending by requiring that the payment 
of principal and interest be based primarily on the performance of the 
financial assets and by requiring retention of a share of the credit 
risk in the securitized loans.
    The conditions applicable to RMBS are more detailed and explicit 
and require additional capital structure changes, disclosures, and 
documentation, the establishment of a reserve and deferral of 
compensation. These standards are intended to address the factors that 
caused significant losses in current RMBS securitization structures as 
demonstrated in the recent crisis. Confidence can be restored in RMBS 
markets only through greater transparency and other structures that 
support sustainable mortgage origination practices and require 
increased disclosures. These standards respond to investor demands for 
greater transparency and alignment of the interests of parties to the 
securitization. In addition, they are generally consistent with 
industry efforts while taking into account proposed legislative and 
regulatory initiatives.

Capital Structure and Financial Assets

    For all securitizations, the benefits of the Proposed Rule should 
be available only to securitizations that are readily understood by the 
market, increase liquidity of the financial assets and reduce consumer 
costs. Any re-securitizations (securitizations supported by other 
securitization obligations) would need to include adequate disclosure 
of the obligations, including the structure and the assets supporting 
each of the underlying securitization obligations and not just the 
obligations that are transferred in the re-securitization. This 
requirement would apply to all re-securitizations, including static re-
securitizations as well as managed collateralized debt obligations. 
Securitizations that are unfunded or synthetic transactions would not 
be eligible for expedited consent under the Proposed Rule. To support 
sound lending, all securitizations would be required to have payments 
of principal and interest on the obligations primarily dependent on the 
performance of the financial assets supporting the securitization. 
Payments of principal or interest to investors could not be contingent 
on market or credit events that are independent of the assets 
supporting the securitization, except for interest rate or currency 
mismatches between the financial assets and the obligations to 
investors.
    For RMBS only, the capital structure of the securitization would be 
limited to six tranches or less to discourage complex and opaque 
structures. The most senior tranche could include time-based sequential 
pay or planned amortization sub-tranches, which are not viewed as 
separate tranches for the purpose of the six tranche requirement. This 
condition would not prevent an issuer from creating the economic 
equivalent of multiple tranches by re-securitizing one or more 
tranches, so long as they meet the conditions set forth in the rule, 
including adequate disclosure in connection with the re-securitization. 
In addition, RMBS could not include leveraged tranches that introduce 
market risks (such as leveraged super senior tranches). Although the 
financial assets transferred into an RMBS would be permitted to benefit 
from asset level credit support, such as guarantees (including 
guarantees provided by governmental agencies, private companies, or 
government-sponsored enterprises), co-signers, or insurance, the RMBS 
could not benefit from external credit support. The temporary payment 
of principal and interest, however, could be supported by liquidity 
facilities. These conditions are designed to limit both the complexity 
and the leverage of an RMBS and therefore the systemic risks introduced 
by them in the market.
    Comments in response to the ANPR expressed concern that a 
limitation on the number of tranches of an RMBS would stifle innovation 
and would negatively affect the ability of securitizations to meet 
investor objectives and maximize offering proceeds. In addition, 
commenters argued that there should be no restriction on external third 
party pool level credit support, while one commenter stated that 
guarantees in RMBS transactions should be permitted at the loan level 
only if issued by

[[Page 27477]]

regulated third parties with proven capacity to ensure prudent loan 
origination and satisfy their obligations. Commenters also requested 
that the Proposed Rule not include the provision that a securitization 
may not be an unfunded securitization or synthetic transaction.
    In formulating the Proposed Rule, the FDIC was mindful of the need 
to permit innovation and accommodate financing needs, and thus 
attempted to strike a balance between permitting multi-tranche 
structures for RMBS transactions, on the one hand, and promoting 
readily understandable securitization structures and limiting 
overleveraging of residential mortgage assets, on the other hand.
    The FDIC is of the view that permitting pool level, external credit 
support in an RMBS can lead to overleveraging of assets, as investors 
might focus on the credit quality of the credit support provider as 
opposed to the sufficiency of the financial asset pool to service the 
securitization obligations.
    Finally, although the Proposed Rule would exclude unfunded and 
synthetic securitizations from the safe harbor, the FDIC does not view 
the inclusion of existing credit lines that are not fully drawn in a 
securitization as causing such securitization to be an ``unfunded 
securitization.'' In addition, to the extent an unfunded or synthetic 
transaction qualifies for treatment as a qualified financial contract 
under section (11)(e) of the FDI Act, it would not need the benefits of 
the safe harbor provided in the Proposed Rule in an FDIC 
receivership.\7\
---------------------------------------------------------------------------

    \7\ 12 U.S.C. 1821(e)(10).
---------------------------------------------------------------------------

Disclosure

    For all securitizations, disclosure serves as an effective tool for 
increasing the demand for high quality financial assets and thereby 
establishing incentives for robust financial asset underwriting and 
origination practices. By increasing transparency in securitizations, 
the Proposed Rule would enable investors (which may include banks) to 
decide whether to invest in a securitization based on full information 
with respect to the quality of the asset pool and thereby provide 
additional liquidity only for sustainable origination practices.
    The data must enable investors to analyze the credit quality for 
the specific asset classes that are being securitized. The FDIC would 
expect disclosure for all issuances to include the types of information 
required under current Regulation AB (17 CFR 229.1100 through 229.1123) 
or any successor disclosure requirements with the level of specificity 
that would apply to public issuances, even if the obligations are 
issued in a private placement or are not otherwise required to be 
registered.
    Securitizations that would qualify under this rule must include 
disclosure of the structure of the securitization and the credit and 
payment performance of the obligations, including the relevant capital 
or tranche structure and any liquidity facilities and credit 
enhancements. The disclosure would be required to include the priority 
of payments and any specific subordination features, as well as any 
waterfall triggers or priority of payment reversal features. The 
disclosure at issuance would also be required to include the 
representations and warranties made with respect to the financial 
assets and the remedies for breach of such representations and 
warranties, including any relevant timeline for cure or repurchase of 
financial assets, and policies governing delinquencies, servicer 
advances, loss mitigation and write offs of financial assets. The 
periodic reports provided to investors would be required to include the 
credit performance of the obligations and financial assets, including 
periodic and cumulative financial asset performance data, modification 
data, substitution and removal of financial assets, servicer advances, 
losses that were allocated to each tranche and remaining balance of 
financial assets supporting each tranche as well as the percentage 
coverage for each tranche in relation to the securitization as a whole. 
The FDIC anticipates that, where appropriate for the type of financial 
assets included the pool, monthly reports would also include asset 
level information that may be relevant to investors (e.g. changes in 
occupancy, loan delinquencies, defaults, etc.).
    Disclosure to investors would also be required to include the 
nature and amount of compensation paid to any mortgage or other broker, 
each servicer, rating agency or third-party advisor, and the originator 
or sponsor, and the extent to which any risk of loss on the underlying 
financial assets is retained by any of them for such securitization. 
Disclosure of changes to this information while obligations are 
outstanding would also be required. This disclosure should enable 
investors to assess potential conflicts of interests and how the 
compensation structure affects the quality of the assets securitized or 
the securitization as a whole.
    For RMBS, loan level data as to the financial assets securing the 
mortgage loans, such as loan type, loan structure, maturity, interest 
rate and location of property, would also be required to be disclosed 
by the sponsor. Sponsors of securitizations of residential mortgages 
would be required to affirm compliance with applicable statutory and 
regulatory standards for origination of mortgage loans, including that 
the mortgages in the securitization pool are underwritten at the fully 
indexed rate relying on documented income \8\ and comply with existing 
supervisory guidance governing the underwriting of residential 
mortgages, including the Interagency Guidance on Non-Traditional 
Mortgage Products, October 5, 2006, and the Interagency Statement on 
Subprime Mortgage Lending, July 10, 2007, and such additional guidance 
applicable at the time of loan origination.
---------------------------------------------------------------------------

    \8\ Institutions should verify and document the borrower's 
income (both source and amount), assets and liabilities. For the 
majority of borrowers, institutions should be able to readily 
document income using recent W-2 statements, pay stubs, and/or tax 
returns. Stated income and reduced documentation loans should be 
accepted only if there are mitigating factors that clearly minimize 
the need for direct verification of repayment capacity. Reliance on 
such factors also should be documented. Mitigating factors might 
include situations where a borrower has substantial liquid reserves 
or assets that demonstrate repayment capacity and can be verified 
and documented by the lender. A higher interest rate is not 
considered an acceptable mitigating factor.
---------------------------------------------------------------------------

    The Proposed Rule would require sponsors to disclose a third party 
due diligence report on compliance with such standards and the 
representations and warranties made with respect to the financial 
assets. Finally, the Proposed Rule would require that the 
securitization documents require the disclosure by servicers of any 
ownership interest of the servicer or any affiliate of the servicer in 
other whole loans secured by the same real property that secures a loan 
included in the financial asset pool. This provision does not require 
disclosure of interests held by servicers or their affiliates in the 
securitization securities. This provision is intended to give investors 
information to evaluate potential servicer conflicts of interest that 
might impede the servicer's actions to maximize value for the benefit 
of investors.
    Responses to questions in the ANPR concerning disclosure included 
requests that disclosure requirements be set forth in terms that are 
susceptible to verification of compliance at the time when the 
securitization securities are issued. Under the Proposed Rule, most of 
the disclosure provisions would require that the securitization 
documents require proper disclosure rather than making the disclosure 
itself a condition to eligibility for the safe

[[Page 27478]]

harbor. Under these provisions, if required disclosure is not made, 
there would be a default under the securitization documents, but a 
transaction that otherwise qualified for the safe harbor would not be 
ineligible for the safe harbor on the basis of inadequate disclosure.
    Several letters requested that the FDIC refrain from adopting its 
own disclosure requirements and that private placements not be required 
to include the same degree of disclosure as is required for public 
securitizations. Concern was also expressed that loan level disclosure 
was inappropriate for certain asset classes, such as credit card 
receivables. Commenters also urged that the safe harbor should not 
require more information on re-securitizations than is required by the 
securities laws. Comments also opposed a requirement that sponsors 
affirm compliance with all statutory and regulatory standards for 
mortgage loan origination. Finally, the comments included a request 
that rating agency fees not be disclosed because of a concern that such 
disclosure would jeopardize the objectivity of the ratings process by 
making such information available to the rating agency analysts that 
rate securitizations.
    The Proposed Rule recognizes that loan level disclosure may not be 
appropriate for each type of asset class securitization.
    The FDIC believes that regardless of whether the securitization 
transaction is in the form of a private rather than public securities 
issuance, full disclosure to investors in such transaction is 
necessary. With respect to re-securitizations, the FDIC does not 
believe that there is a logical basis for requiring less disclosure 
than is required for original securitizations. For both securitizations 
and re-securitizations, the Proposed Rule would permit the omission of 
information that is not available to the sponsor or issuer after 
reasonable investigation so long as there is disclosure as to the types 
of information omitted and the reason for such omission. In particular, 
the FDIC is concerned that robust disclosure be provided in CDO 
transactions and that ongoing monthly reports are provided to investors 
in a securitization, whether or not there is an ongoing obligation for 
filing with respect to such securitization under the Securities 
Exchange Act of 1934.
    Finally, the FDIC feels that disclosure of rating agency fees is 
very important to investors and that rating agencies can take 
appropriate internal measures to ensure that such disclosure does not 
impact the rating process.

Documentation and Recordkeeping

    For all securitizations, the operative agreements are required to 
set forth all necessary rights and responsibilities of the parties, 
including but not limited to representations and warranties, ongoing 
disclosure requirements and any measures to avoid conflicts of 
interest. The contractual rights and responsibilities of each party to 
the transaction must provide each party with sufficient authority and 
discretion for such party to fulfill its respective duties under the 
securitization contracts.
    Additional requirements apply to RMBS to address a significant 
issue that has been demonstrated in the mortgage crisis by improving 
the authority of servicers to mitigate losses on mortgage loans 
consistent with maximizing the net present value of the mortgages, as 
defined by a standardized net present value analysis. Therefore, for 
RMBS, contractual provisions in the servicing agreement must provide 
servicers with the authority to modify loans to address reasonably 
foreseeable defaults and to take such other action as necessary or 
required to maximize the value and minimize losses on the securitized 
financial assets. The servicers are required to apply industry best 
practices related to asset management and servicing.
    The RMBS documents may not give control of servicing discretion to 
a particular class of investors. The documents must require that the 
servicer act for the benefit of all investors rather for the benefit of 
any particular class of investors. Consistent with the forgoing, the 
servicer must commence action to mitigate losses no later than ninety 
(90) days after an asset first becomes delinquent unless all 
delinquencies on such asset have been cured. A servicer must maintain 
sufficient records of its actions to permit appropriate review of its 
actions.
    The FDIC believes that a prolonged period of servicer advances in a 
market downturn misaligns servicer incentives with those of the RMBS 
investors. Servicing advances also serve to aggravate liquidity 
concerns, exposing the market to greater systemic risk. Occasional 
advances for late payments, however, are beneficial to ensure that 
investors are paid in a timely manner. To that end, the servicing 
agreement for RMBS should not require the primary servicer to advance 
delinquent payments by borrowers for more than three (3) payment 
periods unless financing or reimbursement facilities to fund or 
reimburse the primary servicers are available. However, foreclosure 
recoveries cannot serve as the `financing facility' for repayment of 
advances.
    Comments on questions as to these provisions posed by the ANPR 
included statements that the safe harbor should not require the 
servicer to act for the benefit of all investors, and that the servicer 
should be permitted to act for a specified class of investors. In 
addition, concern was expressed that requiring servicer loss mitigation 
to maximize the net present value of the financial assets would unduly 
restrict the servicers.
    Several comments were received relating to whether servicers should 
be required to commence action to mitigate losses in connection with 
residential mortgage securitizations within 90 days after an asset 
first becomes delinquent and whether servicer advances should be 
limited to three payment periods. The comments included suggestions 
that there should be no loss mitigation provisions in the safe harbor, 
that no set period should be established, that 90 days was too short, 
and that 90 days was too long. Responses relating to servicer advances 
included statements that the safe harbor should not include limits on 
servicer advances, and that a longer period for servicer advances 
should be permitted. One commenter suggested that servicers be given 
explicit authority to reduce principal and exercise forbearance as to 
principal payments, and that loan modification be required to be 
evaluated as a precondition to foreclosure.
    While the FDIC agrees that servicers should be given flexibility on 
how best to maximize the value of financial assets, it believes that it 
is essential that there be certain governing principles in RMBS 
transactions. Maximization of net present value is a widely accepted 
standard for mortgage loan workouts, and the FDIC believes that use of 
this standard will result in the highest value being obtained. The FDIC 
also believes that the Proposed Rule would give the servicer authority 
to reduce principal or exercise forbearance if such action would 
maximize the value of an asset, and expects that servicers will 
consider loan modification in evaluating how best to maximize value.
    The FDIC understands that it may not be possible to determine with 
absolute certainty the appropriate deadline for the commencement of 
servicer loss mitigation or the appropriate number of payment periods 
for which servicers can be required to make advances for which 
financing or reimbursement facilities are not available. However, the 
FDIC believes that a framework for sustainable securitizations must 
include certain deadlines and limits that address

[[Page 27479]]

issues identified in the current financial crisis, and that the loss 
mitigation deadline and servicer advance limits set forth in the 
Proposed Rule are appropriate. In this connection, it is important to 
note that action to mitigate losses may include contact with the 
borrower or other steps designed to return the asset to regular 
payments, but does not require initiation of foreclosure or other 
formal enforcement proceedings.
    Finally, the FDIC does not agree that sustainable securitizations 
would be promoted if sponsors are permitted to structure 
securitizations where the servicer does not act for all classes of 
investors.

Compensation

    The compensation requirements of the Proposed Rule would apply only 
to RMBS. Due to the demonstrated issues in the compensation incentives 
in RMBS, in this asset class the Proposed Rule seeks to realign 
compensation to parties involved in the rating and servicing of 
residential mortgage securitizations.
    The securitization documents are required to provide that any fees 
payable credit rating agencies or similar third-party evaluation 
companies must be payable in part over the five (5) year period after 
the initial issuance of the obligations based on the performance of 
surveillance services and the performance of the financial assets, with 
no more than sixty (60) percent of the total estimated compensation due 
at closing. Thus payments to rating agencies must be based on the 
actual performance of the financial assets, not their ratings.
    A second area of concern is aligning incentives for proper 
servicing of the mortgage loans. Therefore, compensation to servicers 
must include incentives for servicing, including payment for loan 
restructuring or other loss mitigation activities, which maximizes the 
net present value of the financial assets in the RMBS.
    Commenters were divided on whether compensation to parties involved 
in a securitization should be deferred. Responses to the ANPR also 
stated that compensation to rating agencies should not be linked to 
performance of a securitization because such linkage would interfere 
with the neutral ratings process, and a rating agency expressed the 
concern that such linkage might give rating agencies an incentive to 
rate a transaction at a level that is lower than the level that the 
rating agency believes to be the appropriate level. Concern was also 
expressed that linkage of compensation to performance of the 
securitization could cause payment of full compensation to one category 
of securitization participants to be dependent in some measure on the 
performance of a different category of securitization participants. 
Comments also included an objection that if deferred performance based 
compensation was imposed on certain securitization participants, such 
as underwriters, these participants would be subject to risks that they 
had not expected to assume. Others commented that there should be 
incentives for servicers to modify loans rather than to foreclose. 
Concern was also expressed as to the complexity of reserving for 
deferred compensation and developing cash flow models relating to 
servicing incentives. Finally, concern was expressed that giving 
servicers incentives might lead to additional assets being consolidated 
on bank balance sheets.
    Based on the comments provided, the Proposed Rule imposes the 
deferred compensation requirement only on fees and other compensation 
to rating agencies or similar third-party evaluation companies. The 
FDIC notes that rating agencies have procedures in place to protect 
analytic independence and ensure the integrity of their ratings. 
Compensation deferral may have certain ramifications on internal rating 
agency processes but should not affect the ratings or surveillance 
process. Finally, the FDIC is mindful of the proposal to encourage loan 
modification rather than foreclosure and has spearheaded efforts in 
this area. The Proposed Rule would include loan restructuring 
activities as one of the categories of loss mitigation activities for 
which incentive compensation could be payable to servicers.

Origination and Retention Requirements

    To provide further incentives for quality origination practices, 
several conditions address origination and retention requirements for 
all securitizations. For all securitizations, the sponsor must retain 
an economic interest in a material portion, defined as not less than 
five (5) percent, of the credit risk of the financial assets. The 
retained interest may be either in the form of an interest of not less 
than five (5) percent in each credit tranche or in a representative 
sample of the securitized financial assets equal to not less than five 
(5) percent of the principal amount of the financial assets at 
transfer. By requiring that the sponsor retain an economic interest in 
the asset pool without hedging the risk of such portion, the sponsor 
would be less likely to originate low quality financial assets.
    The Proposed Rule would require that RMBS securitization documents 
require that a reserve fund be established in an amount equal to at 
least five (5) percent of the cash proceeds due to the sponsor and that 
this reserve be held for twelve (12) months to cover any repurchases