Credit Risk Retention, 24090-24186 [2011-8364]
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24090
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 43
[Docket No. OCC–2011–0002]
RIN 1557–AD40
FEDERAL RESERVE SYSTEM
12 CFR Part 244
[Docket No. 2011–1411]
RIN 7100–AD–70
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 373
RIN 3064–AD74
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Part 1234
RIN 2590–AA43
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 246
[Release No. 34–64148; File No. S7–14–11]
RIN 3235–AK96
DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
24 CFR Part 267
RIN 2501–AD53
Credit Risk Retention
Office of the Comptroller of
the Currency, Treasury (OCC); Board of
Governors of the Federal Reserve
System (Board); Federal Deposit
Insurance Corporation (FDIC); U.S.
Securities and Exchange Commission
(Commission); Federal Housing Finance
Agency (FHFA); and Department of
Housing and Urban Development
(HUD).
ACTION: Proposed rule.
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AGENCIES:
The OCC, Board, FDIC,
Commission, FHFA, and HUD (the
Agencies) are proposing rules to
implement the credit risk retention
requirements of section 15G of the
SUMMARY:
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Securities Exchange Act of 1934 (15
U.S.C. 78o–11), as added by section 941
of the Dodd-Frank Wall Street Reform
and Consumer Protection Act. Section
15G generally requires the securitizer of
asset-backed securities to retain not less
than five percent of the credit risk of the
assets collateralizing the asset-backed
securities. Section 15G includes a
variety of exemptions from these
requirements, including an exemption
for asset-backed securities that are
collateralized exclusively by residential
mortgages that qualify as ‘‘qualified
residential mortgages,’’ as such term is
defined by the Agencies by rule.
DATES: Comments must be received by
June 10, 2011.
ADDRESSES: Interested parties are
encouraged to submit written comments
jointly to all of the Agencies.
Commenters are encouraged to use the
title ‘‘Credit Risk Retention’’ to facilitate
the organization and distribution of
comments among the Agencies.
Commenters are also encouraged to
identify the number of the specific
request for comment to which they are
responding.
Office of the Comptroller of the
Currency: Because paper mail in the
Washington, DC, area and at the OCC is
subject to delay, commenters are
encouraged to submit comments by the
Federal eRulemaking Portal or e-mail, if
possible. Please use the title ‘‘Credit Risk
Retention’’ to facilitate the organization
and distribution of the comments. You
may submit comments by any of the
following methods:
• Federal eRulemaking Portal—
‘‘Regulations.gov’’: Go to https://
www.regulations.gov, under the ‘‘More
Search Options’’ tab click next to the
‘‘Advanced Docket Search’’ option
where indicated, select ‘‘Comptroller of
the Currency’’ from the agency dropdown menu, then click ‘‘Submit.’’ In the
‘‘Docket ID’’ column, select ‘‘OCC–2011–
0002’’ to submit or view public
comments and to view supporting and
related materials for this proposed rule.
The ‘‘How to Use This Site’’ link on the
Regulations.gov home page provides
information on using Regulations.gov,
including instructions for submitting or
viewing public comments, viewing
other supporting and related materials,
and viewing the docket after the close
of the comment period.
• E-mail:
regs.comments@occ.treas.gov.
• Mail: Office of the Comptroller of
the Currency, 250 E Street, SW., Mail
Stop 2–3, Washington, DC 20219.
• Fax: (202) 874–5274.
• Hand Delivery/Courier: 250 E
Street, SW., Mail Stop 2–3, Washington,
DC 20219.
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Instructions: You must include ‘‘OCC’’
as the agency name and ‘‘Docket
Number OCC–2011–0002’’ in your
comment. In general, OCC will enter all
comments received into the docket and
publish them on the Regulations.gov
Web site without change, including any
business or personal information that
you provide such as name and address
information, e-mail addresses, or phone
numbers. Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
proposed rulemaking by any of the
following methods:
• Viewing Comments Electronically:
Go to https://www.regulations.gov, under
the ‘‘More Search Options’’ tab click
next to the ‘‘Advanced Document
Search’’ option where indicated, select
‘‘Comptroller of the Currency’’ from the
agency drop-down menu, then click
‘‘Submit.’’ In the ‘‘Docket ID’’ column,
select ‘‘OCC–2011–0002’’ to view public
comments for this rulemaking action.
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 250 E Street,
SW., Washington, DC. For security
reasons, the OCC requires that visitors
make an appointment to inspect
comments. You may do so by calling
(202) 874–4700. Upon arrival, visitors
will be required to present valid
government-issued photo identification
and submit to security screening in
order to inspect and photocopy
comments.
• Docket: You may also view or
request available background
documents and project summaries using
the methods described above.
Board of Governors of the Federal
Reserve System: You may submit
comments, identified by Docket No. R–
1411, by any of the following methods:
• Agency Web Site: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail:
regs.comments@federalreserve.gov.
Include the docket number in the
subject line of the message.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Address to Jennifer J. Johnson,
Secretary, Board of Governors of the
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Federal Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551.
All public comments will be made
available on the Board’s Web site at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical
reasons. Accordingly, comments will
not be edited to remove any identifying
or contact information. Public
comments may also be viewed
electronically or in paper in Room MP–
500 of the Board’s Martin Building (20th
and C Streets, NW.) between 9 a.m. and
5 p.m. on weekdays.
Federal Deposit Insurance
Corporation: You may submit
comments, identified by RIN number,
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 the RIN number 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
must include the agency name and RIN
for this rulemaking and will be posted
without change to https://www.fdic.gov/
regulations/laws/federal/propose.html,
including any personal information
provided.
Securities and Exchange Commission:
You may submit comments by the
following method:
Electronic Comments
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• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/proposed.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–14–11 on the subject line;
or
• Use the Federal eRulemaking Portal
(https://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
• All submissions should refer to File
Number S7–14–11. This file number
should be included on the subject line
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if e-mail is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Internet Web site
(https://www.sec.gov/rules/
proposed.shtml). Comments are also
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of
10 a.m. and 3 p.m. All comments
received will be posted without change;
we do not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly.
Federal Housing Finance Agency: You
may submit your written comments on
the proposed rulemaking, identified by
RIN number 2590–AA43, by any of the
following methods:
• E-mail: Comments to Alfred M.
Pollard, General Counsel, may be sent
by e-mail at RegComments@fhfa.gov.
Please include ‘‘RIN 2590–AA43’’ in the
subject line of the message.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments. If
you submit your comment to the
Federal eRulemaking Portal, please also
send it by e-mail to FHFA at
RegComments@fhfa.gov to ensure
timely receipt by the Agency. Please
include ‘‘RIN 2590–AA43’’ in the subject
line of the message.
• U.S. Mail, United Parcel Service,
Federal Express, or Other Mail Service:
The mailing address for comments is:
Alfred M. Pollard, General Counsel,
Attention: Comments/RIN 2590–AA43,
Federal Housing Finance Agency,
Fourth Floor, 1700 G Street, NW.,
Washington, DC 20552.
• Hand Delivery/Courier: The hand
delivery address is: Alfred M. Pollard,
General Counsel, Attention: Comments/
RIN 2590–AA43, Federal Housing
Finance Agency, Fourth Floor, 1700 G
Street, NW., Washington, DC 20552. A
hand-delivered package should be
logged at the Guard Desk, First Floor, on
business days between 9 a.m. and 5 p.m.
All comments received by the
deadline will be posted for public
inspection without change, including
any personal information you provide,
such as your name and address, on the
FHFA website at https://www.fhfa.gov.
Copies of all comments timely received
will be available for public inspection
and copying at the address above on
government-business days between the
hours of 10 a.m. and 3 p.m. To make an
appointment to inspect comments
please call the Office of General Counsel
at (202) 414–6924.
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Department of Housing and Urban
Development: Interested persons are
invited to submit comments regarding
this rule to the Regulations Division,
Office of General Counsel, Department
of Housing and Urban Development,
451 7th Street, SW., Room 10276,
Washington, DC 20410–0500.
Communications must refer to the
following docket number [FR–5504–P–
01] and title of this rule. There are two
methods for submitting public
comments. All submissions must refer
to the above docket number and title.
• Submission of Comments by Mail.
Comments may be submitted by mail to
the Regulations Division, Office of
General Counsel, Department of
Housing and Urban Development, 451
7th Street, SW., Room 10276,
Washington, DC 20410–0500.
• Electronic Submission of
Comments. Interested persons may
submit comments electronically through
the Federal eRulemaking Portal at
www.regulations.gov. HUD strongly
encourages commenters to submit
comments electronically. Electronic
submission of comments allows the
commenter maximum time to prepare
and submit a comment, ensures timely
receipt by HUD, and enables HUD to
make them immediately available to the
public. Comments submitted
electronically through the
www.regulations.gov website can be
viewed by other commenters and
interested members of the public.
Commenters should follow the
instructions provided on that site to
submit comments electronically.
• NOTE: To receive consideration as
public comments, comments must be
submitted through one of the two
methods specified above. Again, all
submissions must refer to the docket
number and title of the rule.
• No Facsimile Comments. Facsimile
(FAX) comments are not acceptable.
• Public Inspection of Public
Comments. All properly submitted
comments and communications
submitted to HUD will be available for
public inspection and copying between
8 a.m. and 5 p.m. weekdays at the above
address. Due to security measures at the
HUD Headquarters building, an
appointment to review the public
comments must be scheduled in
advance by calling the Regulations
Division at 202–708–3055 (this is not a
toll-free number). Individuals with
speech or hearing impairments may
access this number via TTY by calling
the Federal Information Relay Service at
800–877–8339. Copies of all comments
submitted are available for inspection
and downloading at https://
www.regulations.gov.
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FOR FURTHER INFORMATION CONTACT:
OCC: Chris Downey, Risk Specialist,
Financial Markets Group, (202) 874–
4660; Kevin Russell, Director, Retail
Credit Risk, (202) 874–5170; Darrin
Benhart, Director, Commercial Credit
Risk, (202) 874–5670; or Jamey Basham,
Assistant Director, or Carl Kaminski,
Senior Attorney, Legislative and
Regulatory Activities Division, (202)
874–5090, Office of the Comptroller of
the Currency, 250 E Street, SW.,
Washington, DC 20219.
Board: Benjamin W. McDonough,
Counsel, (202) 452–2036; April C.
Snyder, Counsel, (202) 452–3099;
Sebastian R. Astrada, Attorney, (202)
452–3594; or Flora H. Ahn, Attorney,
(202) 452–2317, Legal Division; Thomas
R. Boemio, Manager, (202) 452–2982;
Donald N. Gabbai, Senior Supervisory
Financial Analyst, (202) 452–3358; or
Sviatlana A. Phelan, Financial Analyst,
(202) 912–4306, Division of Banking
Supervision and Regulation; Andreas
Lehnert, Deputy Director, Office of
Financial Stability Policy and Research,
(202) 452–3325; or Brent Lattin,
Counsel, (202) 452–3367, Division of
Consumer and Community Affairs,
Board of Governors of the Federal
Reserve System, 20th and C Streets,
NW., Washington, DC 20551.
FDIC: Beverlea S. Gardner, Special
Assistant to the Chairman, (202) 898–
3640; Mark L. Handzlik, Counsel, (202)
898–3990; Phillip E. Sloan, Counsel,
(703) 562–6137; or Petrina R. Dawson,
Counsel, (703) 562–2688, Federal
Deposit Insurance Corporation, 550 17th
Street, NW., Washington, DC 20429.
Commission: Jay Knight, AttorneyAdvisor in the Office of Rulemaking, or
Katherine Hsu, Chief of the Office of
Structured Finance, Division of
Corporation Finance, at (202) 551–3753,
U.S. Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–3628.
FHFA: Patrick J. Lawler, Associate
Director and Chief Economist,
Patrick.Lawler@fhfa.gov, (202) 414–
3746; Austin Kelly, Associate Director
for Housing Finance Research,
Austin.Kelly@fhfa.gov, (202) 343–1336;
Phillip Millman, Principal Capital
Markets Specialist,
Phillip.Millman@fhfa.gov, (202) 343–
1507; or Thomas E. Joseph, Senior
Attorney Advisor,
Thomas.Joseph@fhfa.gov, (202) 414–
3095; Federal Housing Finance Agency,
Third Floor, 1700 G Street, NW.,
Washington, DC 20552. The telephone
number for the Telecommunications
Device for the Hearing Impaired is (800)
877–8339.
HUD: Robert C. Ryan, Deputy
Assistant Secretary for Risk
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Management and Regulatory Affairs,
Office of Housing, Department of
Housing and Urban Development, 451
7th Street, SW., Room 9106,
Washington, DC 20410; telephone
number 202–402–5216 (this is not a tollfree number). Persons with hearing or
speech impairments may access this
number through TTY by calling the tollfree Federal Information Relay Service
at 800–877–8339.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. General Definitions and Scope
A. Asset-Backed Securities, Securitization
Transaction and ABS Interests
B. Securitizer, Sponsor, and Depositor
C. Originator
III. General Risk Retention Requirement
A. Minimum 5 Percent Risk Retention
Required
B. Permissible Forms of Risk Retention
1. Vertical Risk Retention
2. Horizontal Risk Retention
3. L-Shaped Risk Retention
4. Revolving Asset Master Trusts (Seller’s
Interest)
5. Representative Sample
6. Asset-Backed Commercial Paper
Conduits
7. Commercial Mortgage-Backed Securities
8. Treatment of Government-Sponsored
Enterprises
9. Premium Capture Cash Reserve Account
C. Allocation to the Originator
D. Hedging, Transfer, and Financing
Restrictions
IV. Qualified Residential Mortgages
A. Overall Approach to Defining Qualified
Residential Mortgages
B. Exemption for QRMs
C. Eligibility Criteria
1. Eligible Loans, First Lien, No
Subordinate Liens, Original Maturity and
Written Application Requirements
2. Borrower Credit History
3. Payment Terms
4. Loan-to-Value Ratio
5. Down Payment
6. Qualifying Appraisal
7. Ability To Repay
8. Points and Fees
9. Assumability Prohibition
D. Repurchase of Loans Subsequently
Determined To Be Non-Qualified After
Closing
E. Request for Comment on Possible
Alternative Approach
V. Reduced Risk Retention Requirements for
ABS Backed by Qualifying Commercial
Real Estate, Commercial, or Automobile
Loans
A. Asset Classes
B. ABS Collateralized Exclusively by
Qualifying CRE Loans, Commercial
Loans, or Automobile Loans
C. Qualifying Commercial Loans
1. Ability To Repay
2. Risk Management and Monitoring
Requirements
D. Qualifying CRE Loans
1. Ability To Repay
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2. Loan-to-Value Requirement
3. Valuation of the Collateral
4. Risk Management and Monitoring
Requirements
E. Qualifying Automobile Loans
1. Ability to Repay
2. Loan Terms
3. Reviewing Credit History
4. Loan-to-Value
F. Buy-Back Requirements for ABS
Issuances Collateralized by Qualifying
Commercial, CRE or Automobile Loans
VI. General Exemptions
A. Exemption for Federally Insured or
Guaranteed Residential, Multifamily and
Health Care Mortgage Assets
B. Other Exemptions
C. Exemption for Certain Resecuritization
Transactions
D. Additional Exemptions
E. Safe Harbor for Certain Foreign-Related
Transactions
VII. Solicitation of Comments on Use of Plain
Language
VIII. Administrative Law Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Commission Economic Analysis
D. Executive Order 12866 Determination
E. OCC Unfunded Mandates Reform Act of
1995 Determination
F. Commission: Small Business Regulatory
Enforcement Fairness Act
G. FHFA: Considerations of Differences
Between the Federal Home Loan Banks
and the Enterprises
I. Introduction
The Agencies are requesting comment
on proposed rules (proposal or proposed
rules) to implement the requirements of
section 941(b) of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (the Act, or Dodd-Frank Act),1
which is codified as new section 15G of
the Securities Exchange Act of 1934 (the
Exchange Act).2 Section 15G of the
Exchange Act, as added by section
941(b) of the Dodd-Frank Act, generally
requires the Board, the FDIC, the OCC
(collectively, referred to as the Federal
banking agencies), the Commission,
and, in the case of the securitization of
any ‘‘residential mortgage asset,’’
together with HUD and FHFA, to jointly
prescribe regulations that (i) require a
securitizer to retain not less than five
percent of the credit risk of any asset
that the securitizer, through the
issuance of an asset-backed security
(ABS), transfers, sells, or conveys to a
third party, and (ii) prohibit a
securitizer from directly or indirectly
hedging or otherwise transferring the
credit risk that the securitizer is
required to retain under section 15G and
the Agencies’ implementing rules.3
1 Public
Law 111–203, 124 Stat. 1376 (2010).
U.S.C. 78o–11.
3 See 15 U.S.C. 78o–11(b), (c)(1)(A) and
(c)(1)(B)(ii).
2 15
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Section 15G of the Exchange Act
exempts certain types of securitization
transactions from these risk retention
requirements and authorizes the
Agencies to exempt or establish a lower
risk retention requirement for other
types of securitization transactions. For
example, section 15G specifically
provides that a securitizer shall not be
required to retain any part of the credit
risk for an asset that is transferred, sold,
or conveyed through the issuance of
ABS by the securitizer, if all of the
assets that collateralize the ABS are
qualified residential mortgages (QRMs),
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as that term is jointly defined by the
Agencies.4 In addition, section 15G
states that the Agencies must permit a
securitizer to retain less than five
percent of the credit risk of commercial
mortgages, commercial loans, and
automobile loans that are transferred,
sold, or conveyed through the issuance
of ABS by the securitizer if the loans
meet underwriting standards
established by the Federal banking
agencies.5
4 See
5 See
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id. at sec. 78o–11(c)(1)(B)(ii) and (2).
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As shown in tables A, B, C, and D
below, the securitization markets are an
important source of credit to U.S.
households and businesses and state
and local governments.6
BILLING CODE 4810–33–P
6 Data are through September 2010. All data from
Asset Backed Alert except: CMBS data from
Commercial Mortgage Alert, CLO data from
Securities Industry and Financial Markets
Association. The tables do not include any data on
securities issued or guaranteed by the Federal
National Mortgage Association or the Federal Home
Loan Mortgage Corporation.
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BILLING CODE 4810–33–C
TABLE D—TOTAL U.S. ASSET AND MORTGAGE BACKED SECURITIZATIONS ISSUED PER YEAR
[Dollars in millions]
2002
2003
2004
2005
2006
Auto ..........................
CLO ..........................
CMBS .......................
Credit Cards .............
Equipment ................
Floorplan ..................
Other ........................
RMBS .......................
Student Loan ............
95,484
30,388
89,900
73,004
7,062
3,000
135,384
287,916
25,367
Total ..................
747,506
2007
86,350
22,584
107,354
67,385
9,022
6,315
196,769
396,288
40,067
72,881
32,192
136,986
51,188
6,288
11,848
330,161
503,911
45,759
103,717
69,441
245,883
62,916
9,030
12,670
444,137
724,115
62,212
82,000
171,906
305,714
72,518
8,404
12,173
516,175
723,257
65,745
932,134
1,191,216
1,734,122
1,957,891
2010
Total 2002
3Q2010
53,944
2,033
38,750
46,581
7,240
4,959
10,652
48,082
20,839
43,104
..............
27,297
6,149
5,010
8,619
24,936
39,830
13,899
639,724
494,860
1,305,329
535,839
61,137
67,510
1,843,601
3,393,819
360,210
233,079
168,843
..................
2008
2009
66,773
138,827
319,863
94,470
6,066
6,925
165,515
641,808
5,812,212
35,469
27,489
33,583
61,628
3,014
1,000
19,872
28,612
28,199
1,498,370
238,868
Note: 2010 Data are through the month of September.
7 Securitization may reduce the cost of funding,
which is accomplished through several different
mechanisms. For example, firms that specialize in
originating new loans and that have difficulty
funding existing loans may use securitization to
access more liquid capital markets for funding. In
addition, securitization can create opportunities for
more efficient management of the asset–liability
duration mismatch generally associated with the
funding of long-term loans, for example, with shortterm bank deposits. Securitization also allows the
structuring of securities with differing maturity and
credit risk profiles that may appeal to a broad range
of investors from a single pool of assets. Moreover,
securitization that involves the transfer of credit
risk allows financial institutions that primarily
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when incentives are not properly
aligned and there is a lack of discipline
in the origination process, securitization
can result in harm to investors,
consumers, financial institutions, and
the financial system. During the
financial crisis, securitization displayed
significant vulnerabilities to
informational and incentive problems
originate loans to particular classes of borrowers, or
in particular geographic areas, to limit concentrated
exposure to these idiosyncratic risks on their
balance sheets. See generally Report to the Congress
on Risk Retention, Board of Governors of the
Federal Reserve System, at 8 (October 2010),
available at https://federalreserve.gov/boarddocs/
rptcongress/securitization/riskretention.pdf (Board
Report).
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among various parties involved in the
process.8
For example, as noted in the
legislative history of section 15G, under
the ‘‘originate to distribute’’ model, loans
were made expressly to be sold into
securitization pools, with lenders often
not expecting to bear the credit risk of
borrower default.9 In addition,
participants in the securitization chain
may be able to affect the value of the
ABS in opaque ways, both before and
after the sale of the securities,
particularly if those assets are
resecuritized into complex instruments
8 See
9 See
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Board Report at 8–9.
S. Rep. No. 111–176, at 128 (2010).
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When properly structured,
securitization provides economic
benefits that lower the cost of credit to
households and businesses.7 However,
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such as collateralized debt obligations
(CDOs) and CDOs-squared.10 Moreover,
some lenders using an ‘‘originate-todistribute’’ business model loosened
their underwriting standards knowing
that the loans could be sold through a
securitization and retained little or no
continuing exposure to the quality of
those assets.11
The risk retention requirements added
by section 15G are intended to help
address problems in the securitization
markets by requiring that securitizers, as
a general matter, retain an economic
interest in the credit risk of the assets
they securitize. As indicated in the
legislative history of section 15G, ‘‘When
securitizers retain a material amount of
risk, they have ‘skin in the game,’
aligning their economic interest with
those of investors in asset-backed
securities.’’ 12 By requiring that the
securitizer retain a portion of the credit
risk of the assets being securitized,
section 15G provides securitizers an
incentive to monitor and ensure the
quality of the assets underlying a
securitization transaction, and thereby
helps align the interests of the
securitizer with the interests of
investors. Additionally, in
circumstances where the assets
collateralizing the ABS meet
underwriting and other standards that
should ensure the assets pose low credit
risk, the statute provides or permits an
exemption.13
The credit risk retention requirements
of section 15G are an important part of
the legislative and regulatory efforts to
address weaknesses and failures in the
securitization process and the
securitization markets. Section 15G
complements other parts of the DoddFrank Act intended to improve the
securitization markets. These include,
among others, provisions that
strengthen the regulation and
supervision of nationally recognized
statistical rating agencies (NRSROs) and
improve the transparency of credit
ratings; 14 provide for issuers of
registered ABS offerings to perform a
review of the assets underlying the ABS
and disclose the nature of the review; 15
and require issuers of ABS to disclose
the history of the repurchase requests
they received and repurchases they
made related to their outstanding
ABS.16
10 See
id.
id.
12 See id. at 129.
13 See 15 U.S.C. 78o–11(c)(1)(B)(ii), (e)(1)–(2).
14 See, e.g., sections 932, 935, 936, 938, and 943
of the Dodd-Frank Act.
15 See section 945 of the Dodd-Frank Act.
16 See section 943 of the Dodd-Frank Act.
11 See
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In developing the proposed rules, the
Agencies have taken into account the
diversity of assets that are securitized,
the structures historically used in
securitizations, and the manner in
which securitizers may have retained
exposure to the credit risk of the assets
they securitize.17 As described in detail
below, the proposed rules provide
several options securitizers may choose
from in meeting the risk retention
requirements of section 15G, including,
but not limited to, retention of a five
percent ‘‘vertical’’ slice of each class of
interests issued in the securitization or
retention of a five percent ‘‘horizontal’’
first-loss interest in the securitization, as
well as other risk retention options that
take into account the manners in which
risk retention often has occurred in
credit card receivable and automobile
loan and lease securitizations and in
connection with the issuance of assetbacked commercial paper. The proposed
rules also include a special ‘‘premium
capture’’ mechanism designed to
prevent a securitizer from structuring an
ABS transaction in a manner that would
allow the securitizer to effectively
negate or reduce its retained economic
exposure to the securitized assets by
immediately monetizing the excess
spread created by the securitization
transaction.18 In designing these options
and the proposed rules in general, the
Agencies have sought to ensure that the
amount of credit risk retained is
meaningful—consistent with the
purposes of section 15G—while
reducing the potential for the proposed
rules to negatively affect the availability
and costs of credit to consumers and
businesses.
As required by section 15G, the
proposed rules provide a complete
exemption from the risk retention
requirements for ABS that are
collateralized solely by QRMs and
establish the terms and conditions
under which a residential mortgage
would qualify as a QRM. In developing
the proposed definition of a QRM, the
Agencies carefully considered the terms
and purposes of section 15G, public
input, and the potential impact of a
17 Both the language and legislative history of
section 15G indicate that Congress expected the
agencies to be mindful of the heterogeneity of
securitization markets. See, e.g., 15 U.S.C. 78o–
11(c)(1)(E), (c)(2), (e); S. Rep. No. 111–76, at 130
(2010) (‘‘The Committee believes that
implementation of risk retention obligations should
recognize the differences in securitization practices
for various asset classes.’’)
18 ‘‘Excess spread’’ is the difference between the
gross yield on the pool of securitized assets less the
cost of financing those assets (weighted average
coupon paid on the investor certificates), chargeoffs, servicing costs, and any other trust expenses
(such as insurance premiums, if any).
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broad or narrow definition of QRMs on
the housing and housing finance
markets.
As discussed in greater detail in Part
V of this Supplementary Information,
the proposed rules would generally
prohibit QRMs from having product
features that contributed significantly to
the high levels of delinquencies and
foreclosures since 2007—such as terms
permitting negative amortization,
interest-only payments, or significant
interest rate increases—and also would
establish underwriting standards
designed to ensure that QRMs are of
very high credit quality consistent with
their exemption from risk retention
requirements. These underwriting
standards include, among other things,
maximum front-end and back-end debtto-income ratios of 28 percent and 36
percent, respectively; 19 a maximum
loan-to-value (LTV) ratio of 80 percent
in the case of a purchase transaction
(with a lesser combined LTV permitted
for refinance transactions); a 20 percent
down payment requirement in the case
of a purchase transaction; and credit
history restrictions.
The proposed rules also would not
require a securitizer to retain any
portion of the credit risk associated with
a securitization transaction if the ABS
issued are exclusively collateralized by
commercial loans, commercial
mortgages, or automobile loans that
meet underwriting standards included
in the proposed rules for the individual
asset class. As for QRMs, these
underwriting standards are designed to
be robust and ensure that the loans
backing the ABS are of very low credit
risk. In this Supplementary Information,
the Agencies refer to these assets
(including QRMs) as ‘‘qualified assets.’’
The Agencies recognize that many
prudently underwritten residential and
mortgage loans, commercial loans, and
automobile loans may not satisfy all the
underwriting and other criteria in the
proposed rules for qualified assets.
Securitizers of ABS backed by such
prudently underwritten loans would, as
a general matter, be required to retain
credit risk under the rule. However, as
noted above, the Agencies have sought
to structure the proposed risk retention
requirements in a flexible manner that
would allow the securitization markets
for non-qualified assets to function in a
19 A front-end debt-to-income ratio measures how
much of the borrower’s gross (pretax) monthly
income is represented by the borrower’s required
payment on the first-lien mortgage, including real
estate taxes and insurance. A back-end debt-toincome ratio measures how much of a borrower’s
gross (pretax) monthly income would go toward
monthly mortgage and nonmortgage debt service
obligations.
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manner that both facilitates the flow of
credit to consumers and businesses on
economically viable terms and is
consistent with the protection of
investors.
Section 15G allocates the authority for
writing rules to implement its
provisions among the Agencies in
various ways. As a general matter, the
Agencies collectively are responsible for
adopting joint rules to implement the
risk retention requirements of section
15G for securitizations that are backed
by residential mortgage assets and for
defining what constitutes a QRM for
purposes of the exemption for QRMbacked ABS.20 The Federal banking
agencies and the Commission, however,
are responsible for adopting joint rules
that implement section 15G for
securitizations backed by all other types
of assets,21 and also are the agencies
authorized to adopt rules in several
specific areas under section 15G.22 In
addition, the Federal banking agencies
are responsible for establishing, by rule,
the underwriting standards for nonQRM residential mortgages, commercial
mortgages, commercial loans and
automobile loans that would qualify
ABS backed by these types of loans for
a less than five percent risk retention
requirement.23 Accordingly, when used
in this proposal, the term ‘‘Agencies’’
shall be deemed to refer to the
appropriate Agencies that have
rulewriting authority with respect to the
asset class, securitization transaction, or
other matter discussed. The Secretary of
the Treasury, as Chairperson of the
20 See
id. at sec. 78o–11(b)(2), (e)(4)(A) and (B).
id. at sec. 78o–11(b)(1).
22 See, e.g. id. at sec. 78o–11(b)(1)(E) (relating to
the risk retention requirements for ABS
collateralized by commercial mortgages);
(b)(1)(G)(ii) (relating to additional exemptions for
assets issued or guaranteed by the United States or
an agency of the United States); (d) (relating to the
allocation of risk retention obligations between a
securitizer and an originator); and (e)(1) (relating to
additional exemptions, exceptions or adjustments
for classes of institutions or assets).
23 See id. at sec. 78o-11(b)(2)(B). Therefore,
pursuant to section 15G, only the Federal banking
agencies are proposing the underwriting definitions
in § l.16 (except the asset class definitions of
automobile loan, commercial loan, and commercial
real estate loan, which are being proposed by the
Federal banking agencies and the Commission), and
the underwriting standards in §§ l.18(b)(1)–(6),
l.19(b)(1)–(9), and l.20(b)(1)–(8) of the proposed
rules. At the final rule stage, FHFA proposes to
adopt only those provisions of the common rules
that address the types of asset securitization
transactions in which its regulated entities could be
authorized to engage under existing law. The
remaining provisions, such as those addressing
underwriting standards for non-residential
commercial loans and auto loans, would be
designated as [reserved], and the provisions
adopted would be numbered and otherwise
designated so as to correspond to the equivalent
provisions appearing in the regulations of the other
Agencies.
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21 See
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Financial Stability Oversight Council,
coordinated the development of these
joint proposed rules in accordance with
the requirements of section 15G.24
For ease of reference, the proposed
rules of the Agencies are referenced
using a common designation of § l.1 to
§ l.23 (excluding the title and part
designations for each Agency). With the
exception of HUD, each Agency will
codify the rules, when adopted in final
form, within each of their respective
titles of the Code of Federal
Regulations.25 Section l.1 of each
Agency’s proposed rules identifies the
entities or transactions that would be
subject to such Agency’s rules.26
In light of the joint nature of the
Agencies’ rulewriting authority under
section 15G, the appropriate Agencies
will jointly approve any written
interpretations, written responses to
requests for no-action letters and legal
opinions, or other written interpretive
guidance concerning the scope or terms
of section 15G and the final rules issued
thereunder that are intended to be relied
on by the public generally.27 Similarly,
the appropriate Agencies will jointly
approve any exemptions, exceptions, or
adjustments to the final rules.28 For
these purposes, the phrase ‘‘appropriate
Agencies’’ refers to the Agencies with
rulewriting authority for the asset class,
24 See
id. at 78o–11(h).
the agencies propose to codify the
rules as follows: 12 CFR part 43 (OCC); 12 CFR part
244 (Regulation RR) (Board); 12 CFR part 373
(FDIC); 17 CFR part 246 (Commission); 12 CFR part
1234 (FHFA). As required by section 15G, HUD has
jointly prescribed the proposed rules for a
securitization that is backed by any residential
mortgage asset and for purposes of defining a
qualified residential mortgage. HUD’s codification
in 24 CFR part 267 indicates that the proposed rules
include exceptions and exemptions in Subpart D of
each of these rules for certain transactions involving
programs and entities under the jurisdiction of
HUD.
26 The joint proposed rules being adopted by the
Agencies would apply to all sponsors that fall
within the scope of 15G, including state and federal
savings associations and savings and loan holding
companies. These entities are currently regulated
and supervised by the Office of Thrift Supervision
(OTS), which is not among the Federal banking
agencies with rulemaking authority under section
15G. Authority of the OTS under the Home Owners’
Loan Act (12 U.S.C. 1461 et seq.) with respect to
such entities will transfer from the OTS to the
Board, FDIC, and OCC on the transfer date provided
in section 311 of the Dodd-Frank Act. This transfer
will take place well before the effective date of the
Federal banking agencies’ final rules under section
15G. Accordingly, the final rules issued by the
appropriate Federal banking agency would include
the relevant set of these entities in the agency’s
Purpose, Authority, and Scope section (§ l.1).
27 These items would not include staff comment
letters and informal written guidance provided to
specific institutions or matters raised in a report of
examination or inspection of a supervised
institution, which are not intended to be relied on
by the public generally.
28 See 15 U.S.C. 78o–11(c)(1)(G)(i) and (e)(1);
proposed rules at § l.22.
25 Specifically,
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securitization transaction, or other
matter addressed by the interpretation,
guidance, exemption, exceptions, or
adjustments. The Agencies expect to
coordinate with each other to facilitate
the processing, review and action on
requests for such written interpretations
or guidance, or additional exemptions,
exceptions or adjustments.
II. General Definitions and Scope
Section l.2 of the proposed rules
defines terms used throughout the
proposed rules. Certain of these
definitions are discussed in this part of
the Supplementary Information. Other
terms are discussed together with the
section of the proposed rules where they
are used. For example, certain
definitions that relate solely to the
exemptions for securitizations based on
QRMs and certain qualifying
commercial, commercial real estate, and
automobile loans, are contained in, and
are discussed in the context of, those
sections (see subpart C of the proposed
rules).
A. Asset-Backed Securities,
Securitization Transaction and ABS
Interests
The proposed risk retention rules
would apply to securitizers in
securitizations that involve the issuance
of ‘‘asset-backed securities’’ as defined in
section 3(a)(77) of the Exchange Act,
which also was added to the Exchange
Act by section 941 of the Dodd-Frank
Act.29 Section 3(a)(77) of the Exchange
Act generally defines an ‘‘asset-backed
security’’ to mean ‘‘a fixed-income or
other security collateralized by any type
of self-liquidating financial asset
(including a loan, lease, mortgage, or
other secured or unsecured receivable)
that allows the holder of the security to
receive payments that depend primarily
on cash flow from the asset.’’ 30 The
proposed rules incorporate by reference
this definition of asset-backed security
from the Exchange Act.31 Consistent
with this definition, the proposed rules
also define the term ‘‘asset’’ to mean a
self-liquidating financial asset,
including loans, leases, or other
29 See
section 941(a) of the Dodd-Frank Act.
15 U.S.C. § 78c(a)(77). The term also (i)
includes any other security that the Commission, by
rule, determines to be an asset-backed security for
purposes of section 15G of the Exchange Act; and
(ii) does not include a security that is issued by a
finance subsidiary and held by the parent company
of the finance subsidiary or a company that is
controlled by such parent company provided that
none of the securities issued by the finance
subsidiary are held by an entity that is not
controlled by the parent company.
31 See proposed rules at § l.2 (definition of
‘‘asset-backed security’’).
30 See
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receivables.32 The proposal defines the
term ‘‘securitized asset’’ to mean an asset
that is transferred, sold, or conveyed to
an issuing entity and that collateralizes
the ABS interests issued by the issuing
entity.33
Section 15G does not appear to
distinguish between transactions that
are registered with the Commission
under the Securities Act of 1933 (the
‘‘Securities Act’’) and those that are
exempt from registration under the
Securities Act. For example, section 15G
provides authority for exempting from
the risk retention requirements certain
securities that are exempt from
registration under the Securities Act.34
In addition, the statutory definition of
asset-backed security is broader than the
definition of asset-backed security in the
Commission’s Regulation AB,35 which
governs the disclosure requirements for
ABS offerings that are registered under
the Securities Act.36 The definition of
asset-backed security for purposes of
section 15G also includes securities that
are typically sold in transactions that
are exempt from registration under the
Securities Act, such as CDOs, as well as
securities issued or guaranteed by a
government sponsored entity (GSE),
such as the Federal National Mortgage
Association (Fannie Mae) and the
Federal Home Loan Mortgage
Corporation (Freddie Mac). In light of
the foregoing, the proposed risk
retention requirements would apply to
securitizers of ABS offerings whether or
32 See proposed rules at § l.2 (definition of
‘‘asset’’). Because the term ‘‘asset-backed security’’
for purposes of section 15G includes only those
securities that are collateralized by self-liquidating
financial assets, ‘‘synthetic’’ securitizations are not
within the scope of the proposed rules.
33 See proposed rules at § l.2. Assets or other
property collateralize an issuance of ABS interests
if the assets or property serves as collateral for such
issuance. Assets or other property serve as collateral
for an ABS issuance if they provide the cash flow
for the ABS interests issued by the issuing entity
(regardless of the legal structure of the issuance),
and may include security interests in assets or other
property of the issuing entity, fractional undivided
property interests in the assets or other property of
the issuing entity, or any other property interest in
such assets or other property. The term collateral
includes leases that may convert to cash proceeds
from the disposition of the physical property
underlying the assets. The cash flow from an asset
includes any proceeds of a foreclosure on, or sale
of, the asset. See proposed rules at § l.2 (definition
of ‘‘collateral’’ for an ABS transaction).
34 See, e.g., 15 U.S.C. 78o–11(c)(1)(G) (authorizing
exemptions from the risk retention requirements
certain transactions that are typically exempt from
Securities Act registration); 15 U.S.C. 78o–
11(e)(3)(B)(providing for certain exemptions for
certain assets, or securitizations based on assets,
which are insured or guaranteed by the United
States).
35 17 CFR 229.1100 through 17 CFR 229.1123.
36 See 15 U.S.C. 78b.
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not the offering is registered with the
Commission under the Securities Act.
As discussed further below, the
proposed rules generally apply the risk
retention requirements to the securitizer
in each ‘‘securitization transaction,’’
which is defined as a transaction
involving the offer and sale of ABS by
an issuing entity.37 Applying the risk
retention requirements to the securitizer
of each issuance of ABS ensures that the
requirements apply in the aggregate to
all ABS issued by an issuing entity,
including an issuing entity—such as a
master trust—that issues ABS
periodically.
The proposed rules use the term ‘‘ABS
interest’’ to refer to all types of interests
or obligations issued by an issuing
entity, whether or not in certificated
form, including a security, obligation,
beneficial interest or residual interest,
the payments on which are primarily
dependent on the cash flows on the
collateral held by the issuing entity. The
term, however, does not include
common or preferred stock, limited
liability interests, partnership interests,
trust certificates, or similar interests in
an issuing entity that are issued
primarily to evidence ownership of the
issuing entity, and the payments, if any,
on which are not primarily dependent
on the cash flows of the collateral held
by the issuing entity.38
B. Securitizer, Sponsor, and Depositor
Section 15G generally provides for the
Agencies to apply the risk retention
requirements of the statute to a
‘‘securitizer’’ of ABS. Section 15G(a)(3)
in turn provides that the term
‘‘securitizer’’ with respect to an issuance
of ABS includes both ‘‘(A) an issuer of
an asset-backed security; or (B) a person
who organizes and initiates an assetbacked securities transaction by selling
or transferring assets, either directly or
indirectly, including through an
affiliate, to the issuer.’’39
The Agencies note that the second
prong of this definition (i.e., the person
who organizes and initiates the ABS
transaction by selling or transferring
assets, either directly or indirectly,
including through an affiliate, to the
issuer) is substantially identical to the
definition of a ‘‘sponsor’’ of a
securitization transaction in the
Commission’s Regulation AB governing
disclosures for ABS offerings registered
under the Securities Act.40 In light of
this, the proposed rules provide that a
‘‘sponsor’’ of an ABS transaction is a
‘‘securitizer’’ for the purposes of section
15G, and define the term ‘‘sponsor’’ in a
manner consistent with the definition of
that term in the Commission’s
Regulation AB.41
The proposal would, as a general
matter, require that a sponsor of a
securitization transaction retain the
credit risk of the securitized assets in
the form and amount required by the
proposed rules. The Agencies believe
that proposing to apply the risk
retention requirement to the sponsor of
the ABS—as permitted by section 15G—
is appropriate in light of the active and
direct role that a sponsor typically has
in arranging a securitization transaction
and selecting the assets to be
securitized.42 In circumstances where
two or more entities each meet the
definition of sponsor for a single
securitization transaction, the proposed
rules would require that one of the
sponsors retain a portion of the credit
risk of the underlying assets in
accordance with the requirements of
this proposal.43 Each sponsor in the
transaction, however, would remain
responsible for ensuring that at least one
39 See
15 U.S.C. 78o–11(a)(3).
Item 1101 of the Commission’s Regulation
AB (17 CFR 229.1101) (defining a sponsor as ‘‘a
person who organizes and initiates an asset-backed
securities transaction by selling or transferring
assets, either directly or indirectly, including
through an affiliate, to the issuing entity.’’)
41 See proposed rules at § __.2. Consistent with
the Commission’s definition of sponsor, the
Agencies interpret the term ‘‘issuer’’ as used in
section 15G(a)(3)(B) to refer to the issuing entity
that issues the ABS.
42 For example, in the context of collateralized
loan obligations (CLOs), the CLO manager generally
acts as the sponsor by selecting the commercial
loans to be purchased by an agent bank for
inclusion in the CLO collateral pool, and then
manages the securitized assets once deposited in
the CLO structure.
43 See proposed rules at § l.3(a). Because the
term sponsor is used throughout the proposed rules,
the term is separately defined in § l.2 of the
proposed rules. The definition of ‘‘sponsor’’ in § l.2
is identical to the sponsor part of the proposed
rules’ definition of a ‘‘securitizer.’’
40 See
37 An ‘‘issuing entity’’ is defined to mean, with
respect to a securitization transaction, the trust or
other entity created at the direction of the sponsor
that owns or holds the pool of assets to be
securitized, and in whose name the ABS are issued.
See proposed rules at § l.2.
38 See proposed rules at § l.2. In securitization
transactions where ABS interests are issued and
some or all of the cash proceeds of the transaction
are retained by the issuing entity to purchase,
during a limited time period after the closing of the
securitization, self-liquidating financial assets to
support the securitization, the terms ‘‘asset,’’
‘‘collateral,’’ and ‘‘securitized assets’’ should be
construed to include such cash proceeds as well as
the assets purchased with such proceeds and any
assets transferred to the issuing entity on the
closing date. Accordingly, the terms ‘‘asset-backed
security’’ and ‘‘ABS interest’’ should also be
construed to include securities and other interests
backed by such proceeds. Such securitization
transactions are commonly referred to as including
a ‘‘pre-funding account.’’
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sponsor complied with the
requirements.
As noted above, the definition of
‘‘securitizer’’ in section 15G(a)(3)(A)
includes the ‘‘issuer of an asset-backed
security.’’ The term ‘‘issuer’’ when used
in the federal securities laws may have
different meanings depending on the
context in which it is used. For
example, for several purposes under the
federal securities laws, including the
Securities Act 44 and the Exchange
Act 45 and the rules promulgated under
these Acts,46 the term ‘‘issuer’’ when
used with respect to an ABS transaction
is defined to mean the entity—the
depositor—that deposits the assets that
collateralize the ABS with the issuing
entity. The Agencies interpret the
reference in section 15G(a)(3)(A) to an
‘‘issuer of an asset-backed security’’ as
referring to the ‘‘depositor’’ of the ABS,
consistent with how that term has been
defined and used under the federal
securities laws in connection with
ABS.47 As noted above, the proposed
rules generally would apply the risk
retention requirements of section 15G to
a sponsor of a securitization transaction
(and not the depositor for the
securitization transaction).
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C. Originator
As permitted by section 15G, § l.13
of the proposed rules permit a sponsor
to allocate its risk retention obligations
44 Section 2(a)(4) of Securities Act (15 U.S.C.
77b(a)(4)) defines the term ‘‘issuer’’ in part to
include every person who issues or proposes to
issue any security, except that with respect to
certificates of deposit, voting-trust certificates, or
collateral trust certificates, or with respect to
certificates of interest or shares in an
unincorporated investment trust not having a board
of directors (or persons performing similar
functions), the term issuer means the person or
persons performing the acts and assuming the
duties of depositor or manager pursuant to the
provisions of the trust or other agreement or
instrument under which the securities are issued.
45 See Exchange Act sec. 3(a)(8) (15 U.S.C.
78c(a)(8) (defining ‘‘issuer’’ under the Exchange
Act).
46 See, e.g., Securities Act Rule 191 (17 CFR
230.191) and Exchange Act Rule 3b–19 (17 CFR
240.3b-19).
47 For asset-backed securities transactions where
there is not an intermediate transfer of the assets
from the sponsor to the issuing entity, the term
depositor refers to the sponsor. For asset-backed
securities transactions where the person
transferring or selling the pool assets is itself a trust
(such as in an issuance trust structure), the
depositor of the issuing entity is the depositor of
that trust. See proposed rules at § l.2. Securities
Act Rule 191 and Exchange Act Rule 3b–19 also
note that the person acting as the depositor in its
capacity as depositor to the issuing entity is a
different ‘‘issuer’’ from that person in respect of its
own securities in order to make clear—for
example—that any applicable exemptions from
Securities Act registration that person may have
with respect to its own securities are not applicable
to the asset-backed securities. That distinction does
not appear relevant here.
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to the originator(s) of the securitized
assets in certain circumstances and
subject to certain conditions. The
proposed rules define the term
originator in the same manner as section
15G, that is, as a person who, through
the extension of credit or otherwise,
creates a financial asset that
collateralizes an asset-backed security,
and sells the asset directly or indirectly
to a securitizer (i.e., a sponsor or
depositor). Because this definition refers
to the person that ‘‘creates’’ a loan or
other receivable, only the original
creditor under a loan or receivable—and
not a subsequent purchaser or
transferee—is an ‘‘originator’’ of the loan
or receivable for purposes of section
15G.48
Request for Comment
1. Do the proposed rules
appropriately implement the terms
‘‘securitizer’’ and ‘‘originator’’ as used in
section 15G and consistent with its
purpose?
2. Are there other terms, beyond those
defined in § l.2 of the proposed rules,
that the Agencies should define?
3(a). As a general matter, is it
appropriate to impose the risk retention
requirements on the sponsor of an ABS
transaction, rather than the depositor for
the transaction? 3(b). If not, why?
4(a). With respect to the terms
defined, would you define any of the
terms differently? 4(b). If so, which ones
would you define differently, and how
would you define them? For example,
credit risk is defined to mean, among
other things, the risk of loss that could
result from failure of the issuing entity
to make required payments or from
bankruptcy of the issuing entity.
5. Is it appropriate for the definition
of credit risk to include risk of nonpayment by the issuing entity unrelated
to the assets, such as risk that the
issuing entity is not bankruptcy remote?
6. Are all of the definitions in § l.2
of the proposed rules necessary? For
instance, is a definition of ‘‘asset’’
necessary?
7(a). As proposed, where two or more
entities each meet the definition of
sponsor for a single securitization
transaction, the proposed rules would
require that one of the sponsors retain
a portion of the credit risk of the
underlying assets in accordance with
the requirements of the rules. Is this the
best approach to take when there are
multiple sponsors in a single
securitization transaction? 7(b). If not,
what is a better approach and why? For
example, should all sponsors be
required to retain credit risk in some
48 See
PO 00000
proportional amount, should the
sponsor selling the greatest number of
assets or with a particular attribute be
required to retain the risk, or should the
proposed rules only allow a sponsor
that has transferred a minimum
percentage (e.g., 10 percent, 20 percent,
or 50 percent) of the total assets into the
trust to retain the risk?
8(a). Should the proposed rules allow
for allocation of risk to a sponsor
(among multiple sponsors in a single
transaction) similar to the proposed
rules’ parameters for allocation of risk
among multiple originators? 8(b). Why
or why not?
9. A securitization transaction is
proposed to be defined as a transaction
involving the offer and sale of assetbacked securities by an issuing entity. In
a single securitization transaction, there
may be intermediate steps; however, the
proposed rules would only require the
sponsor to retain risk for the
securitization transaction as a whole.49
Should the rules provide additional
guidance for when a transaction with
intermediate steps constitutes one or
more securitization transactions that
each should be subject to the rules’ risk
retention requirements?
III. General Risk Retention
Requirement
A. Minimum 5 Percent Risk Retention
Required
Section 15G of the Exchange Act
generally requires that the Agencies
jointly prescribe regulations that require
a securitizer to retain not less than five
percent of the credit risk for any asset
that the securitizer, through the
issuance of an ABS, transfers, sells, or
conveys to a third party, unless an
exemption from the risk retention
requirements for the securities or
transaction is otherwise available (e.g.,
if the ABS is collateralized exclusively
by QRMs). Consistent with the statute,
the proposed rules generally would
require that a sponsor retain an
economic interest equal to at least five
percent of the aggregate credit risk of the
assets collateralizing an issuance of ABS
(the ‘‘base’’ risk retention requirement).50
49 For example, in auto lease securitizations, the
auto leases and car titles are originated in the name
of a separate trust to avoid the administrative
expenses of retitling the physical property
underlying the leases. The separate trust will issue
to the issuing entity for the asset-backed security a
collateral certificate, often called a ‘‘special unit of
beneficial interest’’ (SUBI). The issuing entity will
then issue the asset-backed securities backed by the
SUBI certificate.
50 See proposed rules at § l.3 through § l.11.
We note that the proposed rules, in some instances,
permit a sponsor to allow another person to retain
the required amount of credit risk (e.g., originators,
15 U.S.C. 78o–11(a)(3).
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This exposure should provide a sponsor
with an incentive to monitor and
control the quality of the assets being
securitized and help align the interests
of the sponsor with those of investors in
the ABS. As discussed in Part III.D of
this Supplementary Information, the
sponsor also would be prohibited from
hedging or otherwise transferring this
retained interest.
As required by section 15G, the
proposed risk retention requirements
would apply to all ABS transactions that
are within the scope of section 15G,
regardless of whether the sponsor is an
insured depository institution, a bank
holding company or subsidiary thereof,
a registered broker-dealer, or other type
of federally supervised financial
institution. Thus, for example, it would
apply to securitization transactions by
any nonbank entity that is not an
insured depository institution (such as
an independent mortgage firm), as well
as by Fannie Mae and Freddie Mac.
The Agencies note that the five
percent risk retention requirement
established by the proposed rules would
be a regulatory minimum. The sponsor,
originator, or other party to a
securitization may retain, or be required
to retain, additional exposure to the
credit risk of assets that the sponsor,
originator, or other party helps
securitize beyond that required by the
proposed rules, either on its own
initiative or in response to the demands
of private market participants.
Moreover, the proposed rules would
require that a sponsor, in certain
circumstances, fund a premium capture
cash reserve account in connection with
a securitization transaction (see Part
III.B.9 of this Supplementary
Information). Any amount a sponsor
might be required to place in a premium
capture cash reserve account would be
in addition to the five percent ‘‘base’’
risk retention requirement of the
proposed rules.
srobinson on DSKHWCL6B1PROD with PROPOSALS
Request for Comment
10. The Agencies request comment on
whether the minimum five percent risk
retention requirement established by the
proposed rules for non-exempt ABS
transactions is appropriate, or whether a
higher risk retention requirement
should be established for all nonthird-party purchasers in commercial mortgagebacked securities transactions, and originatorsellers in asset-backed commercial paper conduit
securitizations). However, in such circumstances
the proposal includes limitations and conditions
designed to ensure that the purposes of section 15G
continue to be fulfilled. Further, we note that even
when a sponsor would be permitted to allow
another person to retain risk, the sponsor would
still remain responsible under the rule for
compliance with the risk retention requirements.
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exempt ABS transactions or for any
particular classes or types of nonexempt ABS.
11. If a higher minimum requirement
should be established, what minimum
should be established and what factors
should the Agencies take into account
in determining that higher minimum?
For example, should the amount of
credit risk be based on expected losses,
or a market-based test based on the
interest rate spread relative to a
benchmark index?
12(a). Would the minimum five
percent risk retention requirement, as
proposed to be implemented, have a
significant adverse effect on liquidity or
pricing in the securitization markets for
certain types of assets (such as, for
example, prudently underwritten
residential mortgage loans that do not
satisfy all of the requirements to be a
QRM)? 12(b). If so, what markets would
be adversely affected and how? What
adjustments to the proposed rules (e.g.,
the minimum risk retention amount, the
manner in which credit exposure is
measured for purposes of applying the
risk retention requirement, or the form
of risk retention) could be made to the
proposed rules to address these
concerns in a manner consistent with
the purposes of section 15G? Please
provide details and supporting data.
B. Permissible Forms of Risk Retention
As recognized in recent studies and
reports on securitization and risk
retention that have examined historical
market practices, there are several ways
in which a sponsor or other entity may
have retained exposure to the credit risk
of securitized assets.51 These include
(i) a ‘‘vertical’’ slice of the ABS interests,
whereby the sponsor or other entity
retains a specified pro rata piece of
every class of interests issued in the
transaction; (ii) a ‘‘horizontal’’ first-loss
position, whereby the sponsor or other
entity retains a subordinate interest in
the issuing entity that bears losses on
the assets before any other classes of
interests; (iii) a ‘‘seller’s interest’’ in
securitizations structured using a master
trust collateralized by revolving assets
whereby the sponsor or other entity
holds a separate interest that is pari
passu with the investors’ interest in the
pool of receivables (unless and until the
occurrence of an early amortization
event); or (iv) a representative sample,
whereby the sponsor retains a
representative sample of the assets to be
51 See Board Report; see also Macroeconomic
Effects of Risk Retention Requirements, Chairman of
the Financial Stability Oversight Counsel (January
2011), available at https://www.treasury.gov/
initiatives/wsr/Documents/Section 946 Risk
Retention Study (FINAL).pdf.
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securitized that exposes the sponsor to
credit risk that is equivalent to that of
the securitized assets. These examples
are not exclusive.
The various forms of risk retention
have developed, in part, due to the
diversity of assets that are securitized
and the structures commonly used in
securitizing different types of assets. For
example, due to the revolving nature of
credit card accounts and the fact that
multiple series of ABS collateralized by
credit card receivables typically are
issued using a single master trust
structure, sponsors of ABS transactions
collateralized by credit card receivables
often have maintained exposure to the
credit risk of the underlying loans
through use of a seller’s interest. On the
other hand, sponsors of ABS backed by
automobile loans where the originator of
the loan is often a finance company
affiliated with the sponsor will often
retain a portion of the loans that would
ordinarily be securitized, thus providing
the sponsor some continuing exposure
to the credit risk of those loans. In
connection with the securitization of
commercial mortgage-backed securities
(‘‘CMBS’’), a form of horizontal risk
retention often has been employed, with
the horizontal first-loss position being
initially held by a third-party purchaser
that specifically negotiates for the
purchase of the first-loss position and
conducts its own credit analysis of each
commercial loan backing the CMBS.52
Sponsors across a wide range of asset
classes may initially hold a horizontal
piece of the securitization (such as a
residual interest). Different forms of risk
retention also may have different
accounting implications for a sponsor or
other entity.53 Historically, whether or
52 Section 15G(c)(1)(E) allows the Federal banking
agencies and the Commission to determine that
with respect to CMBS, a form of retention that
satisfies the requirements includes retention of a
first-loss position by a third-party purchaser that
meets certain criteria. See 15 U.S.C. 78o–11(c)(1)(E).
53 The determination whether a legal entity
established to issue ABS must be included in the
consolidated financial statements of the sponsor or
another participant in the securitization chain is
primarily addressed by the following generally
accepted accounting principles issued by the
Financial Accounting Standards Board (FASB):
Accounting Standards Codification Topic 860,
Transfers and Servicing (ASC 860, commonly called
FAS 166); and FASB Accounting Standards
Codification Topic 810, Consolidation (ASC 810,
commonly called FAS 167). ASC 860 addresses
whether securitizations and other transfers of
financial assets are treated as sales or financings.
ASC 810 addresses whether legal entities often used
in securitization and other structured finance
transactions should be included in the consolidated
financial statements of any one of the parties
involved in the transaction. Together, this guidance
determines the extent to which an originator,
sponsor, or another company is required to
maintain securitized assets and corresponding
liabilities on their balance sheets.
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Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules
how a sponsor retained exposure to the
credit risk of the assets it securitized
was determined by a variety of factors
including the rating requirements of the
NRSROs, investor preferences or
demands, accounting considerations,
and whether there was a market for the
type of interest that might ordinarily be
retained (at least initially by the
sponsor).
Section 15G expressly provides the
Agencies the authority to determine the
permissible forms through which the
required amount of risk retention must
be held.54 Consistent with this
flexibility, Subpart B of the proposed
rules would provide sponsors with
multiple options to satisfy the risk
retention requirements of section 15G.
The options in the proposed rules are
designed to take into account the
heterogeneity of securitization markets
and practices, and to reduce the
potential for the proposed rules to
negatively affect the availability and
costs of credit to consumers and
businesses. However, importantly, each
of the permitted forms of risk retention
included in the proposed rules is
subject to terms and conditions that are
intended to help ensure that the sponsor
(or other eligible entity) retains an
economic exposure equivalent to at least
five percent of the credit risk of the
securitized assets. Thus, the forms of
risk retention would help to ensure that
the purposes of section 15G are fulfilled.
In addition, as discussed further in Part
III.D of this Supplementary Information
below, the proposed rules would
prohibit a sponsor from transferring,
selling or hedging the risk that the
sponsor is required to retain, thereby
preventing sponsors from circumventing
the requirements of the rules by selling
or transferring the risk after the
securitization transaction has been
completed. The proposed rules also
include disclosure requirements that are
an integral part of and specifically
tailored to each of the permissible forms
of risk retention. The disclosure
requirements are integral to the
proposed rules because they would
provide investors with material
information concerning the sponsor’s
retained interests in a securitization
transaction, such as the amount and
form of interest retained by sponsors,
and the assumptions used in
determining the aggregate value of ABS
to be issued (which generally affects the
amount of risk required to be retained).
54 See 15 U.S.C. 78o–11(c)(1)(C)(i); see also S.
Rep. No. 111–176, at 130 (2010) (‘‘The Committee
[on Banking, Housing, and Urban Affairs] believes
that implementation of risk retention obligations
should recognize the differences in securitization
practices for various asset classes.’’).
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Further, the disclosures are also integral
to the rule because they would provide
investors and the Agencies with an
efficient mechanism to monitor
compliance with the risk retention
requirements of the proposed rules.55
Request for Comment
13. Is the proposed menu of options
approach to risk retention, which would
allow a sponsor to choose the form of
risk retention (subject to all applicable
terms and conditions), appropriate?
14(a). Should the Agencies mandate
that sponsors use a particular form of
risk retention (e.g., a vertical slice or a
horizontal slice) for all or specific types
of asset classes or specific types of
transactions? 14(b). If so, which forms
should be required for with which asset
classes and why?
15. Does the proposed menu approach
achieve the objectives of the statute to
provide securitizers an incentive to
monitor and control the underwriting
quality of securitized assets and help
align incentives among originators,
sponsors, and investors?
16. Is each of the proposed forms of
risk retention appropriate? In particular,
the Agencies seek comment on the
potential effectiveness of the proposed
forms of risk retention in achieving the
purposes of section 15G, their potential
effect on securitization markets, and any
operational or other problems these
forms may present.
17. Are there any kinds of
securitizations for which a particular
form of risk retention is not appropriate?
18. How effective would each of the
proposed risk retention options be in
creating incentives to monitor and
control the quality of assets that are
securitized and in aligning the interests
among the parties in a securitization
transaction?
19(a). Are there other forms of risk
retention that the Agencies should
permit? 19(b). If so, please provide a
detailed description of the form(s), how
such form(s) could be implemented, and
whether such form(s) would be
appropriate for all, or just certain,
classes of assets.
20. Should the proposed rules require
disclosure as to why the sponsor chose
a particular risk retention option?
21(a). Are there ways that sponsors
could avoid the risk retention
requirements in an effort to reduce or
eliminate their risk retention
requirements? 21(b). If so, how should
we modify the proposed rules to address
this potential?
22. Are the methodologies proposed
for calculating the required five percent
exposure under each of the options
appropriate?
23(a). Are there other ways that the
minimum five percent requirement
should be calculated? 23(b). Would such
calculation methods be difficult to
enforce? 23(c). If so, how can we
address those difficulties? 23(d). Are
there other alternatives?
1. Vertical Risk Retention
As proposed, a sponsor may satisfy its
risk retention requirements with respect
to a securitization transaction by
retaining at least five percent of each
class of ABS interests issued as part of
the securitization transaction.56 A
sponsor using this approach must retain
at least five percent of each class of ABS
interests issued in the securitization
transaction regardless of the nature of
the class of ABS interests (e.g., senior or
subordinated) and regardless of whether
the class of interests has a par value,
was issued in certificated form, or was
sold to unaffiliated investors. For
example, if four classes of ABS interests
were issued by an issuing entity as part
of a securitization—a senior AAA-rated
class, a subordinated class, an interestonly class, and a residual interest—a
sponsor using this approach with
respect to the transaction would have to
retain at least five percent of each such
class or interest.57 The proposed rules
do not specify a method of measuring
the amount of each class, because the
amount retained, regardless of method
of measurement, should equal at least
five percent of the par value (if any), fair
value, and number of shares or units of
each class.
Under the vertical risk retention
option, by holding a five percent
vertical slice in an ABS issuance, a
sponsor is exposed to five percent of the
credit risk that each class of investors
has to the underlying collateral. This
provides the sponsor an interest in the
entire structure of the securitization
transaction.
proposed rules at § l.4.
noted previously, the proposed definition of
ABS interests does not include common or
preferred stock, limited liability interests,
partnership interests, trust certificates or similar
interests that are issued primarily to evidence
ownership of the issuing entity and the payments,
if any, on which are not primarily dependent on the
cash flows of the assets of the issuing entity. See
proposed rules at § l.2 (definition of ‘‘ABS
interests’’).
56 See
55 The
Agencies note that a variation of the
vertical, horizontal, seller’s interest and
representative sample options described below are
forms of eligible risk retention in the proposed
European Union capital requirement directive
relating to securitizations. See ‘‘Call for Technical
Advice on the Effectiveness of a Minimum
Retention Requirement for Securitizations,’’
Committee of European Bank Supervisors (October
30, 2009) (CEBS proposal).
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Under the proposed rules, a sponsor
that elects to retain risk through the
vertical slice option would be required
to provide, or cause to be provided, to
potential investors a reasonable time
prior to the sale of the asset-backed
securities in the securitization
transaction and, upon request, to the
Commission and to its appropriate
Federal banking agency (if any), the
amount (expressed as a percentage and
a dollar amount) of each class of ABS
interests in the issuing entity that the
sponsor will retain (or did retain) at
closing as well as the amount
(expressed, again, as a percentage and
dollar amount) that the sponsor is
required to retain under the proposed
rules. This disclosure would allow
investors to know what risk the sponsor
will actually retain in the transaction
and compare this amount to the risk that
the sponsor is required to retain under
the proposed rules. In addition, the
proposed rules would require a sponsor
to disclose, or cause to be disclosed, the
material assumptions and
methodologies it used to determine the
aggregate dollar amount of ABS interests
issued by the issuing entity in the
securitization transaction, including
those pertaining to any estimated cash
flows and the discount rate used.
Disclosure of these assumptions and
methodologies should help investors
and the Agencies monitor the sponsor’s
compliance with its risk retention
requirements because the five percent
risk retention requirement is based on
the aggregate amount of each class of
ABS interests issued as part of the
transaction.58
srobinson on DSKHWCL6B1PROD with PROPOSALS
Request for Comment
24. Are the disclosures proposed
sufficient to provide investors with all
material information concerning the
sponsor’s retained interest in a
securitization transaction, as well as to
enable investors and the Agencies to
monitor the sponsor’s compliance with
the rule?
58 For similar reasons, disclosure of such
assumptions and methodologies would be required
under the other risk retention options where the
amount of the sponsor’s required amount of risk
retention is based on the amount of interests issued
by the issuing entity or the amount of the collateral
underlying such interests. Depending on the
circumstances, a sponsor may have an incentive to
inflate the value of the underlying collateral and the
ABS supported by such collateral (for example, to
increase the proceeds from the securitization
transaction) or to underestimate the value of such
collateral and ABS (for example, to reduce the
sponsor’s risk retention requirement). The material
assumptions relating to estimated cash flows likely
would include those relating to the estimated
default rate, prepayment rate, the time between
default and recoveries on the underlying assets, as
well as interest rate projections for assets with
variable interest rates.
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25(a). Should additional disclosures
be required? 25(b). If so, what should be
required and why?
26. Are there any additional factors,
such as cost considerations, that the
Agencies should consider in
formulating an appropriate vertical risk
retention option?
2. Horizontal Risk Retention
As proposed, the second risk
retention option permits a sponsor to
satisfy its risk retention obligations by
retaining an ‘‘eligible horizontal residual
interest’’ in the issuing entity in an
amount that is equal to at least five
percent of the par value of all ABS
interests in the issuing entity that are
issued as part of the securitization
transaction.59 As discussed below, the
eligible horizontal residual interest
would expose the sponsor to a five
percent first-loss exposure to the credit
risk of the entire pool of securitized
assets.
The proposed rules include a number
of terms and conditions governing the
structure of an eligible horizontal
residual interest in order to ensure that
the interest would be a ‘‘first-loss’’
position,60 and could not be reduced in
principal amount (other than through
the absorption of losses) more quickly
than more senior interests and, thus,
would remain available to absorb losses
on the securitized assets. Specifically,
an interest qualifies as an ‘‘eligible
horizontal residual interest’’ under the
proposed rules only if it is an ABS
interest that is allocated all losses on the
securitized assets until the par value of
the class is reduced to zero and has the
most subordinated claim to payments of
both principal and interest by the
issuing entity.61
Moreover, until all other ABS
interests in the issuing entity are paid in
full, the eligible horizontal residual
interest generally cannot receive any
payments of principal made on a
securitized asset. However, the interest
may receive its proportionate share of
scheduled payments of principal
received on the securitized assets in
accordance with the relevant transaction
documents. For example, so long as any
other ABS interests are outstanding, a
sponsor, through its ownership of the
eligible horizontal residual interest,
proposed rules at § l.4.
discussed in Part III.B.9 of this
Supplemental Information, if a sponsor is required
to establish and fund a premium capture cash
reserve account in connection with a securitization
transaction, such account would first bear losses on
the securitized assets (even before an eligible
horizontal residual interest) until the account was
depleted.
61 See proposed rules at § l.2 (definition of
‘‘eligible horizontal residual interest’’).
59 See
60 As
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would be prohibited from receiving any
prepayments of principal made on the
underlying assets because these are, by
definition, unscheduled payments. This
sponsor also would be prohibited from
receiving principal payments made on
the underlying assets derived from
proceeds from the sale of, or foreclosure
on, an underlying asset. The prohibition
of unscheduled payments to the eligible
horizontal residual interest is designed
to ensure that unscheduled payments
would not accelerate the payoff of the
eligible horizontal residual interest
before other ABS interests. Such
acceleration would reduce the capacity
of the eligible horizontal residual
interest to absorb losses on the
securitized assets as well as the duration
of the sponsor’s interest in the
securitized assets. The proposed rules
would, however, permit the eligible
horizontal residual interest to receive its
pro rata share of scheduled principal
payments on the underlying assets.62
Similar to the vertical slice risk
retention option, under the proposed
rules, a sponsor using the horizontal
risk retention option would be required
to provide, or cause to be provided, to
potential investors a reasonable period
of time prior to the sale of ABS interests
in the issuing entity and, upon request,
to the Commission and its appropriate
Federal banking agency (if any): the
amount (expressed as a percentage and
dollar amount) of the eligible horizontal
residual interest that will be retained (or
was retained) by the sponsor at closing,
and the amount (expressed as a
percentage and dollar amount) of the
eligible horizontal residual interest
required to be retained by the sponsor
in connection with the securitization
transaction; a description of the material
terms of the eligible horizontal residual
interest, such as when such interest is
allocated losses or may receive
payments; and the material assumptions
and methodologies used in determining
the aggregate dollar amount of ABS
interests issued by the issuing entity in
the securitization transaction, including
those pertaining to any estimated cash
flows and the discount rate used.
In lieu of holding an eligible
horizontal residual interest, the
proposed rules would allow a sponsor
to cause to be established and funded,
in cash, a reserve account at closing
62 Thus, an eligible horizontal residual interest
with a par value of five percent of the aggregate par
value of all ABS interests could, subject to its most
subordinate place in the payments waterfall, (i)
initially be entitled to receive up to five percent of
scheduled principal payments received on the
securitized assets, and (ii) if losses reduced the par
value of the interest to three percent, receive no
more than three percent of scheduled principal
payments received on the securitized assets.
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(horizontal cash reserve account) in an
amount equal to at least five percent of
the par value of all the ABS interests
issued as part of the transaction (i.e., the
same dollar amount as would be
required if the sponsor held an eligible
horizontal residual interest).63 This
horizontal cash reserve account would
have to be held by the trustee (or person
performing functions similar to a
trustee) for the benefit of the issuing
entity. The proposed rules include
several important restrictions and
limitations on such a horizontal cash
reserve account. These limitations and
restrictions are intended to ensure that
a sponsor that establishes a horizontal
cash reserve account would be exposed
to the same amount and type of first-loss
credit risk on the underlying assets as
would be the case if the sponsor held an
eligible horizontal residual interest.
Specifically, the proposed rules
would provide that, until all ABS
interests in the issuing entity are paid in
full or the issuing entity is dissolved,
the horizontal cash reserve account
must be used to satisfy payments on
ABS interests on any payment date
when the issuing entity has insufficient
funds from any source (including any
premium capture cash reserve account
established under § l.12 of the
proposed rules) to satisfy an amount
due on any ABS interest.64 Thus, the
amounts in the account would bear first
loss on the securitized assets in the
same way as an eligible horizontal
residual interest. In addition, until all
ABS interests in the issuing entity are
paid in full or the issuing entity is
dissolved, the proposed rules would
prohibit any other amounts from being
withdrawn or distributed from the
account, with only two exceptions. The
first exception would allow amounts in
the account to be released to the sponsor
(or any other person) due to receipt by
the issuing entity of scheduled
payments of principal on the securitized
assets, provided that the issuing entity
distributes such payments of principal
in accordance with the transaction
documents and the amount released
from the horizontal cash reserve account
on any date does not exceed the product
of: (i) The amount of scheduled
payments of principal on the securitized
assets received by the issuing entity and
for which the release is being made; and
(ii) the ratio of the current balance in the
horizontal cash reserve account to the
aggregate remaining principal balance of
all ABS interests in the issuing entity.
This limitation is intended to ensure
that, like an eligible horizontal residual
63 See
64 See
proposed rules at § l.4(b).
proposed rules at § l.4(b)(3)(i).
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interest, a horizontal cash reserve
account would not be depleted by
unscheduled payments of principal on
the underlying assets. The second
exception would be that the sponsor
would be permitted to receive interest
payments (but not principal payments)
received by the horizontal cash reserve
account on its permitted investments.65
A sponsor electing to establish and
fund a horizontal cash reserve account
would be required to provide
disclosures similar to those required
with respect to an eligible horizontal
residual interest, except that these
disclosures have been modified to
reflect the different nature of the
account.
Request for Comment
27. Do the conditions and limitations
in the proposed rules effectively limit
the ability of the sponsor to structure
away its risk exposure?
28(a). Is the restriction on certain
payments to the sponsor with respect to
the eligible horizontal residual interest
appropriate and sufficient? 28(b). Why
or why not?
29(a). Is the proposed approach to
measuring the size of horizontal risk
retention (five percent of the par value
of all ABS interests in the issuing entity
that are issued as part of the
securitization transaction) appropriate?
29(b). Would a different measurement
be better? Please provide details and
data supporting any alternative
measurements.
30. Are the disclosures proposed
sufficient to provide investors with all
material information concerning the
sponsor’s retained interest in a
securitization transaction, as well as
enable investors and the Agencies to
monitor whether the sponsor has
complied with the rule?
31(a). Should additional disclosures
be required? 31(b). If so, what should be
required and why?
32. Are there any additional factors,
such as accounting or cost
considerations that the Agencies should
consider with respect to horizontal risk
retention?
33. Should a sponsor be prohibited
from utilizing the horizontal risk
retention option if the sponsor (or an
affiliate) acts as servicer for the
securitized assets?
65 Under
the proposed rules, amounts in a
horizontal cash reserve account may only be
invested in (i) United States Treasury securities
with remaining maturities of 1 year or less; and (ii)
deposits in one or more insured depository
institutions (as defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813)) that are
fully insured by federal deposit insurance. See
proposed rules at § l.4(b)(2).
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34. Are the terms and conditions of
the horizontal cash reserve account
appropriate?
35. Do the terms and conditions
ensure that such an account will expose
the sponsor to the same type and
amount of credit risk and have the same
incentive effects as an eligible
horizontal residual interest?
36(a). Should the eligible horizontal
residual interest be required to be
structured as a ‘‘Z bond’’ such that it
pays no interest while principal is being
paid down on more senior interests?
36(b). Why or why not?
3. L-Shaped Risk Retention
The next risk retention option in the
proposed rules would allow a sponsor,
subject to certain conditions, to use an
equal combination of vertical risk
retention and horizontal risk retention
as a means of retaining the required five
percent exposure to the credit risk of the
securitized assets. This form of risk
retention is referred to as an ‘‘L-Shaped’’
form of risk retention because it
combines both vertical and horizontal
forms. Specifically, § l.6 of the
proposed rules would allow a sponsor
to meet its risk retention obligations
under the rules by retaining:
(i) Not less than 2.5 percent of each
class of ABS interests in the issuing
entity issued as part of the securitization
transaction (the vertical component);
and
(ii) An eligible horizontal residual
interest in the issuing entity in an
amount equal to at least 2.564 percent
of the par value of all ABS interests in
the issuing entity issued as part of the
securitization transaction, other than
those interests required to be retained as
part of the vertical component (the
horizontal component).66
The amount of the horizontal
component is calibrated to avoid double
counting that portion of an eligible
horizontal residual interest that the
sponsor is required to hold as part of the
vertical component. This calibration
also ensures that the combined amount
of the vertical component and the
horizontal component would be five
percent of the aggregate transaction. For
example, in a securitization transaction
structured with three classes of
interests: A certificated senior class
whose par value is equal to $950, an
66 As under the horizontal risk retention option
itself, a sponsor would have the option of
establishing and funding, in cash, a horizontal cash
reserve account at the closing of the securitization
transaction in this amount rather than holding an
eligible horizontal residual interest. See proposed
rules at § l.4(b). Any such horizontal cash reserve
account would be subject to the same restrictions
and limitations as under the horizontal risk
retention option.
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uncertificated subordinated class of $24
and an uncertificated eligible horizontal
residual interest whose par value is
equal to $26, a sponsor would be
required to retain $23.75 of the senior
class ($950*2.5%), $0.60 of the
subordinated class ($24*2.5%) and
$25.65 of the eligible horizontal residual
interest (($26*2.5%) + ($1000 ¥ ($23.75
+ $0.60 + $0.65))*2.564%) for a total of
$50 in risk retention requirements.
Because the required size of the
sponsor’s retained eligible horizontal
residual interest ($25.65) is less than the
amount of the eligible horizontal
residual interest, retention of the entire
horizontal residual interest by the
sponsor complies with the minimum
L-shape retention requirements for the
securitization.67
The proposal would require that a
sponsor hold 50 percent of its required
risk retention amount in the form of a
vertical component and 50 percent in
the form of a horizontal component in
order to help ensure that each
component is large enough to affect the
sponsor’s incentives and to help align
the incentives of the sponsor and
investors. In addition, requiring that
each component represent 50 percent of
the total minimum risk retention
requirement should assist investors and
the Agencies with monitoring
compliance with the proposed rules.
Because a sponsor using the L-shape
risk retention option would retain both
a vertical and a horizontal component,
the proposed rules would require that
the sponsor provide the disclosures
required under the vertical risk
retention option, as well as those
required under the horizontal risk
retention option.
Request for Comment
37. Are the disclosures proposed
sufficient to provide investors with all
material information concerning the
sponsor’s retained interest in a
securitization transaction, as well as
enable investors and the Agencies to
monitor whether the sponsor has
complied with the rule?
38(a). Should additional disclosures
be required? 38(b). If so, what should be
required and why?
39. Are there any additional factors,
such as cost considerations, that the
Agencies should consider with respect
to L-shape risk retention?
40(a). Should the Agencies permit or
require that a higher proportion of the
risk retention held by a sponsor under
this option be composed of a vertical
component or a horizontal component?
67 This example is provided for simple
illustration only.
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40(b). What implications might such
changes have on the effectiveness of the
option in helping achieving the
purposes of section 15G?
4. Revolving Asset Master Trusts
(Seller’s Interest)
Securitizations backed by revolving
lines of credit, such as credit card
accounts or dealer floorplan loans, often
are structured using a revolving master
trust, which allows the trust to issue
more than one series of ABS backed by
a single pool of the revolving assets.68
In these types of transactions, the
sponsor typically holds an interest
known as a ‘‘seller’s interest.’’ This
interest is pari passu with the investors’
interest in the receivables backing the
ABS interests of the issuing entity until
the occurrence of an early amortization
event. A seller’s interest is a direct,
shared interest with all of the investors
in the performance of the underlying
assets and, thus, exposes the sponsor to
the credit risk of the pool or receivables.
In light of and to accommodate those
types of securitizations, the proposed
rules would allow a sponsor of a
revolving asset master trust that is
collateralized by loans or other
extensions of credit that arise under
revolving accounts to meet its base risk
retention requirement by retaining a
seller’s interest in an amount not less
than five percent of the unpaid
principal balance of all the assets held
by the issuing entity.69 The proposed
rules define a ‘‘revolving asset master
trust’’ as an issuing entity that (i) is a
master trust; and (ii) is established to
issue more than one series of ABS, all
of which are collateralized by a single
pool of revolving securitized assets that
are expected to change in composition
over time. The proposed rules also
define a ‘‘seller’s interest’’ as an ABS
interest (i) in all of the assets that are
held by the issuing entity and that do
not collateralize any other ABS interests
issued by the entity; (ii) that is pari
passu with all other ABS interests
issued by the issuing entity with respect
to the allocation of all payments and
losses prior to an early amortization
event (as defined in the transaction
documents); and (iii) that adjusts for
fluctuations in the outstanding principal
balances of the securitized assets. The
definitions of a seller’s interest and a
revolving asset master trust are intended
to be consistent with market practices
and, with respect to seller’s interest,
68 In a master trust securitization, assets (e.g.,
credit card receivables or dealer floorplan
financings) may be added to the pool in connection
with future issuances of the securities backed by the
pool.
69 See proposed rules at § l.7.
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designed to ensure that any seller’s
interest retained by a sponsor under the
proposal would expose the sponsor to
the credit risk of the underlying assets.
Under the proposed rules, a sponsor
using the seller’s interest option would
be required to provide, or cause to be
provided, in writing to potential
investors a reasonable period of time
prior to the sale of the asset-backed
securities in the securitization
transaction and, upon request, to the
Commission and its appropriate Federal
banking agency (if any) the amount
(expressed as a percentage and dollar
amount) of the seller’s interest that the
sponsor will retain (or has retained) in
the transaction at closing and the
amount (expressed as a percentage and
dollar amount) that the sponsor is
required to retain pursuant to § l.7 of
the rule; a description of the material
terms of the seller’s interest; and the
material assumptions and methodology
used in determining the aggregate dollar
amount of ABS interests issued by the
issuing entity in the securitization
transaction, including those pertaining
to any estimated cash flows and the
discount rate used.
Request for Comment
41(a). Should a sponsor of a revolving
asset master trust be permitted to satisfy
its base risk retention requirement by
retaining the seller’s interest, as
proposed? 41(b). Why or why not?
42(a). Are there additional or different
conditions that should be placed on this
option? 42(b). If so, please explain in
detail what other conditions would be
appropriate.
43. Are there alternative methods of
structuring risk retention for revolving
asset master trust securitization
transactions that should be permitted?
Provide detailed descriptions and data
or other support for any alternatives.
44. Are the proposed disclosures
sufficient to provide investors with all
material information concerning the
sponsor’s retained interest in a
securitization transaction, as well as
enable investors and the Agencies to
monitor whether the sponsor has
complied with the rule?
45(a). Should additional disclosures
be required? 45(b). If so, what should be
required and why?
46. Should a seller’s interest form of
risk retention be applied to any other
types of securitization transactions? If
so, explain in detail and provide data or
other support for application to other
types of securitization transactions.
5. Representative Sample
The next proposed risk retention
option permits a sponsor of a
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securitization transaction to meet its
risk retention requirements by retaining
a randomly selected representative
sample of assets that is equivalent, in all
material respects, to the assets that are
transferred to the issuing entity and
securitized, subject to certain
conditions.70 This method of risk
retention has been used in connection
with securitizations involving
automobile loans where the underlying
loans are not originated purely for
distribution, but are securitized by the
sponsor as part of a broader funding
strategy. By retaining a randomly
selected representative sample of assets,
the sponsor retains exposure to
substantially the same type of credit risk
as investors in the ABS. Therefore, this
structure provides a sponsor incentives
to monitor and control the quality of the
underwriting of the securitized assets
and helps align the sponsor’s incentives
with those of investors in the ABS.
Consistent with other risk retention
options, a sponsor using the
representative sample approach would
be required to retain at least five percent
of the credit risk of the assets the
sponsor identifies for securitization.
Therefore, the unpaid principal balance
of all the assets in the representative
sample would be required to equal at
least five percent of the aggregate
unpaid principal balance of all the
assets in the pool of assets initially
identified for securitization (including
those that end up in the representative
sample). For example, if the assets that
are identified for securitization have an
aggregate unpaid principal balance of
$100 million, the aggregate unpaid
principal balance of the assets in the
representative sample would be
required to equal at least $5 million.71
To ensure that a sponsor that retains
a representative sample remains
exposed to substantially the same
aggregate credit risks as investors in the
ABS, the proposal would require the
sponsor to construct a representative
sample according to a specific process.
As an initial step, the sponsor would
need to designate a pool of at least 1,000
separate assets for securitization (the
‘‘designated pool’’). The representative
sample would be required to be drawn
exclusively from the designated pool.
Also, the designated pool would be
prohibited from containing any assets
proposed rules at § l.8.
otherwise, the unpaid principal balance
of the assets comprising the representative sample
must be no less than 5/95ths (5.264 percent) of the
aggregate unpaid principal balance of all the assets
that ultimately are securitized in the securitization
transaction. The proposed rules use this approach
to defining the minimum size of a representative
sample. See proposed rules at § l.8(b)(1)(i).
70 See
71 Stated
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other than those that are either
securitized or selected for the
representative sample. In the second
step, the sponsor must use a random
selection process to identify those loans
from within the designated pool that
will be included in the representative
sample. This random selection process
may not take account of any
characteristic of the assets other than
their unpaid principal balance.
After the sponsor randomly selects a
representative sample from the
designated pool, it would be required to
assess that sample to ensure that, for
each material characteristic of the
assets, including the average unpaid
principal balance, in the designated
pool the mean of any quantitative
characteristic, and the proportion of any
characteristic that is categorical in
nature, of the sample of assets randomly
selected from the designated pool is
within a 95 percent two-tailed
confidence interval of the mean or
proportion, respectively, of the same
characteristic of all the assets in the
designated pool.72
Without these statistical tests, a
sample could be biased towards, for
example, assets with a larger dollar
value or assets with a lower expected
risk of default. In summary, this process
is designed to ensure that the assets
randomly selected from the designated
pool are, in fact, representative of the
securitized pool. If this process does not
produce a sample with equivalent
material characteristics (as measured by
the required two-tailed confidence
level), the sponsor must repeat it as
necessary in order to achieve an
equivalent result or rely on another
permissible option for retaining credit
risk. The proposal permits this reselection and testing process.
72 Depending on the type of assets involved in the
securitization, the material characteristics other
than the unpaid principal balance of the assets
might include, for example, the geographical
location of the property securing the loan, the debtto-income ratio(s) of the borrower (DTI ratio), and
the interest rate payable on the loan. Characteristics
such as the DTI ratio and the interest rate payable
on the loan would be considered quantitative
characteristics, and characteristics such as the
geographic location of the property securing the
loan would be considered categorical
characteristics. Assuming the factors above are
material, a sponsor using the representative sample
option would be required to test the mean of the
DTI ratio of loans in the representative sample
against the mean of the DTI ratio of all assets in the
designated pool (including the ones selected for the
random sample). In addition, the sponsor would be
required to test the proportion of the number of
assets from one geographic location in the
representative sample to the total number of assets
in the representative sample against the proportion
of the number of assets from the same geographic
location in the designated pool to the total number
of assets in the designated pool.
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The proposal contains a variety of
safeguards to ensure that the sponsor
has constructed the representative
sample in conformance with the
requirements described above. For
example, the sponsor would be required
to have in place, and adhere to, policies
and procedures for (i) identifying and
documenting the material
characteristics of the assets in the
designated pool; (ii) selecting assets
randomly from the designated pool for
inclusion in the representative sample;
(iii) testing the randomly selected
sample of assets in the designated pool;
(iv) maintaining, until all ABS interests
are paid in full, documentation that
clearly identifies the assets included in
the representative sample; and (v)
prohibiting, until all ABS interests are
paid in full, assets in the representative
sample from being included in the
designated pool of any other
securitization transaction.
In addition, prior to the sale of the
asset-backed securities as part of the
securitization transaction, the sponsor
would be required to obtain an agreed
upon procedures report from an
independent, public accounting firm. At
a minimum, the independent, public
accounting firm must report on whether
the sponsor has the policies and
procedures mentioned above.73 Once an
acceptable agreed upon procedures
report has been obtained, the sponsor
may rely on such report for subsequent
securitizations. However, if the
sponsor’s policies and procedures
change in any material respect, a new
agreed upon procedures report would be
required. Under the proposal, the
independent public accounting firm
providing the agreed upon procedures
report must report on the following
minimum items:
(i) Policies and procedures that
require the sponsor to identify and
document the material characteristics of
assets included in a designated pool of
assets that meets the requirements of the
proposal;
(ii) Policies and procedures that
require the sponsor to select assets
randomly in accordance with the
proposal;
(iii) Policies and procedures that
require the sponsor to test the
randomly-selected sample of assets in
accordance with the proposal of this
section;
(iv) Policies and procedures that
require the sponsor to maintain, until all
ABS interests are paid in full,
documentation that identifies the assets
in the representative sample established
in accordance with the proposal; and
73 See
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(v) Policies and procedures that
require the sponsor to prohibit, until all
ABS interests are paid in full, assets in
the representative sample from being
included in the designated pool of any
other securitization transaction.
Because the performance of the assets
included in the representative sample
could differ from the performance of the
securitized assets if the two sets of
assets were serviced under different
standards or procedures, the proposal
provides that, until such time as all ABS
interests in the issuing entity have been
fully paid or the issuing entity has been
dissolved, servicing of the assets
included in the representative sample
must be conducted by the same entity
and under the same contractual
standards as the servicing of the
securitized assets. In addition, the
individuals responsible for servicing the
assets comprising the representative
sample or the securitized assets must
not be able to determine whether an
asset is held by the sponsor or held by
the issuing entity.
A sponsor would also be required to
comply with the hedging, transfer and
sale restrictions in section l.14 with
respect to the assets in the
representative sample. Additionally, the
sponsor would be prohibited from
removing any assets from the
representative sample and, until all ABS
interests are repaid, causing or
permitting the assets in the
representative sample to be included in
any other designated pool or
representative sample established in
connection with any other securitization
transaction.74
To help ensure that potential
investors and the Agencies can monitor
and assess the sponsor’s compliance
with these requirements, the proposal
would require the sponsor to provide, or
cause to be provided, the following
disclosures to potential investors a
reasonable period of time prior to the
sale of asset-backed securities as part of
the securitization transaction and to
provide, or cause to be provided, the
same information, upon request, to the
Commission and its appropriate Federal
banking agency (if any):
(i) The amount (expressed as a
percentage of the designated pool and
dollar amount) of assets included in the
representative sample to be retained by
the sponsor;
(ii) The amount (expressed as a
percentage of the designated pool and
dollar amount) of assets required to be
included in the representative sample
and retained by the sponsor;
74 See
proposed rules at § l.8(f).
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(iii) A description of the material
characteristics of the designated pool
and the representative sample,
including, but not limited to, the
average unpaid principal balance of the
assets in the designated pool and the
representative sample, the means of the
quantitative characteristics and
proportions of characteristics that are
categorical in nature with respect to
each of the material characteristics of
the assets in the designated pool and the
representative sample, of appropriate
introductory and explanatory
information to introduce the
characteristics, the methodology used in
determining or calculating the
characteristics, and any terms or
abbreviations used; 75
(iv) A description of the policies and
procedures that the sponsor used for
ensuring that the process for identifying
the representative sample complies with
the proposal and that the representative
sample has equivalent material
characteristics to those of the pool of
securitized assets;
(v) Confirmation that an agreed upon
procedures report was obtained as
required by the proposal; and
(vi) The material assumptions and
methodology used in determining the
aggregate dollar amount of ABS interests
issued by the issuing entity in the
securitization transaction, including
those pertaining to any estimated cash
flows and the discount rate used.
Further, after the sale of the ABS, the
sponsor would be required to provide,
or cause to be provided, to investors at
the end of each distribution period (as
specified in the governing transaction
documents) a comparison of the
performance of the pool of securitized
assets for the related distribution period
with the performance of the assets in the
representative sample for the related
distribution period. A sponsor selecting
the representative sample option also
would be required to provide investors
disclosure concerning the assets in the
representative sample in the same form,
level, and manner as it provides,
pursuant to rule or otherwise,
concerning the securitized assets.
Therefore, if loan-level disclosure
concerning the securitized assets was
required, by rule or otherwise, to be
provided to investors, the same level of
disclosure would also be required
concerning the representative sample.
75 See, e.g., disclosure of pool characteristics
required in registered transactions in the
Commission’s Regulation AB, Item 1111(b).
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Request for Comment
47. Should we include the
representative sample alternative as a
risk retention option?
48. Are the mechanisms that we have
proposed adequate to ensure monitoring
of the randomization process if such an
alternative were permitted?
49. Is the requirement that the
designated pool contain at least 1000
assets appropriate, or should a greater
number of assets be required or a lesser
number be permitted?
50. Are there material characteristics
other than the average unpaid principal
balance of all the assets that should be
identified in the rule for purposes of the
equivalent risk determination and
disclosure requirements?
51. Are there any better ways to
ensure an adequate randomization
process and the equivalence of the
representative sample to the pool of
securitized assets? For example, would
it be appropriate and sufficient if the
sponsor were required to use a third
party to conduct the random selection
with no subsequent testing to determine
if the sample constructed has material
characteristics equivalent to those of the
securitized assets?
52(a). Alternatively, would it be
adequate if the sponsor was required to
provide a third-party opinion that the
selection process was random and that
retained exposures are equivalent (i.e.,
share a similar risk profile) to the
securitized exposures? 52(b). Would this
opinion resemble a credit rating, thereby
raising concerns about undue reliance
on credit ratings? 52(c). If this approach
were adopted, should the Agencies
impose any standards of performance to
be followed by such a third party, or
that such third party have certain
characteristics?
53. If the Agencies adopt a
representative sample option, should
the same disclosures be required
regarding the securitized assets subject
to risk retention that are required for the
assets in the pool at the time of
securitization and on an ongoing basis?
54. Should the retained exposures, as
proposed, be subject to the same
servicing standards as the securitized
exposures?
55. Are the disclosures proposed
sufficient to provide investors with all
material information concerning the
sponsor’s retained interest in a
securitization transaction, as well as
enable investors and the Agencies to
monitor whether the sponsor has
complied with the rule?
56(a). Should additional disclosures
be required? 56(b). If so, what should be
required and why?
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57(a). Is the condition that a sponsor
obtain an agreed upon procedures report
from an independent, public accounting
firm appropriate? 57(b). If not, is there
another mechanism that should be
included in the option that helps ensure
that the sponsor has constructed the
representative sample in conformance
with the requirements of the rule?
58(a). Is the requirement that the
sponsor determine equivalency with a
95 percent two-tailed confidence
appropriate? 58(b). If not, what
measurement of equivalency do you
recommend and why?
srobinson on DSKHWCL6B1PROD with PROPOSALS
6. Asset-Backed Commercial Paper
Conduits
The next risk retention option under
the proposed rules is an option
specifically designed for structures
involving asset-backed commercial
paper (ABCP) that is supported by
receivables originated by one or more
originators and that is issued by a
conduit that meets certain conditions.76
This option is designed to take account
of the special structures through which
this type of ABCP typically is issued, as
well as the manner in which exposure
to the credit risk of the underlying
assets typically is retained by
participants in the securitization chain
for this type of ABCP.
ABCP is a type of liability that is
typically issued by a special purpose
vehicle (or conduit) sponsored by a
financial institution or other sponsor.
The commercial paper issued by the
conduit is collateralized by a pool of
assets, which may change over the life
of the entity. Depending on the type of
ABCP program being conducted, the
assets collateralizing the ABCP may
consist of a wide range of assets
including auto loans, commercial loans,
trade receivables, credit card
receivables, student loans, and other
securities. Like other types of
commercial paper, the term of ABCP
typically is short, and the liabilities are
‘‘rolled,’’ or refinanced, at regular
intervals. Thus, ABCP conduits
generally fund longer-term assets with
shorter-term liabilities.
As proposed, this risk retention
option in § __.9 of the proposed rules
would be available only for short-term
ABCP collateralized by receivables or
loans and supported by a liquidity
facility that provides 100 percent
liquidity coverage from a regulated
institution. This risk retention option
would not be available to entities or
ABCP programs that operate as
76 See
proposed rules at § l.9.
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securities or arbitrage programs.77 ABCP
conduits that purchase loans or
receivables from one originator or
multiple originators are commonly
referred to as single-seller ABCP
programs and multi-seller ABCP
programs, respectively. In each of these
programs, the sponsor of the ABCP
conduit approves the originators whose
loans or receivables will collateralize
the ABCP issued by the conduit. An
‘‘originator-seller’’ will sell the eligible
loans or receivables to an intermediate,
bankruptcy remote SPV established by
the originator-seller. The credit risk of
the receivables transferred to the
intermediate SPV then typically is
separated into two classes—a senior
interest that is purchased by the ABCP
conduit and a residual interest that
absorbs first losses on the receivables
and is retained by the originator-seller.
The residual interest retained by the
originator-seller typically is sized so
that it is sufficiently large to absorb all
losses on the underlying receivables.
The ABCP conduit, in turn, issues
short-term ABCP that is collateralized
by the senior interests purchased from
the intermediate SPVs (which itself is
supported by the subordination
provided by the residual interest
retained by the originator-seller). The
sponsor of these types of ABCP conduit,
which is usually a bank or other
regulated financial institution, also
typically provides (or arranges for
another regulated financial institution to
provide) 100 percent liquidity coverage
on the ABCP issued by the conduit. This
liquidity support typically requires the
support provider to provide funding to,
or purchase assets from, the ABCP
conduit in the event that the conduit
lacks the funds necessary to repay
maturing ABCP issued by the conduit.
The proposal includes several
conditions designed to ensure that this
option is available only to the type of
single-seller or multi-seller ABCP
conduits described above. For example,
this option is available only with
respect to ABCP issued by an ‘‘eligible
ABCP conduit,’’ as defined by the
proposal. The proposal defines an
eligible ABCP conduit as an issuing
entity that issues ABCP and that meets
each of the following criteria.78 First,
the issuing entity must be bankruptcy
remote or otherwise isolated for
77 Structured investment vehicles (SIVs) and
securities arbitrage ABCP programs both purchase
securities (rather than receivables and loans from
originators). SIVs typically lack liquidity facilities
covering all of these liabilities issued by the SIV,
while securities arbitrage ABCP programs typically
have such liquidity support.
78 See proposed rules at § l.2 (definition of
‘‘eligible ABCP conduit’’).
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insolvency purposes from the sponsor
and any intermediate SPV. Second, the
ABS issued by an intermediate SPV to
the issuing entity must be collateralized
solely by assets originated by a single
originator-seller.79 Third, all the
interests issued by an intermediate SPV
must be transferred to one or more
ABCP conduits or retained by the
originator-seller. Fourth, a regulated
liquidity provider must have entered
into a legally binding commitment to
provide 100 percent liquidity coverage
(in the form of a lending facility, an
asset purchase agreement, a repurchase
agreement, or similar arrangement) to all
the ABCP issued by the issuing entity by
lending to, or purchasing assets from,
the issuing entity in the event that funds
are required to repay maturing ABCP
issued by the issuing entity.80
Under the proposed risk retention
option applicable to ABCP conduit
structures, the sponsor of an eligible
ABCP conduit would be permitted to
satisfy its base risk retention obligations
under the rule if each originator-seller
that transfers assets to collateralize the
ABCP issued by the conduit retains the
same amount and type of credit risk as
would be required under the horizontal
risk retention option as if the originatorseller was the sponsor of the
intermediate SPV. Specifically, the
proposal provides that a sponsor of an
ABCP securitization transaction would
satisfy its base risk retention
requirement with respect to the issuance
of ABCP by an eligible ABCP conduit if
each originator-seller retains an eligible
horizontal residual interest in each
intermediate SPV established by or on
79 Under the proposal, an originator-seller would
mean an entity that creates assets through one or
more extensions of credit and sells those assets (and
no other assets) to an intermediate SPV, which in
turn sells interests collateralized by those assets to
one or more ABCP conduits. The proposal defines
an intermediate SPV as a special purpose vehicle
that is bankruptcy remote or otherwise isolated for
insolvency purposes that purchases assets from an
originator-seller and that issues interests
collateralized by such assets to one or more ABCP
conduits. See proposed rules at § l.2 (definitions
of ‘‘originator-seller’’ and ‘‘intermediate SPV’’).
80 The proposal defines a regulated liquidity
provider as a depository institution (as defined in
section 3 of the Federal Deposit Insurance Act (12
U.S.C. 1813)); a bank holding company (as defined
in 12 U.S.C. 1841) or a subsidiary thereof; a savings
and loan holding company (as defined in 12 U.S.C.
1467a) provided all or substantially all of the
holding company’s activities are permissible for a
financial holding company under 12 U.S.C. 1843(k)
or a subsidiary thereof; or a foreign bank (or a
subsidiary thereof) whose home country supervisor
(as defined in § 211.21 of the Federal Reserve
Board’s Regulation K (12 CFR 211.21)) has adopted
capital standards consistent with the Capital
Accord of the Basel Committee on Banking
Supervision, as amended, provided the foreign bank
is subject to such standards. See https://www.bis.org/
bcbs/index.htm for more information about the
Basel Capital Accord.
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behalf of that originator-seller for
purposes of issuing interests to the
eligible ABCP conduit. The eligible
horizontal residual interest retained by
the originator-seller must equal at least
five percent of the par value of all
interests issued by the intermediate
SPV. Accordingly, each originator-seller
would be required to retain credit
exposure to the receivables sold by that
originator-seller to support issuance of
the ABCP.
The eligible horizontal residual
interest retained by the originator-seller
would be subject to the same terms and
conditions as apply under the
horizontal risk retention option. Thus,
for example, if an originator-seller
transfers $100 of receivables to an
intermediate SPV, which then issues
senior interests and an eligible
horizontal residual interest with an
aggregate par value of $100, the
originator-seller must retain an eligible
horizontal residual interest with a par
value of $5 or more.81 Importantly, the
originator-seller also would be
prohibited from selling, transferring,
and hedging the eligible horizontal
residual interest that it is required to
retain. This option is designed to
accommodate the special structure and
features of these types of ABCP
programs.
Although the proposal would allow
the originator-sellers (rather than the
sponsor) to retain the required eligible
horizontal residual interest, the
proposal also imposes certain
obligations directly on the sponsor in
recognition of the key role the sponsor
plays in organizing and operating an
eligible ABCP conduit. Most
importantly, the proposal provides that
the sponsor of an eligible ABCP conduit
that issues ABCP in reliance on this
option would be responsible for
compliance with the requirements of
this risk retention option. The proposal
also would require that the sponsor
maintain policies and procedures to
monitor the originator-sellers’
compliance with the requirements of the
proposal. In the event that the sponsor
determines that an originator-seller no
longer complies with the requirements
of the rule (for example, because the
originator-seller has sold the interest it
was required to retain), the sponsor
would be required to promptly notify, or
cause to be notified, the investors in the
securitization transaction of such
noncompliance.
81 As noted above, this would be the minimum
amount of credit risk that must be retained as part
of a securitization transaction.
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In addition, consistent with market
practice, the proposal would require
that the sponsor:
(i) Establish the eligible ABCP
conduit;
(ii) Approve the originator-sellers
permitted to sell or transfer assets,
indirectly through an intermediate SPV,
to the ABCP conduit;
(iii) Establish criteria governing the
assets the originator-sellers are
permitted to sell or transfer to an
intermediate SPV;
(iv) Approve all interests in an
intermediate SPV to be purchased by
the eligible ABCP conduit;
(v) Administer the ABCP conduit by
monitoring the interests acquired by the
conduit and the assets collateralizing
those interests, arranging for debt
placement, compiling monthly reports,
and ensuring compliance with the
conduit documents and with the
conduit’s credit and investment policy;
and
(vi) Maintain, and adhere to, policies
and procedures for ensuring that the
requirements of the rule have been
met.82
The sponsor also would have to
provide, or cause to be provided, to
potential purchasers a reasonable period
of time prior to the sale of any ABCP
from the conduit, and to the
Commission and its appropriate Federal
banking agency, if any, upon request,
the name and form of organization of
each originator-seller that will retain (or
has retained) an interest in the
securitization transaction pursuant to
§ l.9 of the proposed rules (including
a description of the form, amount, and
nature of such interest), and of each
regulated liquidity provider that
provides liquidity support to the eligible
ABCP conduit (including a description
of the form, amount, and nature of such
liquidity coverage).
Section 15G permits the Agencies to
allow an originator (rather than a
sponsor) to retain the required amount
and form of credit risk and to reduce the
amount of risk retention required of the
sponsor by the amount retained by the
originator.83 In developing the proposed
risk retention option for eligible ABCP
conduits, the Agencies have considered
the factors set forth in section 15G(d)(2)
of the Exchange Act.84 The terms of the
proposed option for eligible ABCP
conduits include conditions designed to
ensure that the interests in the
intermediate SPVs sold to an eligible
ABCP conduit have low credit risk, and
to ensure that originator-sellers have
incentives to monitor the quality of the
assets that are sold to an intermediate
SPV and collateralize the ABCP issued
by the conduit. In addition, the proposal
is designed to effectuate the risk
retention requirements of section 15G of
the Exchange Act in a manner that
facilitates reasonable access to credit by
consumers and businesses through the
issuance of ABCP backed by consumer
and business receivables. Finally, as
noted above, an originator-seller would
be subject to the same restrictions on
transferring the retained eligible
horizontal residual interest to a third
party as would apply to sponsors under
the rule.
82 The sponsor of an ABCP conduit satisfies the
definition of ‘‘sponsor’’ under the proposed rules. If
the conduit does not satisfy the conditions for an
‘‘eligible ABCP conduit,’’ the sponsor must retain
credit risk in accordance with another risk retention
option included in the proposal (unless an
exemption for the transaction exists).
83 See 15 U.S.C. 78o–11(1)(c)(G)(iv) and (d)
(permitting the Commission and the Federal
banking agencies to allow the allocation of risk
retention from a sponsor to an originator).
84 15 U.S.C. 78o–11(d)(2). These factors are
whether the assets sold to the securitizer have
terms, conditions, and characteristics that reflect
low credit risk; whether the form or volume of
transactions in securitization markets creates
incentives for imprudent origination of the type of
loan or asset to be sold to the securitizer; and the
potential impact of the risk retention obligations on
the access of consumers and businesses to credit on
reasonable terms, which may not include the
transfer of credit risk to a third party.
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Request for Comment
59. Is the proposed risk retention
option for eligible ABCP conduits
appropriate?
60(a). Have the Agencies
appropriately defined the terms (such as
an eligible ABCP conduit, intermediate
SPV and originator-seller) that govern
use of this option? 60(b). Is the foregoing
description of ABCP structures
accurate? 60(c) Are there additional
ABCP structures that are not easily
adaptable to the risk retention options
proposed? 60(d). If so, should the
proposed ABCP option be revised to
include these structures and if so, how?
61. Should the proposed option for
securitizations structured using ABCP
conduits require financial disclosure
regarding the liquidity provider?
62(a). Also, should other entities be
permitted to be liquidity providers for
purposes of the rule? For example,
should the rule permit an insurance
company to be an eligible liquidity
provider if the company is in the
business of providing credit protection
(such as a bond insurer or re-insurer)
and is subject to supervision by a State
insurance regulator or is a foreign
insurance company subject to
comparable regulation to that imposed
by U.S. insurance companies?
62(b). Why or why not?
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63. In addition, the Agencies seek
confirmation that the terms of this
option effectively prevent structures
such as SIVs and ABCP programs that
operate as arbitrage programs from using
this option.
64. Should the rule, as proposed,
allow the liquidity provider to be a
depository institution holding company
or a subsidiary of a depository
institution instead of just the depository
institution?
65. Are the disclosures proposed
sufficient to provide investors with all
material information concerning the
originator-seller that will retain an
interest in the securitization transaction
and of each regulated liquidity provider
that provides liquidity support to the
eligible ABCP conduit, as well as enable
investors and the Agencies to monitor
whether the sponsor has complied with
the rule?
66(a). Should additional disclosures
be required? 66(b). If so, what should be
required and why? 66(c). For example,
should a sponsor be required to disclose
the material assumptions and
methodology used in determining the
aggregate dollar amount of interests
issued by each intermediate SPV? 66(d).
Would such a disclosure be beneficial to
investors? 66(e). In light of the broad
range of asset classes that underlie
ABCP conduits, would such a
disclosure pose any operational or other
challenges for sponsors of ABCP
conduits?
67(a). Should we, as proposed, require
that the ABCP be for a term of 270 days
or less? 67(b). Should we allow for a
longer term, such as up to one year?
7. Commercial Mortgage-Backed
Securities
Section 15G(c)(1)(E) of the Exchange
Act provides that, with respect to
securitizations involving commercial
mortgages, the regulations prescribed by
the Agencies may provide for ‘‘retention
of the first-loss position by a third-party
purchaser that specifically negotiates for
the purchase of such first loss position,
holds adequate financial resources to
back losses, provides due diligence on
all individual assets in the pool before
the issuance of the asset-backed
securities, and meets the same standards
for risk retention as the Federal banking
agencies and the Commission require of
the securitizer[.]’’ 85 In light of this
provision, the Agencies are proposing to
permit a sponsor of ABS that is
collateralized by commercial real estate
loans to meet its risk retention
requirements if a third-party purchaser
acquires an eligible horizontal residual
85 15
U.S.C. 78o–11(c)(1)(E)(iv).
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interest in the issuing entity in the same
form, amount, and manner as the
sponsor would have been required to
retain under the horizontal risk
retention option and certain additional
conditions are met.
The allocation of a first-loss position
to a third-party purchaser has been
common practice in CMBS transactions
for a number of years.86 The third-party
purchaser has been commonly referred
to in the CMBS marketplace as a ‘‘Bpiece buyer’’ 87 because the CMBS
tranche or tranches purchased by this
investor were either unrated by the
credit rating agencies or assigned a
below-investment grade credit rating.
Typically a B-piece buyer purchases at
a discount to face value the most
subordinate tranche in the cash flow
waterfall of the CMBS transaction. In
order to manage its risk, the B-piece
buyer often is involved early in the
securitization process and has
significant influence over the selection
of pool assets. For example, the B-piece
buyer often performs ‘‘due diligence’’ on
the pool assets, which often means a
review of the loans in the pool at the
property and loan level. As a result of
this review, a B-piece buyer may request
that specific loans be removed from the
pool prior to securitization.
Additionally, a B-piece buyer is often
designated as the ‘‘controlling class’’
under the terms of the pooling and
servicing agreement governing the
CMBS transaction, and in accordance
with its rights as the controlling class,
a B-piece buyer often names itself, or an
affiliated company, as the ‘‘special
servicer’’ in the transaction. Such
servicer typically is the servicer
authorized to service loans in default or
having other non-payment issues. The
control of special servicing rights by the
B-piece buyer has the potential to create
conflicts of interest with the senior
certificate holders to the securitization.
For example, the control of special
servicing rights would allow the B-piece
buyer to directly or indirectly manage
any loan modifications. While some
CMBS transactions required an
‘‘operating advisor’’ to oversee the
servicing activities of the special
servicer, in many instances this
operating advisor works on behalf of the
controlling class (i.e., the B-piece buyer
unless and until losses reduced its
junior tranche to zero). To help better
address the potential conflict created by
special servicer arrangements involving
86 See,
e.g., Board Report.
note that under the proposal there is no
requirement that the tranche or tranches purchased
by the third-party purchaser be assigned any
particular credit rating.
87 We
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24109
B-piece buyers, newly issued CMBS for
which investors received financing
through the Term-Asset Backed
Securities Lending Facility (‘‘TALF’’)
were required to have an independent
operating advisor that acted on behalf of
the investors as a collective whole, had
consultative rights over major decisions
of the special servicer, and had the
ability to recommend replacement of the
special servicer.88 These operating
advisor requirements also were coupled
with enhanced disclosures to investors
regarding major decisions by the B-piece
buyer and special servicer. Aspects of
these TALF requirements have been
incorporated into recent CMBS
transactions undertaken after the closing
of the TALF to new financings.
In light of the specific provisions of
Section 15G(c)(1)(E) and the historical
market practice of third-party
purchasers acquiring first-loss positions
in CMBS transactions, the Agencies’
proposal would allow a sponsor to meet
its risk retention requirements under the
rule if a third-party purchaser retains
the necessary exposure to the credit risk
of the underlying assets provided six
conditions are met. These conditions are
designed to help ensure that the form,
amount, and manner of the third-party
purchaser’s risk retention are consistent
with the purposes of section 15G of the
Exchange Act. This option would be
available only for securitization
transactions where commercial real
estate loans constitute at least 95
percent of the unpaid principal balance
of the assets being securitized.89
The first condition requires that the
third-party purchaser retain an eligible
88 The TALF was a special lending facility
established by the Federal Reserve and the Treasury
Department in response to the financial crisis to
assist the financial markets in accommodating the
credit needs of consumers and businesses of all
sizes by facilitating the issuance of ABS
collateralized by a variety of consumer and business
loans. The TALF also was intended to improve the
market conditions for ABS more generally.
Additional information concerning the TALF is
available on the public Web sites of the Board (see
https://www.federalreserve.gov/monetarypolicy/bst_
lendingother.htm ) and the Federal Reserve Bank of
New York (see https://www.newyorkfed.org/markets/
talf.html).
89 See proposed rules at § l.10(a). ‘‘Commercial
real estate loan’’ is defined in § l.16 of the
proposed rules to mean a loan secured by a
property with five or more single family units, or
by nonfarm nonresidential real property, the
primary source (fifty (50) percent or more) of
repayment for which is expected to be derived from
the proceeds of the sale, refinancing, or permanent
financing of the property; or rental income
associated with the property other than rental
income derived from any affiliate of the borrower.
A commercial real estate loan does not include a
land development and construction loan (including
1- to 4-family residential or commercial
construction loans); any other land loan; a loan to
a real estate investment trust (REIT); or an
unsecured loan to a developer.
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horizontal residual interest in the
securitization in the same form, amount,
and manner as would be required of the
sponsor under the horizontal risk
retention option (proposed § l.5).90
Accordingly, the interest acquired by
the third-party purchaser must be the
most junior interest in the issuing
entity, and must be subject to the same
limits on payments as would apply if
the eligible horizontal residual interest
were held by the sponsor pursuant to
the horizontal risk retention option.
The second condition would require
that the third-party purchaser pay for
the first-loss subordinated interest in
cash at the closing of the securitization
without financing being provided,
directly or indirectly, from any other
person that is a party to the
securitization transaction (including,
but not limited to, the sponsor,
depositor, or an unaffiliated servicer),
other than a person that is a party solely
by reason of being an investor.91 This
would prohibit the third-party
purchaser or an affiliate of the thirdparty purchase from obtaining financing
from any such person as well as from
any affiliate of any such person. These
requirements should help ensure that
the third-party purchaser has sufficient
financial resources to fund the
acquisition of the first-loss subordinated
interest and absorb losses on the
underlying assets to which it would be
exposed through this interest.92
The third condition relates to the
third-party purchaser’s review of the
assets collateralizing the ABS. This
proposed condition would require that
the third-party purchaser perform a
review of the credit risk of each asset in
the pool prior to the sale of the assetbacked securities. This review must
include, at a minimum, a review of the
underwriting standards, collateral, and
expected cash flows of each commercial
loan in the pool.
The fourth condition is intended to
address the potential conflicts of
interest that can arise when a thirdparty purchaser serves as the
‘‘controlling class’’ of a CMBS
transaction. This condition would
prohibit a third-party purchaser from
(i) being affiliated with any other party
to the securitization transaction (other
than investors); or (ii) having control
rights in the securitization (including,
but not limited to acting as servicer or
special servicer) that are not collectively
proposed rules at § l.10.
proposed rules at § l.10.
92 This requirement is consistent with section
15G(b)(1)(E)(ii) of the Exchange Act, which
provides that the Agencies may consider whether
a third-party purchaser of CMBS ‘‘holds adequate
financial resources to back losses.’’
90 See
91 See
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shared by all other investors in the
securitization. The proposed prohibition
of control rights related to servicing,
would be subject to an exception,
however, if the underlying
securitization transaction documents
provide for the appointment of an
independent operating advisor
(Operating Advisor) with certain powers
and responsibilities.93 Under the
proposal, an ‘‘Operating Advisor’’ would
be defined as a party that (i) is not
affiliated with any other party to the
securitization, (ii) does not directly or
indirectly have any financial interest in
the securitization other than in fees
from its role as Operating Advisor, and
(iii) is required to act in the best interest
of, and for the benefit of, investors as a
collective whole.
The Agencies believe that the
introduction of an independent
Operating Advisor would minimize the
ability of third-party purchasers to
manipulate cash flows through special
servicing. In approving loans for
inclusion in the securitization, the
third-party purchaser will be mindful of
the limits on its ability to offset the
consequences of poor underwriting
through servicing tactics if a loan
becomes troubled, thereby providing
stronger incentive for the third-party
purchaser to be diligent in assessing
credit quality of the pool assets at the
time of securitization. For these types of
securitization transactions, the thirdparty purchaser’s review of each loan
can serve as an effective check on the
underwriting quality and credit risk of
the underlying loans and the reliability
of key information utilized.
Further, in order for a third-party
purchaser to have servicing rights in
connection with the securitization
transaction, the securitization
transaction documents must require that
the Operating Advisor have certain
powers and responsibilities in order to
ensure that the Operating Advisor can
effectively fulfill its advisory role in the
transaction.94 For example, as proposed,
the transaction documents must require
that, if the third-party purchaser or an
affiliate acts as servicer, the servicer
consult with the Operating Advisor in
connection with, and prior to, any major
decision in connection with the
93 See proposed rules at § l.10(a)(4)(i). The
proposal also includes a de minimis exception to
the general prohibition on affiliation with other
parties to the securitization transaction. Under this
de minimis exception, the third-party purchaser
would be permitted to be affiliated with one or
more originators of the securitized assets so long as
the assets contributed by such originator(s)
collectively comprise less than 10 percent of the
assets in the pool (as measured by dollar volume).
See proposed rules at § l.10(a)(4)(ii).
94 See proposed rules at § l.10(a)(4)(B)–(E).
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servicing of the securitized assets. Major
decisions would include, without
limitation, any material modification of,
or waiver with respect to, any provision
of a loan agreement, any foreclosure
upon or comparable conversion of the
ownership of a property, and any
acquisition of a property.
The securitization transaction
documents must also provide that the
Operating Advisor is responsible for
reviewing the actions of any servicer
that is, or is, affiliated with the thirdparty purchaser and for issuing a report
to investors and the issuing entity, on a
periodic basis, concerning whether the
Operating Advisor believes, in its sole
discretion exercised in good faith, the
servicer is in compliance with any
standards required of the servicer as
provided in the applicable transaction
documents, and if not, the standard(s)
with which the servicer is out of
compliance. In addition, the
securitization transaction documents
must also provide that the Operating
Advisor has the authority to recommend
that a servicer that is, or is affiliated
with, the third-party purchaser be
replaced by a successor servicer if the
Operating Advisor determines, in its
sole discretion exercised in good faith,
that the servicer has failed to comply
with any standard required of the
servicer as provided in the applicable
transaction documents and that such
replacement would be in the best
interest of the investors as a collective
whole. The relevant transaction
documents must provide that, if such a
recommendation is made, the servicer
that is, or affiliated with, the third-party
purchaser must be replaced unless a
majority of each class of certificate
holders eligible to vote on the matter
votes to retain the servicer.
Consistent with other disclosure
requirements under the proposed rules,
the fifth proposed condition requires
that the sponsor provide, or cause to be
provided, potential purchasers certain
information concerning the third-party
purchaser and other information
concerning the transaction. Specifically,
the proposal would require that a
sponsor disclose to potential investors a
reasonable time before the sale of assetbacked securities and, upon request, to
the Commission and its appropriate
Federal banking agency (if any) the
name and form of organization of the
third-party purchaser, a description of
the third-party purchaser’s experience
in investing in CMBS, and any other
information regarding the third-party
purchaser or the third-party purchaser’s
retention of the eligible horizontal
residual interest that is material to
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investors in light of the circumstances of
the particular securitization transaction.
Additionally, a sponsor would be
required to disclose the amount of the
eligible horizontal residual interest that
the third-party purchaser will retain (or
has retained) in the transaction
(expressed as a percentage of ABS
interests in the issuing entity and as a
dollar amount); the purchase price paid
for such interest; the material terms of
such interest; and the amount of the
interest that the sponsor would have
been required to retain if the sponsor
had retained an interest in the
transaction pursuant to the horizontal
menu option. The material assumptions
and methodology used in determining
the aggregate amount of ABS interests of
the issuing entity, including any
estimated cash flows and the discount
rate used, also must be included in the
disclosure. The proposed rules would
require that the sponsor provide, or
cause to be provided, to potential
investors the representations and
warranties concerning the securitized
assets, the schedule of any securitized
assets that are determined not to comply
with such representations and
warranties, and what factors were used
to make the determination that a
securitized asset should be included in
the pool notwithstanding that it did not
comply with such representations and
warranties, such as compensating
factors or a determination that the
exceptions(s) were not material.
Finally, the sixth condition would
require that any third-party purchaser
acquiring an eligible horizontal residual
interest under this option comply with
the hedging, transfer and other
restrictions applicable to such interest
under the proposed rules if the thirdparty purchaser was a sponsor who had
acquired the interest under the
horizontal risk retention option.
Although the third-party purchaser
may retain the credit risk required
under § l.3 of the proposed rules, the
proposal provides that the sponsor
remains responsible for compliance
with the requirements described above.
Therefore, consistent with the menu
option available to eligible ABCP
conduits, the proposal would require
that the sponsor maintain and adhere to
policies and procedures to monitor the
third-party purchaser’s compliance with
these requirements. In the event that the
sponsor determines that the third-party
purchaser no longer complies with the
requirements of the rule (for example,
because the third-party purchaser has
sold the interest it was required to
retain), the sponsor must promptly
notify the investors in the securitization
transaction of such noncompliance.
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Request for Comment
68(a). Should the rules allow a thirdparty purchaser to retain the required
amount of risk in a CMBS transaction as
described above?
68(b). Why or why not?
69(a). Should a third-party purchaser
option be available to other asset classes
besides CMBS? Would expanding this
option to other asset classes fulfill the
purposes of section 15G? 69(b). If so,
would any adjustments or requirements
be necessary?
70. Should the use of this option be
conditioned, as proposed, on a
requirement that the third-party
purchaser separately examine the assets
in the pool and/or not sell or hedge the
interest it is required to retain?
71(a). Should the use of this option be
conditioned, as proposed, on the
requirement that the sponsor disclose
the actual purchase price paid by the
third-party purchaser for the eligible
horizontal residual interest? 71(b). Why
or why not?
72. Is any disclosure concerning the
financial resources of the third-party
purchaser necessary in light of the
requirement that the third-party
purchaser fund the acquisition of the
eligible horizontal residual interest in
cash without direct or indirect financing
from a party to the transaction?
73(a). Should the rule specify the
particular types of information about a
third-party purchaser that should be
disclosed, rather than requiring
disclosure of any other information
regarding the third-party purchaser that
is material to investors in light of the
circumstances of the particular
securitization transaction? 73(b). Should
the specific types of information about
a third-party purchaser be in addition to
any other information regarding the
third-party purchaser that is material to
investors in light of the circumstances of
the particular securitization transaction?
74. Are the conditions relating to
servicing, including those related to an
Operating Advisor, appropriate or
should they be modified or
supplemented?
75(a). Should the Agencies require
any other disclosure relating to
representations and warranties
concerning the assets for CMBS?
76(a). We are aware of at least one
industry group developing model
representations and warranties for
CMBS.95 Should the rule require that a
blackline of the representations and
95 See, e.g., comment letter to the Commission
from CRE Finance Council dated January 19, 2011,
available at https://www.sec.gov/comments/df-titleix/asset-backed-securities/assetbackedsecurities37.pdf.
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warranties for the securitization
transaction against an industry-accepted
standard for model representations and
warranties be provided to investors at a
reasonable time prior to sale? 76(b).
Would this provide more information
regarding the adequacy of the
representation and warranties being
provided? 76(c). Would this be a costly
requirement? 76(d). Could investors
easily create their own blacklines if
needed?
77. Are the disclosures proposed
sufficient to provide investors with all
material information concerning the
third-party purchaser’s retained interest
in the securitization transaction, as well
as to enable investors and the Agencies
to monitor whether the sponsor has
complied with the rule?
78(a). Should additional disclosures
be required? 78(b). If so, what should be
required and why?
8. Treatment of Government-Sponsored
Enterprises
Section l.11 of the proposed rules
would govern the credit risk retention
requirements for the Federal National
Mortgage Association (Fannie Mae) and
the Federal Home Loan Mortgage
Corporation (Freddie Mac) (jointly, the
‘‘Enterprises’’) while operating under the
conservatorship or receivership of
FHFA, as well as for any limited-life
regulated entity succeeding to the
charter of either Fannie Mae or Freddie
Mac pursuant to section 1367 of the
Federal Housing Enterprises Financial
Safety and Soundness Act of 1992
(Safety and Soundness Act).96 The
primary business of the Enterprises
under their respective charter acts is to
pool conventional mortgage loans and to
issue securities backed by these
mortgages that are fully guaranteed as to
the timely payment of principal and
interest by the issuing Enterprise.97
Because of these activities, Fannie Mae
or Freddie Mac (or a successor limitedlife regulated entity) would be the
sponsor of the asset-backed securities
that it issues for purposes of section
15G.
In considering how to address in the
proposal the risk retention requirements
of section 15G with respect to the
mortgage-backed securities issued, and
fully guaranteed as to timely payment of
principal and interest, by the
Enterprises or a successor limited-life
regulated entity, the Agencies
considered several factors. Because
Fannie Mae and Freddie Mac fully
guarantee the timely payment of
96 12
U.S.C. 4617.
12 U.S.C. 1451, et seq. (Freddie Mac); 12
U.S.C. 1716, et seq. (Fannie Mae).
97 See
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principal and interest on the mortgagebacked securities they issue, the
Enterprises are exposed to the entire
credit risk of the mortgages that
collateralize those securities.98
Both Fannie Mae and Freddie Mac
have been operating under the
conservatorship of FHFA since
September 6, 2008. As conservator,
FHFA has assumed all powers formerly
held by each Enterprise’s officers,
directors, and shareholders. In addition,
FHFA, as conservator, is authorized to
take such actions as may be necessary
to restore each Enterprise to a sound
and solvent condition and that are
appropriate to preserve and conserve
the assets and property of each
Enterprise.99 The primary goals of the
conservatorships are to help restore
confidence in the Enterprises, enhance
their capacity to fulfill their mission,
mitigate the systemic risk that
contributed directly to instability in
financial markets, and maintain the
Enterprises’ secondary mortgage market
role until their future is determined
through legislation. To these ends,
FHFA’s conservatorship of the
Enterprises is directed toward
minimizing losses, limiting risk
exposure, and ensuring that the
Enterprises price their services to
adequately address their costs and risk.
Any limited-life regulated entity
established by FHFA to succeed to the
charter of an Enterprise also would
operate under the direction and control
of FHFA, acting as receiver of the
related Enterprise.100
Concurrently with being placed in
conservatorship under section 1367 of
the Safety and Soundness Act, each
Enterprise entered into a Senior
Preferred Stock Purchase Agreement
(PSPA) with the United States
Department of the Treasury (Treasury).
Under each PSPA, Treasury purchased
senior preferred stock of each
Enterprise. In addition, if FHFA
determines that the Enterprise’s
liabilities have exceeded its assets under
generally accepted accounting
principles (GAAP), Treasury will
contribute cash capital to that Enterprise
in an amount equal to the difference
between its liabilities and assets. In
exchange for this cash contribution, the
liquidation preference of the senior
preferred stock purchased from each
98 The charters of Fannie Mae and Freddie Mac
also place limitations on the types of mortgages that
the Enterprises may guarantee and securitize.
99 See 12 U.S.C. 4617(b)(2)(D).
100 See 12 U.S.C. 4617(i). The affairs of a limitedlife regulated entity must be wound up not later
than two years after its establishment, subject to the
potential for a maximum of three one-year
extensions at the discretion of the Director of FHFA.
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Enterprise under the respective PSPA
increases in an equivalent amount. The
senior preferred stock of each Enterprise
purchased by Treasury is senior to all
other preferred stock, common stock or
other capital stock issued by the
Enterprise, and dividends on the
aggregate liquidation preference of the
senior preferred stock purchased by
Treasury are payable at a rate of 10
percent per annum.101 Under each
PSPA, Treasury’s commitment to each
Enterprise is the greater of (1) $200
billion, or (2) $200 billion plus the
cumulative amount of the Enterprise’s
net worth deficit as of the end of any
calendar quarter in 2010, 2011 and
2012, less any positive net worth as of
December 31, 2012.102 Accordingly, the
PSPAs provide support to the relevant
Enterprise should the Enterprise have a
net worth deficit as a result of the
Enterprise’s guaranty of timely payment
on the asset-backed securities it issues.
By their terms, the PSPA with an
Enterprise may not be assigned or
transferred, or inure to the benefit of,
any limited-life regulated entity
established with respect to the
Enterprise without the prior written
consent of Treasury.
In light of the foregoing, § l.11 of the
proposed rules provides that the
guaranty provided by an Enterprise
while operating under the
conservatorship or receivership of
FHFA with capital support from the
United States will satisfy the risk
retention requirements of the Enterprise
under section 15G of the Exchange Act
with respect to the mortgage-backed
securities issued by the Enterprise.
Similarly, an equivalent guaranty
provided by a limited-life regulated
entity that has succeeded to the charter
of an Enterprise, and that is operating
under the direction and control of FHFA
under section 1367(i) of the Safety and
Soundness Act, will satisfy the risk
retention requirements, provided that
the entity is operating with capital
support from the United States. If either
Enterprise or a successor limited-life
regulated entity were to begin to operate
other than as provided in the proposed
rules, that Enterprise or entity would no
longer be able to avail itself of the credit
risk retention option set forth in § l.11.
For similar reasons, the proposed
rules provide that the premium capture
cash reserve account requirements in
§ l.12, as well as the hedging and
financing prohibitions in § l.14(b), (c),
101 Under the PSPAs, the rate rises to 12 percent
per annum if the dividends are not paid in cash.
102 The PSPAs also provide for the retained
portfolios of each Enterprise to be reduced over
time.
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and (d), of the proposed rules shall not
apply to an Enterprise while operating
under the conservatorship or
receivership of FHFA with capital
support from the United States, or to a
limited-life regulated entity that has
succeeded to the charter of an
Enterprise and that is operating under
the direction and control of FHFA with
capital support from the United States.
In the past, the Enterprises have
sometimes acquired pool insurance to
cover a percentage of losses on the
mortgage loans comprising the pool.103
Because § l.11 requires each
Enterprise, while in conservatorship or
receivership, to hold 100 percent of the
credit risk on MBS that it issues, the
prohibition on hedging related to the
credit risk that the retaining sponsor is
required to retain would limit the ability
of the Enterprises to require such pool
insurance in the future. Because the
exception would continue only so long
as the relevant Enterprise operates
under the control of FHFA and with
capital support from the United States,
the proposed exception from these
restrictions should be consistent with
the maintenance of quality underwriting
standards, in the public interest, and
consistent with the protection of
investors.
A sponsor utilizing this section shall
provide to investors, in written form
under the caption ‘‘Credit Risk
Retention’’ and, upon request, to FHFA
and the Commission, a description of
the manner in which it has met the
credit risk retention requirement of this
part.
The Agencies recognize both the need
for, and importance of, reform of the
Enterprises. In recent months, the
Administration and Congress have been
considering a variety of proposals to
reform the housing finance system and
the Enterprises. The Agencies expect to
revisit and, if appropriate modify § l.11
of the proposed rules after the future of
the Enterprises and of the statutory and
regulatory framework for the Enterprises
becomes clearer.
Request for Comment
79. Is our proposal regarding the
treatment of the Enterprises
appropriate?
80. Would applying the hedging
prohibition to all of the credit risk that
the Enterprises are required to retain
when using § l.11 to satisfy the risk
retention requirements be an unduly
burdensome result for the Enterprises?
103 Typically, insurers would pay the first losses
on a pool of loans, up to one or two percent of the
aggregate unpaid principal balance of the pool.
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81(a). Instead of the broad exception
from the hedging prohibition for the
Enterprises, when satisfying the risk
retention requirements pursuant to
§ l.11, should the rules prohibit an
Enterprise from hedging five percent of
the total credit risk in any securitization
transaction where the Enterprise acts as
a sponsor (thus ensuring the Enterprise
retains at least that amount of exposure
to the credit risk of the assets)? 81(b).
Would this be consistent with statutory
intent? 81(c). Would that be feasible for
the Enterprises to monitor?
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9. Premium Capture Cash Reserve
Account
In many securitization transactions,
particularly those involving residential
and commercial mortgages, conducted
prior to the financial crisis, sponsors
sold premium or interest-only tranches
in the issuing entity to investors, as well
as more traditional obligations that paid
both principal and interest received on
the underlying assets. By selling
premium or interest-only tranches,
sponsors could thereby monetize at the
inception of a securitization transaction
the ‘‘excess spread’’ that was expected to
be generated by the securitized assets
over time. By monetizing excess spread
before the performance of the
securitized assets could be observed and
unexpected losses realized, sponsors
were able to reduce the impact of any
economic interest they may have
retained in the outcome of the
transaction and in the credit quality of
the assets they securitized. This created
incentives to maximize securitization
scale and complexity, and encouraged
aggressive underwriting.
In order to achieve the goals of risk
retention, the Agencies propose to
adjust the required amount of risk
retention to account for any excess
spread that is monetized at the closing
of a securitization transaction.
Otherwise, a sponsor could effectively
negate or reduce the economic exposure
it is required to retain under the
proposed rules. Furthermore,
prohibiting sponsors from receiving
compensation in advance for excess
spread income expected to be generated
by securitized assets over time should
better align the interests of sponsors and
investors and promote more robust
monitoring by the sponsor of the credit
risk of securitized assets, thereby
encouraging the use of sound
underwriting in connection with
securitized loans. It also should promote
simpler and more coherent
securitization structures as sponsors
would receive excess spread over time
and would not be able to reduce the
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economic exposure they are required to
retain.
Accordingly, as proposed, if a sponsor
structures a securitization to monetize
excess spread on the underlying
assets—which is typically effected
through the sale of interest-only
tranches or premium bonds—the
proposed rule would ‘‘capture’’ the
premium or purchase price received on
the sale of the tranches that monetize
the excess spread and require that the
sponsor place such amounts into a
separate ‘‘premium capture cash reserve
account.’’ 104 The amount placed into
the premium capture cash reserve
account would be separate from and in
addition to the sponsor’s base risk
retention requirement under the
proposal’s menu of options, and would
be used to cover losses on the
underlying assets before such losses
were allocated to any other interest or
account. As a likely consequence to this
proposed requirements, the Agencies
expect that few, if any, securitizations
would be structured to monetize excess
spread at closing and, thus, require the
establishment of a premium capture
cash reserve account, which should
provide the benefits described above.
Specifically, the proposal would
require that a sponsor retaining credit
risk under the vertical, horizontal, Lshaped, or revolving asset master trust
options of the proposed rules establish
and fund (in cash) at closing a premium
capture cash reserve account in an
amount equal to the difference (if a
positive amount) between (i) the gross
proceeds received by the issuing entity
from the sale of ABS interests in the
issuing entity to persons other than the
sponsor (net of closing costs paid by a
sponsor or the issuing entity to
unaffiliated parties); and (ii) 95 percent
of the par value of all ABS interests in
the issuing entity issued as part of the
transaction. The 95 percent of par value
amount is designed to take into account
the five percent interest that the sponsor
is required to retain in the issuing entity
under each of these options.
If the sponsor will retain (or caused to
be retained) credit risk under the
representative sample, ABCP, or CMBS
third-party purchaser options of the
proposed rules, the sponsor would have
to fund in cash at closing a premium
capture cash reserve account in an
amount equal to the difference (if a
positive amount) between (i) the gross
proceeds received by the issuing entity
from the sale of ABS interests to persons
other than the sponsor (net of the
closing costs described above), and (ii)
100 percent of the par value of the ABS
104 See
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interests in the issuing entity issued as
part of the transaction. In these cases,
the proposal uses 100 percent (rather
than 95 percent) of the par value of the
ABS interests issued because the
relevant menu options do not require
that the sponsor itself retain any of the
ABS interests issued in the transaction
and, accordingly, potentially all of such
interests could be sold to third parties.
Under the proposed rules, a premium
capture cash reserve account would
have to be established and funded
whenever a positive amount resulted
from the relevant calculation described
in the preceding paragraphs. These
calculations are designed to capture the
amount of excess spread that a sponsor
may seek to immediately monetize at
closing such as through the issuance of
an interest-only tranche (which may
have a nominal value assigned to it, but
does not have a par value) or premium
bonds that are sold for amounts in
excess of their par value. On the other
hand, the proposal would not require a
sponsor to establish and fund a
premium capture cash reserve account if
the sponsor does not structure the
securitization to immediately monetize
excess spread, thus resulting in no
‘‘premium’’ that would be captured by
the calculations described above.
Accordingly, existing types of
securitization structures that do not
monetize excess spread at closing would
not trigger establishment of a premium
capture reserve account. Going forward,
sponsors would have the ability to
structure their securitization
transactions in a manner that does not
monetize excess spread at closing and
would not require the establishment of
such a premium capture cash reserve
account.
The proposed rules include a number
of conditions and limitations on a
premium capture cash reserve account.
Specifically, the proposed rules would
require that the premium capture cash
reserve account be held by the trustee,
or person performing functions similar
to a trustee, in the name and for the
benefit of the issuing entity. In addition,
until all ABS interests in the issuing
entity (including junior or residual
interests) are paid in full or the issuing
entity is dissolved, amounts in the
account would be required to be
released to satisfy payments on ABS
interests in the issuing entity (in order
of the securitization transaction’s
priority of payments) on any payment
date where the issuing entity has
insufficient funds to make such
payments. The proposal specifies that,
the determination of whether
insufficient funds are available must be
made prior to the allocation of any
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losses to (i) any eligible horizontal
residual interest held under the
horizontal, L-shaped, ABCP, or CMBS
third-party purchaser risk retention
options; or (ii) the class of ABS interests
in the issuing entity that is allocated
losses before other classes if no eligible
horizontal residual interest in the
issuing entity is held under such
options (or if the contractual terms of
the securitization transaction do not
provide for the allocation of losses by
class, the class of ABS interests that has
the most subordinate claim to payment
of principal or interest by the issuing
entity). Thus, amounts in a premium
capture reserve account would be used
to cover losses on the underlying assets
first before any other interest in or
account of the issuing entity, including
an eligible horizontal residual interest
or a horizontal cash reserve account.105
In order to prevent a sponsor from
circumventing the premium capture
requirements of the proposal by taking
back at closing, and then reselling,
additional ABS interests (thereby
reducing the gross proceeds received at
closing from the sale of interests to third
parties), the proposal includes a special
anti-evasion provision. Under this
provision, the retaining sponsor would
need to add to the ‘‘gross proceeds’’
amount that is used to calculate the
amount (if any) that must be placed in
the premium capture cash reserve
account an amount equal to the par
value of any ABS interest (or the fair
value of the ABS interest if it does not
have a par value) in the issuing entity
that is directly or indirectly transferred
to the sponsor in connection with the
closing of the securitization transaction
and that (i) the sponsor does not intend
to hold to maturity; or (ii) represents a
contractual right to receive some or all
of the interest, and no more than a
minimal amount of principal payments
received by the issuing entity, and that
has a priority of payment of interest (or
principal, if any) senior to the most
subordinated class of interests in the
issuing entity. The condition in (i)
above is designed to capture proceeds
from those interests that the sponsor
retains at closing, but expects to sell to
third parties after closing. ABS interests
retained and expected to be held to
maturity by the sponsor increase the
105 Until needed to cover losses, amounts in a
premium capture cash reserve account may be
invested in U.S. Treasury securities with remaining
maturities of 1 year or less and in fully-insured
deposits at one or more insured depository
institutions. Interest received on such investments
could be released from the account to any person
(including the sponsor), but the principal amount
invested must remain in the account and available
to absorb losses.
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sponsor’s exposure to the credit risk of
the underlying assets, thus mitigating
the concerns of a sponsor trying to
evade the risk retention requirements.
A sponsor could, however, seek to
achieve the same economic benefits that
could be achieved from the sale of an
interest-only tranche by retaining an
interest-only tranche at or near the top
of the waterfall that diverts to the
sponsor excess spread on the underlying
assets before other interests are paid.
For this reason, the proposal requires
that the value of any interest-only
tranche that the sponsor retains at
closing be included in the calculation of
the premium capture reserve account
(regardless of whether the sponsor
intends to hold it to maturity) if such
tranche has priority of payment senior
to the most subordinated class of
interests in the issuing entity.106
Sponsors required to fund a premium
capture cash reserve account under the
proposed rules would be required to
provide potential investors before the
sale of asset-backed securities as part of
the securitization transaction and, upon
request, the Commission and its
appropriate Federal banking agency (if
any) disclosures describing the dollar
amount the sponsor was required to
place in the account and the actual
amount the sponsor will deposit (or has
deposited) in the account at closing. The
sponsor would also be required to
disclose the material assumptions and
methodology used in (i) determining the
fair value of any ABS interest in the
issuing entity that does not have a par
value (and that was used in calculating
the amount required for the premium
capture cash reserve account) and is
subject to the anti-evasion provisions
described above; and (ii) the aggregate
amount of ABS interests in the issuing
entity, including those pertaining to any
estimated cash flows and the discount
rate used.
Request for Comment
82. Do you believe the premium
capture cash reserve account will be an
effective mechanism at capturing the
monetization of excess spread,
promoting sponsor monitoring of credit
quality, and promoting the sound
underwriting of securitized assets?
106 To
avoid double counting, the calculation
would not include any interest-only tranche
required to be retained by a sponsor using the
vertical or L-shaped options to meet its risk
retention requirement. Also, because an eligible
horizontal residual interest, by definition, must
have the most subordinated claim to payments of
both principal and interest, a sponsor selecting this
option of risk retention would be required to
include the value of any excess spread tranche
retained by the sponsor in its calculation of gross
proceeds received by the issuing entity.
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83. The Agencies seek input on
alternative methods for removing
incentives to monetize excess spread
and whether the proposed premium
capture reserve account would have any
adverse effects on securitizations that
are inconsistent with the purposes of
section 15G. For example, is the method
of calculating the premium capture cash
reserve account appropriate or are there
alternative methodologies that would
better achieve the purpose of the
account?
84. Should amounts from the
premium capture reserve account be
used only for amounts due to the seniormost class of ABS interests?
85(a). Alternatively, are the
conditions imposed on the premium
capture cash reserve account more than
what is needed to achieve the objectives
of the account? 85(b). If so, how?
C. Allocation to the Originator
As a general matter, the proposed
rules would provide that the sponsor of
a securitization transaction is solely
responsible for complying with the risk
retention requirements established
under section 15G of the Exchange Act.
However, subject to a number of
considerations, section 15G authorizes
the Agencies to allow a sponsor to
allocate at least a portion of the credit
risk it is required to retain to the
originator(s) of securitized assets.107
Accordingly, subject to conditions and
restrictions discussed below, § l.13 of
the proposed rules permits a sponsor to
reduce its required risk retention
obligations in a securitization
transaction by the portion of risk
retention obligations assumed by the
originator(s) of the securitized assets.
When determining how to allocate the
risk retention requirements, the
Agencies are directed to consider
whether the assets sold to the sponsor
have terms, conditions, and
characteristics that reflect low credit
risk; whether the form or volume of the
transactions in securitization markets
creates incentives for imprudent
origination of the type of loan or asset
to be sold to the sponsor; and the
potential impact of the risk retention
obligations on the access of consumers
107 As discussed above, 15 U.S.C. 78o–11(a)(4)
defines the term ‘‘originator’’ as a person who,
through the extension of credit or otherwise, creates
a financial asset that collateralizes an asset-backed
security; and who sells an asset directly or
indirectly to a securitizer (i.e., a sponsor or
depositor). Because this definition refers only to the
person that ‘‘creates’’ a loan or other receivable, only
the original creditor of a loan or receivable—and
not a subsequent purchaser or transferee—would be
deemed to be the ‘‘originator’’ for purposes of the
proposed rules. See 15 U.S.C. 78o–11(c)(1)(G)(iv);
(d).
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and businesses to credit on reasonable
terms, which may not include the
transfer of credit risk to a third party.108
The Agencies are proposing a
framework that would permit a sponsor
of a securitization to allocate a portion
of its risk retention obligation to an
originator that contributes a significant
amount of assets to the underlying asset
pool. The Agencies have endeavored to
create appropriate incentives for both
the securitization sponsor and the
originator(s) to maintain and monitor
appropriate underwriting standards,
respectively, without creating undue
complexity, which potentially could
mislead investors and confound
supervisory efforts to monitor
compliance. Importantly, the proposal
does not mandate allocation to an
originator. Therefore, it does not raise
the types of concerns about credit
availability that might arise if certain
originators, such as mortgage brokers or
small community banks (that may
experience difficulty obtaining funding
to retain risk positions), were required
to do so. Mandatory allocation of risk
retention to the originator of the
securitized assets also could pose
significant operational and compliance
problems, as a loan may be sold or
transferred several times between
origination and securitization and,
accordingly, an originator may not know
when a loan it has originated is
included in a securitization transaction.
The proposed rules would permit a
securitization sponsor that satisfies its
base risk retention obligation either
under the vertical risk retention option
as set forth in § l.4 or under the
horizontal risk retention option through
the acquisition of an eligible horizontal
interest as set forth in § l.5, to allocate
a portion of its risk retention obligation
under such option to any originator of
the underlying assets that contributed at
least 20 percent of the underlying assets
in the pool. The amount of the retention
interest held by each originator that is
allocated credit risk in accordance with
the proposal must be at least 20 percent,
but could not exceed the percentage of
the securitized assets it originated. The
originator would also have to hold its
allocated share of the risk retention
obligation in the same manner as would
have been required of the sponsor and
108 15 U.S.C. 78o–11(d)(2). The Agencies note that
section 15G(d) appears to contain an erroneous
cross-reference. Specifically, the reference at the
beginning of section 15G(d) to ‘‘subsection
(c)(1)(E)(iv)’’ is read to mean ‘‘subsection
(c)(1)(G)(iv)’’, as the former subsection does not
pertain to allocation, while the latter is the
subsection that permits the Agencies to provide for
the allocation of risk retention obligations between
a securitizer and an originator in the case of a
securitizer that purchases assets from an originator.
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subject to the same restrictions on
transferring, hedging, and financing the
retained interest that would apply to the
sponsor. Thus, for example, if the
sponsor satisfies its risk retention
requirements by acquiring an eligible
horizontal residual interest under the
horizontal risk retention option, an
originator allocated risk under § l.13 of
the proposal would have to acquire a
portion of that horizontal first-loss
interest, in an amount not exceeding the
percentage of pool assets created by the
originator. The sponsor’s risk retention
requirements would be reduced by the
amount allocated to the originator.
The Agencies believe this approach is
a relatively straightforward way to allow
both the sponsor and the originator to
retain credit risk in securitized assets,
on a basis that should reduce the
potential for confusion by investors in
asset-backed securities.
By limiting this option to originators
that have originated at least 20 percent
of the asset pool, the Agencies have
sought to ensure that the originator
retains risk in an amount significant
enough to function as an actual
incentive for the originator to monitor
the quality of all the assets being
securitized (and to which it would
retain some credit risk exposure). In
addition, by restricting originators to
holding no more than their proportional
share of the risk retention obligation, the
proposal seeks to prevent sponsors from
circumventing the purpose of the risk
retention obligation by transferring an
outsized portion of the obligation to an
originator that may be seeking to acquire
a speculative investment. These
requirements should also reduce the
proposal’s potential complexity and
facilitate investor and regulatory
monitoring.
Request for Comment
86(a). Should the proposed rules
permit allocation to originators where
the sponsor is using other menu
options, such as the L-shaped risk
retention option in § l.6 of the
proposed rules, and if so, under what
specific conditions and requirements?
86(b). In what cases is it likely that this
alternative approach actually would be
used? 86(c). What are the specific
benefits of an alternative approach, and
do they outweigh concerns regarding
complexity?
87. Should the rule permit allocation
to originators if the sponsor elects the
horizontal cash reserve account option
in proposed § l.5(b)?
88(a). Should the proposed rules
permit allocation of risk to originators
that have originated less than 20 percent
of the asset pool? 88(b). Alternately, is
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the minimum 20 percent threshold
sufficient to ensure that an originator
allocated risk has an incentive to
monitor the quality of the entire
collateral pool?
89(a). Are there alternative
mechanisms for allocating risk to an
originator that should be permitted by
the Agencies? For example, should the
rules permit or require that an originator
that is allocated risk retention by a
sponsor retain exposure only to the
assets that the originator itself
originates? 89(b). If so, how might such
an allocation mechanism feasibly be
structured, incorporated into the rule,
and monitored by investors and
supervisors?
90. Should the rules permit sponsors
to allocate risk to a third party, and if
so, how to ensure that incentives
between the sponsor and investors are
aligned in a manner that promotes
quality underwriting standards?
91. Are the proposed disclosures
sufficient to provide investors with all
material information concerning the
originator’s retained interest in a
securitization transaction, as well as to
enable investors to monitor the
originator(s) and the Agencies to assess
the sponsor’s compliance with the rule?
92(a). Should additional disclosures
be required? 92(b). If so, what should be
required and why?
93(a). As proposed, the retaining
sponsor is responsible for compliance
with the rule and must maintain and
adhere to policies and procedures
reasonably designed to monitor
compliance by each originator retaining
credit risk, including the anti-hedging
restrictions. 93(b). What are the
practical implications if the originator
fails to comply?
94(a). To help ensure that the
originator has sufficient incentive to
retain its interest in accordance with the
rule, should the rule require that a
sponsor obtain a contractual
commitment from the originator to
retain the interest in accordance with
the rule? 94(b). If so, how should the
Agencies implement this requirement?
95. Are there other methods that
could be implemented to help ensure
that a sponsor satisfies its obligations
under the rule?
D. Hedging, Transfer and Financing
Restrictions
Section 15G(a)(1)(A) provides that the
risk retention regulations prescribed
shall ‘‘prohibit a securitizer from
directly or indirectly hedging or
otherwise transferring the credit risk
that the securitizer is required to retain
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with respect to an asset.’’ 109 Consistent
with this statutory directive, the
proposed rules would prohibit a
sponsor from transferring any interest or
assets that it is required to retain under
the rule to any person other than an
affiliate whose financial statements are
consolidated with those of the sponsor
(a consolidated affiliate). The rule
permits a transfer to one or more
consolidated affiliates because the
required risk exposure would remain
within the consolidated organization
and, thus, would not reduce the
organization’s financial exposure to the
credit risk of the securitized assets.
The proposal also would prohibit a
sponsor or any consolidated affiliate
from hedging the credit risk the sponsor
is required to retain under the rule. The
proposal extends the hedging
prohibition to a sponsor’s consolidated
affiliates because the rule would allow
a sponsor to transfer the risk it is
required to retain to a consolidated
affiliate. Moreover, even absent such a
transfer, if a consolidated affiliate was
permitted to hedge the risks required to
be retained by a sponsor, the net effect
of the hedge on the organization
controlling the sponsor would offset the
credit risk required to be retained and
defeat the purposes of section 15G.
The proposal prohibits a sponsor and
its consolidated affiliates from
purchasing or selling a security or other
financial instrument, or entering into an
agreement (including an insurance
contract), derivative or other position,
with any other person if: (i) Payments
on the security or other financial
instrument or under the agreement,
derivative, or position are materially
related to the credit risk of one or more
particular ABS interests, assets, or
securitized assets that the retaining
sponsor is required to retain, or one or
more of the particular securitized assets
that collateralize the asset-backed
securities; and (ii) the security,
instrument, agreement, derivative, or
position in any way reduces or limits
the financial exposure of the sponsor to
the credit risk of one or more of the
particular ABS interests, assets, or
securitized assets, or one or more of the
particular securitized assets that
collateralize the asset-backed securities.
The statutory hedging prohibition is
focused on the credit risk associated
with the interest or assets that a sponsor
is required to retain, which itself is
dependent on the credit risk of the
particular securitized assets that
underlie the ABS interests. Therefore,
hedge positions that are not materially
related to the credit risk of the particular
109 15
U.S.C. 78o–11(a)(1)(A).
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ABS interests or exposures required to
be retained by the sponsor or its affiliate
would not be prohibited under the
proposal. Such positions would include
hedges related to overall market
movements, such as movements of
market interest rates (but not the
specific interest rate risk, also known as
spread risk, associated with the ABS
interest that is otherwise considered
part of the credit risk), currency
exchange rates, home prices, or of the
overall value of a particular broad
category of asset-backed securities.
Likewise, hedges tied to securities that
are backed by similar assets originated
and securitized by other sponsors, also
would not be prohibited. On the other
hand, a security, instrument, derivative
or contract generally would be
‘‘materially related’’ to the particular
interests or assets that the sponsor is
required to retain if the security,
instrument, derivative or contract refers
to those particular interests or assets or
requires payment in circumstances
where there is or could reasonably be
expected to be a loss due to the credit
risk of such interests or assets (e.g., a
credit default swap for which the
particular interest or asset is the
reference asset).
The proposal also addresses other
hedges based on indices that may
include one or more tranches from a
sponsor’s asset-backed securities
transactions, as well as tranches of
asset-backed securities transactions of
other sponsors. The proposal provides
that holding a security tied to the return
of an index (such as the subprime
ABX.HE index) would not be
considered a prohibited hedge by the
retaining sponsor so long as: (i) Any
class of ABS interests in the issuing
entity that were issued in connection
with the securitization transaction and
that are included in the index
represented no more than 10 percent of
the dollar-weighted average of all
instruments included in the index, and
(ii) all classes of ABS interests in all
issuing entities that were issued in
connection with any securitization
transaction in which the sponsor was
required to retain an interest pursuant to
the proposal and that are included in
the index represent, in the aggregate, no
more than 20 percent of the dollarweighted average of all instruments
included in the index. These restrictions
are designed to prevent a sponsor (or a
consolidated affiliate) from evading the
hedging restrictions through the
purchase of instruments that are based
on an index that is composed, to a
significant degree, of asset-backed
securities from securitization
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transactions in which a sponsor is
required to retain risk under the
proposed rules.
The proposal would also prohibit a
sponsor and a consolidated affiliate
from pledging as collateral for any
obligation (including a loan, repurchase
agreement, or other financing
transaction) any interest or asset that the
sponsor is required to retain unless the
obligation is with full recourse to the
sponsor or consolidated affiliate.
Because the lender of a loan that is not
with full recourse to the borrower has
limited rights against the borrower on
default, and may rely more heavily on
the collateral pledged (rather than the
borrower’s assets generally) for
repayment, a limited recourse financing
supported by a sponsor’s risk retention
interest may transfer some of the risk of
the retained interest to the lender during
the term of the loan. If the sponsor or
consolidated affiliate pledged the
interest or asset to support recourse
financing and subsequently allowed
(whether by consent, pursuant to the
exercise of remedies by the counterparty
or otherwise) the interest or asset to be
taken by the counterparty to the
financing transaction, the sponsor will
have violated the prohibition on
transfer.
The proposed rules would specify
that the issuing entity in a securitization
would not be deemed a consolidated
affiliate of the sponsor for the
securitization even if its financial
statements are consolidated with those
of the sponsor under applicable
accounting standards.110 This provision
is designed to ensure that an issuing
entity may continue to engage in
hedging activities itself because such
activities would be for the benefit of all
investors in the asset-backed
securities.111 However, if an issuing
entity were to obtain credit protection or
hedge the exposure on the particular
interests or assets that the sponsor is
required to retain under the proposal,
such credit protection or hedge could
negate or limit the sponsor’s credit
exposure to the securitized assets.
Accordingly, under the proposal, any
credit protection by or hedging
protection obtained by an issuing entity
may not cover any ABS interest or asset
that the sponsor is required to retain
under the rule. For example, if the
sponsor uses the vertical approach to
110 See proposed rules at § __.2 (definition of
‘‘consolidated affiliate’’).
111 For example, the proposal would not prohibit
an issuing entity (and indirectly its investors) from
being the beneficiary of loan-level private mortgage
insurance (PMI) taken out by borrowers in
connection with the underlying assets that are
securitized.
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risk retention, an issuing entity may
purchase (or benefit from) a credit
insurance wrap that covers up to 95
percent of the tranches, but not the five
percent of such tranches required to be
retained by the sponsor.
Request for Comment
96(a). Under the proposal, a sponsor
would not be permitted to sell or
otherwise transfer any interest or assets
that the sponsor is required to retain to
any person other than an entity that is
and remains a consolidated affiliated. Is
the permitted transfer to consolidated
affiliates appropriate?
96(b). Why or why not?
97. Is the proposed hedging
prohibition appropriately structured?
98(a). Would the proposal
inadvertently capture any kinds of
hedging that should be permissible?
98(b). If so, please provide specific
recommendations on how we can
appropriately tailor the requirements.
99. Does the proposed approach
appropriately implement the statutory
requirement to prohibit direct and
indirect hedging?
100(a). Does the proposal permit
hedging that is inconsistent with risk
retention and should be prohibited?
100(b). If so, please provide specific
recommendations on how we can more
appropriately tailor the requirements.
101. Are the proposed provisions
concerning the pledging of retained
assets appropriate? Should the rule
instead prohibit the pledging of retained
assets even where the financial
transaction is recourse to the sponsor or
consolidated affiliate?
102(a). Under the proposal, a sponsor
(or a consolidated affiliate) would be
prohibited from transferring the retained
interest or assets until the retained
interest or assets were fully repaid or
extinguished. Is this appropriate, or
should a sponsor be permitted to freely
transfer or hedge its retained exposure
after a specified period of time? 102(b).
If so, should a period of time be
established for different types of
securitizations?
103. Are the proposal’s requirements
pertaining to index hedging
appropriate?
104. Are the 10 percent and 20
percent thresholds discussed above
consistent with market practice and the
underlying goals of the statutory risk
retention requirements?
105. Should credit protection and
hedging by the issuing entity of any
portion of the credit risk on the
securitized assets be permitted or,
because such credit protection and
hedges could limit the incentive of
investors to conduct due diligence on
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the securitized assets, should all credit
protection and hedging by the issuing
entity (other than interest rate and
currency risk) be prohibited?
IV. Qualified Residential Mortgages
Section 15G provides that the risk
retention requirements shall not apply
to an issuance of ABS if all of the assets
that collateralize the ABS are QRMs.112
Section 15G also directs all of the
Agencies to define jointly what
constitutes a QRM, taking into
consideration underwriting and product
features that historical loan performance
data indicate result in a lower risk of
default.113 Moreover, section 15G
requires that the definition of a QRM be
‘‘no broader than’’ the definition of a
‘‘qualified mortgage’’ (QM), as the term
is defined under section 129C(b)(2) of
the Truth in Lending Act (TILA) (15
U.S.C. 1639C(b)(2)), as amended by the
Dodd-Frank Act, and regulations
adopted thereunder.114
A. Overall Approach to Defining
Qualifying Residential Mortgages
In considering how to define a QRM
for purposes of the proposed rules, the
Agencies were guided by several factors
and principles. The sponsor of an ABS
that is collateralized solely by QRMs is
completely exempt from the risk
retention requirement with respect to
such securitization. Accordingly, under
the statute, a sponsor will not be
required to retain any portion of the
credit risk associated with the
securitization of residential mortgages
that meet the requirements to be a QRM.
This requirement suggests that the
underwriting standards and product
features for QRMs should help ensure
that such residential mortgages are of
very high credit quality.
In considering how to determine if a
mortgage is of sufficient credit quality,
the Agencies also examined data from
several sources. For example, the
112 See
15 U.S.C. 78o–11(c)(1)(C)(iii).
id. at sec. 78o–11(e)(4).
114 See id. at sec. 78o–11(e)(4)(C). As adopted, the
text of section 15G(e)(4)(C) cross-references section
129C(c)(2) of TILA for the definition of a QM.
However, section 129C(b)(2), and not section
129C(c)(2), of TILA contains the definition of a
‘‘qualified mortgage.’’ The legislative history clearly
indicates that the reference in the statute to section
129C(c)(2) of TILA (rather than section 129C(b)(2)
of TILA) was an inadvertent technical error. See 156
Cong. Rec. S5929 (daily ed. July 15, 2010)
(statement of Sen. Christopher Dodd) (‘‘The
[conference] report contains the following technical
errors: the reference to ‘section 129C(c)(2)’ in
subsection (e)(4)(C) of the new section 15G of the
Securities and Exchange Act, created by section 941
of the [Dodd-Frank Act] should read ‘section
129C(b)(2).’ In addition, the references to
‘subsection’ in paragraphs (e)(4)(A) and (e)(5) of the
newly created section 15G should read ‘section.’ We
intend to correct these in future legislation.’’).
113 See
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24117
Agencies reviewed data on mortgage
performance supplied by the Applied
Analytics division (formerly McDash
Analytics) of Lender Processing Services
(LPS). To minimize performance
differences arising from unobservable
changes across products, and to focus
on loan performance through stressful
environments, for the most part, the
Agencies considered data for prime
fixed-rate loans originated from 2005 to
2008. This dataset included
underwriting and performance
information on approximately 8.9
million mortgages.
As is typical among data provided by
mortgage servicers, the LPS data do not
include detailed information on
borrower income and on other debts the
borrower may have in addition to the
mortgage. For this reason, the Agencies
also examined data from the 1992 to
2007 waves of the triennial Survey of
Consumer Finances (SCF).115 Because
families’ financial conditions will
change following the origination of a
mortgage, the analysis of SCF data
focused on respondents who had
purchased their homes either in the
survey year or the previous year. This
data set included information on
approximately 1,500 families. The
Agencies also examined a combined
data set of loans purchased or
securitized by the Enterprises from 1997
to 2009. This data set consisted of more
than 75 million mortgages, and included
data on loan products and terms,
borrower characteristics (e.g., income
and credit score), and performance data
through the third quarter of 2010.116
Based on these and other data, the
underwriting and product features
established by the Agencies for QRMs
include standards related to the
borrower’s ability and willingness to
repay the mortgage (as measured by the
borrower’s debt-to-income (DTI) ratio);
the borrower’s credit history; the
borrower’s down payment amount and
sources; the loan-to-value (LTV) ratio for
the loan; the form of valuation used in
underwriting the loan; the type of
115 The SCF is conducted every three years by the
Board, in cooperation with the Treasury, to provide
detailed information on the finances of U.S.
families. The SCF collects information on the
balance sheet, pension, income, and other
demographic characteristics of U.S. families. To
ensure the representativeness of the study,
respondents are selected randomly using a
scientific sampling methodology that allows a
relatively small number of families to represent all
types of families in the nation. Additional
information on the SCF is available at https://
www.federalreserve.gov/pubs/oss/oss2/
method.html.
116 Additional information concerning the
Enterprise data used by the Agencies in developing
the proposed QRM standards is provided in
Appendix A in the proposed common rule.
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mortgage involved; and the owneroccupancy status of the property
securing the mortgage. A substantial
body of evidence, both in academic
literature and developed for this
rulemaking, supports the view that
loans that meet the minimum standards
established by the Agencies have low
credit risk even in stressful economic
environments that combine high
unemployment with sharp drops in
house prices.117
Any set of fixed underwriting rules
likely will exclude some creditworthy
borrowers. For example, a borrower
with substantial liquid assets might be
able to sustain an unusually high DTI
ratio above the maximum established
for a QRM. As this example indicates,
in many cases sound underwriting
practices require judgment about the
relative weight of various risk factors
(e.g., the tradeoff between LTV and DTI
ratios). These decisions are usually
based on complex statistical default
models or lender judgment, which will
differ across originators and over time.
However, incorporating all of the
tradeoffs that may prudently be made as
part of a secured underwriting process
into a regulation would be very difficult
without introducing a level of
complexity and cost that could
undermine any incentives for sponsors
to securitize, and originators to
originate, QRMs.
The Agencies recognize that many
prudently underwritten residential
mortgage loans will not meet the
proposed definition of a QRM. Sponsors
of ABS backed by these mortgages will
be required to retain some of the credit
risk of these mortgage loans in
accordance with the proposed
117 For the importance of loan-to-value ratio at
origination, see Quigley, J. and R. Van Order.
‘‘Explicit tests of contingent claims models of
mortgage default,’’ Journal of Real Estate Finance
and Economics, 11, 99–117 (1995) and the
extensive literature that has followed, including
Foote, C., K. Gerardi and P. Willen, ‘‘Negative equity
and foreclosures: Theory and evidence,’’ Federal
Reserve Bank of Boston Public Policy Discussion
Papers Number 08–3. (2008) https://www.bos.frb.org/
economic/ppdp/2008/ppdp0803.pdf; for the
importance of credit history, see Barakova, I., R.
Bostic, P. Calem, and S. Wachter, ‘‘Does credit
quality matter for homeownership?’’ Journal of
Housing Economics, 12, 318–336 (2003); for several
other underwriting criteria see Foote, C., K. Gerardi
and P. Willen, ‘‘Negative equity and foreclosures:
theory and evidence,’’ Federal Reserve Bank of
Boston Public Policy Discussion Papers Number
08–3 (2008). https://www.bos.frb.org/economic/
ppdp/2008/ppdp0803.pdf, Mayer, C., K. Pence and
S. M. Sherlund ‘‘The rise in mortgage defaults: facts
and myths,’’ Manuscript, Federal Reserve Board,
Washington, DC. (2008), and S. Sherlund, ‘‘The
past, present, and future of subprime mortgages,’’
Finance and Economics Discussion Series No.
2008–63, Federal Reserve Board, Washington, DC
(2008). https://www.federalreserve.gov/pubs/feds/
2008/200863/200863abs.html.
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regulation (unless another exemption is
available). However, as discussed
further in Part III.B of this
Supplementary Information, the
Agencies have sought to provide
sponsors with several options for
complying with the risk retention
requirements of section 15G so as to
reduce the potential for these
requirements to disrupt securitization
markets, including those for non-QRM
residential mortgages, or materially
affect the flow or pricing of credit to
borrowers and businesses. Moreover,
the amount of non-QRM residential
mortgages should be sufficiently large,
and include enough prudently
underwritten loans, so that ABS backed
by non-QRM residential mortgages may
be routinely issued and purchased by a
wide variety of investors. As a result,
the market for such securities should be
relatively liquid, all else being equal.
Indeed, the broader the definition of a
QRM, the less liquid the market
ordinarily would be for residential
mortgages falling outside the QRM
definition.
The Agencies also have sought to
make the standards applicable to QRMs
transparent to, and verifiable by,
originators, securitizers, investors and
supervisors. As discussed further below,
whether a residential mortgage meets
the definition of a QRM can and will be
determined at or prior to the time of
origination of the mortgage loan. For
example, the DTI ratio and the LTV ratio
are measured at or prior to the closing
of the mortgage transaction. The
Agencies believe that this approach
should assist originators of all sizes in
determining whether residential
mortgages will qualify for the QRM
exemption, and assist ABS issuers and
investors in assessing whether a pool of
mortgages will meet the requirements of
the QRM exemption. In addition, the
approach taken by the proposal would
allow individual QRM loans to be
modified after securitization without the
loan ceasing to be a QRM in order to
avoid creating a disincentive to engage
in appropriate loan modifications.
In developing the proposed criteria
for a QRM, the Agencies also considered
how best to address the interaction
between the definitions and standards
for QRM and QM, as mandated by the
Dodd-Frank Act.118 The Board currently
has sole rulemaking authority for the
QM standards, which authority will
transfer to the Consumer Financial
Protection Bureau (the CFPB) on the
designated transfer date, which is set as
July 21, 2011 (transfer date). In addition,
while Section 15G’s risk retention
118 See
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requirements are to be prescribed by the
Agencies no later than 270 days after
enactment of the Dodd-Frank Act (April
17, 2011), the Dodd-Frank Act provides
that the rules implementing the QM
standards must be prescribed before the
end of the 18-month period beginning
on the transfer date.
In light of these provisions, the
Agencies propose to incorporate the
statutory QM standards, in addition to
other requirements, into the QRM
requirements and apply those standards
strictly in setting the QRM requirements
in order to ensure that, consistent with
Congress’ directive, the definition of a
QRM be no broader than a QM. The
Agencies have proposed this approach
to minimize any potential for conflicts
between the QRM standards in the
proposed rules and the QM standards
that ultimately will be proposed or
adopted under TILA, as well as to
provide the public a reasonable
opportunity to comment on the
proposed QRM standards, including
those that are bounded by the statutory
QM standards. The proposed approach
also helps reinforce the goal of ensuring
that QRMs are of very high credit
quality.
As noted above, rulemaking authority
for the QM standards is vested initially
in the Board and, after the transfer date,
the CFPB. TILA provides the QM
rulewriting agency with the authority to
establish key aspects of the QM
definition (e.g., any qualifying ratios of
the borrower’s total debt to monthly
income) and to revise, add to, or
subtract from the criteria for a
residential mortgage loan to qualify as a
QM.119 Accordingly, the Agencies
expect to monitor the rules adopted
under TILA to define a QM and will
review those rules to determine whether
changes to the definition of QRM are
necessary or appropriate to ensure that
the definition of a QRM is ‘‘no broader’’
than the definition of a QM as defined
in section 129C(b)(2) of TILA and to
appropriately implement the risk
retention requirement of section 15G.120
In light of the different purposes and
effects of the QRM and the QM
standards,121 as well as the different
119 See
Section 129C(b)(3)(B)(i) of TILA.
section 15G(e)(4)(C), future changes to
the QM definition do not, in and of themselves,
alter the QRM definition. The QRM definition will
not change until the Agencies have determined,
through joint rulemaking, that the QRM definition
should be altered.
121 The function of the QM standard is to provide
lenders with a presumption of compliance with the
requirement in section 129C(a) of TILA to assess a
borrower’s ability to repay a residential mortgage
loan. The purposes of these provisions are to ensure
that consumers are offered and receive residential
mortgage loans on terms that reasonably reflect
120 Under
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agencies responsible for implementing
these standards, the proposed standards
for QRMs should not be interpreted in
any way as reflecting or suggesting the
way in which the QM standards under
TILA may be defined either in proposed
or final form.
As required by section 15G, the
Agencies also considered information
regarding the credit risk mitigation
effects of mortgage guarantee insurance
or other credit enhancements obtained
at the time of origination.122 If such
guarantees are backed by sufficient
capital, they likely lower the credit risk
faced by lenders or purchasers of
securities because they typically pay out
when borrowers default. Such
guarantees have historically been
required for loans with higher LTV
ratios, where borrowers have relatively
thin equity cushions.123 Mortgage
insurance companies charge a riskbased premium for this insurance, as
well as impose additional underwriting
restrictions. The Agencies considered a
variety of information and reports
relative to such guarantees and other
credit enhancements. While this
insurance protects creditors from losses
when borrowers default, the Agencies
have not identified studies or historical
loan performance data adequately
demonstrating that mortgages with such
credit enhancements are less likely to
default than other mortgages, after
adequately controlling for loan
underwriting or other factors known to
influence credit performance, especially
considering the important role of LTV
ratios in predicting default. Therefore,
the Agencies are not proposing to
include any criteria regarding mortgage
guarantee insurance or other types of
insurance or credit enhancements at this
time. The Agencies note that mortgage
guarantee insurance is a form of credit
enhancement accepted by the
Enterprises for mortgages with higher
LTV ratios that allows such mortgages to
be securitized through mortgage-backed
securities guaranteed by the Enterprises.
For the reasons explained in Part III.B.8
of this Supplemental Information, under
§ __.11 of the proposed rules, the
guarantee provided by an Enterprise
while operating under the
conservatorship or receivership of
FHFA with capital support from the
United States would satisfy the risk
retention requirements of the Enterprise
their ability to repay the loans and that are
understandable and not unfair, deceptive, or
abusive. See section 129B(a)(2) of TILA.
122 See 15 U.S.C. 78o–11(e)(4)(B)(iv).
123 See National Association of Realtors,
‘‘Financing the Home Purchase: The Real Estate
Professional’s Guide 1993,’’ Chicago: National
Association of Realtors, at 20 and 117.
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with respect to the mortgage-backed
securities issued by the Enterprise.
A number of the proposed standards
developed for the QRM exemption (e.g.,
the DTI ratios and acceptable sources of
borrower funds) are dependent upon
certain definitions, calculations and
verification requirements that are
critical to the robustness of the QRM
standards. The Agencies believe that it
is important to provide clarity on what
these definitions, calculations, and
verification requirements include for
purposes of the QRM standards. The
Agencies considered how best to
achieve this goal in a manner that is
transparent, uniform, and familiar to the
mortgage industry. After carefully
considering a variety of options, the
Agencies propose to incorporate and use
certain definitions and key terms
established by HUD and required to be
used by lenders originating residential
mortgages that are insured by the
Federal Housing Administration (FHA).
Specifically, the proposed rules
incorporate the definitions and
standards currently set out in the HUD
Handbook 4155.1 (New Version),
Mortgage Credit Analysis for Mortgage
Insurance, as in effect on December 31,
2010 (HUD Handbook) 124 for
determining and verifying borrower
funds and the borrower’s monthly
housing debt, total monthly debt and
monthly gross income. This proposed
approach provides a transparent,
uniform and well-known basis for
lenders to determine whether a
residential mortgage loan qualifies as a
QRM, without requiring the Agencies to
establish and maintain—and lenders to
comply with—new requirements.
In order to facilitate the use of these
standards for QRM purposes, the
Agencies propose to include in the
Additional QRM Standards Appendix of
the proposed rules all of the standards
in the HUD Handbook that are used for
QRM purposes. The only modifications
made to the relevant standards in the
HUD Handbook would be those
necessary to remove those portions
unique to the FHA underwriting process
(e.g., TOTAL Scorecard instructions).
The proposed rules and the Additional
QRM Standards Appendix would not
affect or change any of the standards in
the HUD Handbook as they apply to
FHA-insured mortgages. Moreover, HUD
continues to have sole authority to
modify the HUD Handbook. Any such
amendments would not affect the
Additional QRM Standards Appendix of
the proposed rules unless separately
124 See HUD Handbook, available at https://
www.fhaoutreach.gov/FHAHandbook/prod/
contents.asp?address=4155-1.
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adopted by the Agencies under section
15G.
Request for Comment
106. Is the overall approach taken by
the Agencies in defining a QRM
appropriate?
107. What impact might the proposed
rules have on the market for
securitizations backed by QRM and nonQRM residential mortgage loans?
108. What impact, if any, might the
proposed QRM standards have on
pricing, terms, and availability of nonQRM residential mortgages, including to
low and moderate income borrowers?
109(a). The Agencies seek general
comment on the overall approach of
using certain longstanding HUD
standards for certain definitions and
standards within the QRM exemption
and whether the Agencies should adopt
a different approach. 109(b). Are there
any other existing, transparent, and
widely recognized standards that the
Agencies should use for ensuring that
lenders follow consistent and sound
processes in determining whether a
residential mortgage loan meets the
qualifications for a QRM?
110. The Agencies seek comment on
all aspects of the proposed definition of
a QRM, including the specific terms and
conditions discussed in the following
section.
111(a). The Agencies seek comment
on whether mortgage guarantee
insurance or other types of insurance or
credit enhancements obtained at the
time of origination would or would not
reduce the risk of default of a residential
mortgage that meets the proposed QRM
criteria but for a higher adjusted LTV
ratio. Commenters are requested to
provide historical loan performance
data or studies and other factual support
for their views if possible, particularly
if they control for loan underwriting or
other factors known to influence credit
performance. 111(b). If the information
indicates that such products would
reduce the risk of default, should the
LTV ratio limits be increased to account
for the insurance or credit
enhancement? 111(c). If so, by how
much?
112(a). If the proposed QRM criteria
were adjusted for the inclusion of
mortgage guarantee insurance or other
types of insurance or credit
enhancements, what financial eligibility
standards should be incorporated for
mortgage insurance or financial product
providers and how might those
standards be monitored and enforced?
112(b). What disclosure regarding the
entity would be appropriate?
113. Are there additional ways that
the Agencies could clarify the standards
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applicable to QRMs to reduce the
potential for uncertainty as to whether
a residential mortgage loan qualifies as
a QRM at origination?
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B. Exemption for QRMs
Consistent with section 15G,
§ l.15(b) of the proposed rules provides
that a sponsor is exempt from the risk
retention requirements of the proposed
rules with respect to any securitization
transaction if all of the securitized assets
that collateralize the ABS are QRMs,
and none of the securitized assets that
collateralize the ABS are other ABS.
These conditions implement the
requirements in 15 U.S.C. 78o–
11(c)(1)(C)(iii) and (e)(5).
Section l.15(b) of the proposed rules
includes two additional requirements
for a securitization transaction to qualify
for the QRM exemption. First, the
proposal would require that, at the
closing of the securitization transaction,
each QRM collateralizing the ABS is
currently performing (i.e., the borrower
is not 30 days or more past due, in
whole or in part, on the mortgage).125
Because QRMs are completely exempt
from the risk retention requirements, the
proposed rules would not permit a
residential mortgage loan that satisfied
the conditions to be a QRM upon
origination to be included in an ABS
transaction exempt under § l.15(c) of
the proposed rules if the loan was not
currently performing at the time of
closing of the securitization transaction.
Second, the depositor 126 for the ABS
must certify that it evaluated the
effectiveness of its internal supervisory
controls for ensuring that all of the
assets that collateralize the ABS are
QRMs and that it has determined that its
internal supervisory controls are
effective. This evaluation must be
performed as of a date within 60 days
prior to the cut-off date (or similar date)
for establishing the composition of the
collateral pool. The sponsor also must
provide, or cause to be provided, a copy
of this certification to potential
investors a reasonable period of time
prior to the sale of ABS and, upon
request, to the Commission and its
appropriate Federal banking agency, if
any. These evaluation and certification
conditions implement the requirements
in 15 U.S.C. 78o–11(e)(6).127
125 See proposed rules at § l.15(a) (definition of
‘‘currently performing’’ for QRM purposes).
126 See proposed rules at § l.2 (definition of
‘‘depositor’’).
127 For these purposes, the Agencies interpret the
term ‘‘issuer’’ as used in section 15G(e)(6) to refer
to the depositor for the transaction.
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C. Eligibility Criteria
1. Eligible Loans, First Lien, No
Subordinate Liens, Original Maturity
and Written Application Requirements
The proposed definition limits a QRM
to a closed-end first-lien mortgage to
purchase or refinance a one-to-four
family property, at least one unit of
which is the principal dwelling of a
borrower.128 Under the proposal,
construction loans, ‘‘bridge’’ loans with
a term of twelve months or less, loans
to purchase time-share properties, and
reverse mortgages could not be QRMs.
Construction loans, bridge loans and
other loans designed to offer temporary
financing have typically not been
securitized in the past, and their
underwriting is notably more complex
than that of standard mortgage loans.
Thus, expanding the definition of QRMs
to include such loans would be complex
and seem to offer few, if any, benefits.
Any loan relating to a time share also
may not be a QRM, as these types of
loans are excluded from the definition
of a ‘‘residential mortgage loan’’ that may
be a QM under section 103(cc)(5) of
TILA.
Even before the financial crisis, the
overwhelming majority of reverse
mortgages were insured by the FHA.129
Reverse mortgages insured by the FHA
are separately exempted from the risk
retention requirements of section
15G.130 In addition, reverse mortgages
may be QMs only to the extent that they
meet certain standards to be determined
by regulation by the Board or CFPB
under section 129C(b)(2)(A)(ix) of TILA.
Because the extent to which reverse
mortgages may be considered a QM
under TILA is not yet known, the
Agencies have excluded reverse
mortgages from potential QRM status.
Under the proposal, a QRM must be
secured by a first-lien, perfected in
accordance with applicable law, on the
one-to-four family property to be
purchased or refinanced. In addition,
consistent with the QM requirement
under section 129C(b)(2) of TILA, the
maturity date of a QRM, at the closing
of the mortgage transaction, must not
exceed 30 years. A one-to-four family
property is defined to mean real
property that is (i) held in fee simple, or
128 Closed-end
credit and the related terms
consumer credit and open-end credit are defined in
a manner consistent with the definition of such
terms under the Board’s Regulation Z, which
implements TILA.
129 See Hui Shan, ‘‘Reversing the Trend: The
Recent Expansion of the Reverse Mortgage Market
Finance and Economics Discussion Series,’’ Board
of Governors of the Federal Reserve System, 2009–
42 (2009), available at https://www.federalreserve.
gov/pubs/feds/2009/200942/200942pap.pdf .
130 See 15 U.S.C. 78o–11(e)(3)(B).
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on leasehold under a lease for not less
than 99 years which is renewable, or
under a lease having a period that is at
least 10 years longer than the mortgage,
and (ii) improved by a residential
structure that contains one to four
units.131 A one-to-four family property
may include an individual
condominium or cooperative unit, as
well as a manufactured home that is
constructed in conformance with the
National Manufactured Home
Construction and Safety Standards and
erected on, or otherwise affixed to, a
foundation in accordance with
requirements established by the FHA.
If the mortgage transaction is to
purchase a one-to-four family property,
no other recorded or perfected liens on
the one-to-four family property can, to
the creditor’s knowledge, exist at the
time of the closing of the mortgage
transaction. Thus, the proposed rules
prohibit the use of a junior lien in
conjunction with a QRM to purchase a
home. Data indicate that, controlling for
other factors, including combined LTV
ratio, the use of junior liens at
origination to decrease down
payments—so-called ‘‘piggyback’’
mortgages—significantly increased the
risk of default.132 The proposal would
not prohibit the existence of junior liens
in connection with the refinancing of an
existing loan secured by an owneroccupied one-to-four family property,
provided that the combined LTV ratio at
closing of the mortgage transaction does
not exceed certain thresholds
established by the proposed rules.133
The Agencies have not proposed to
prohibit the existence of a junior lien in
connection with a refinancing
transaction (subject to certain combined
LTV limits) because the Agencies
recognize that some borrowers may have
existing home equity loans or lines of
credit and are currently performing on
all of their mortgage obligations.134 A
prohibition on junior liens in
connection with a refinancing
transaction would force such
performing borrowers to terminate their
existing home equity loans or lines of
credit and obtain a new home equity
loan or line of credit shortly thereafter,
with additional transaction costs
131 See proposed rules at § l.15(a) (definition of
‘‘one-to-four family property’’).
132 See Kristopher Gerardi, Andreas Lehnert,
Shane Sherlund, and Paul S. Willen, ‘‘Making Sense
of the Subprime Crisis,’’ Brookings Papers on
Economic Activity (Fall 2008), at 86, Table 3.
133 See proposed rules at § l.15(d)(9).
134 As discussed further below, the proposed
rules would require that the borrower be currently
performing on all of the borrower’s debt
obligations—including any current first mortgage,
home equity loan or line of credit—for any new
mortgage to qualify as a QRM.
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(including a loan origination fee). To
help ensure that the borrower continues
to have the ability and incentive to
repay a QRM that is originated as part
of a refinancing transaction, the
proposal includes certain combined
LTV limits on refinancing transactions
and DTI limits both of which assume
that any home equity loan or line of
credit is fully drawn.
The proposed rules also would
require that the borrower complete and
submit to the creditor a written
application for the mortgage transaction.
The application, as supplemented or
amended prior to closing of the
mortgage transaction, must include an
acknowledgement by the borrower that
the information provided in the
application is true and correct as of the
date executed by the borrower, and that
any intentional or negligent
misrepresentation of the information
provided in the application may result
in civil liability and/or criminal
penalties under 18 U.S.C. 1001.135 This
standard is consistent with the written
acknowledgement in the Uniform
Residential Loan Application (Form
1003) used by the Enterprises.
Request for Comment
114(a). The Agencies request
comment on each of these conditions for
QRM eligibility. In addition, should a
loan be disqualified from being a QRM
if the creditor has ‘‘reason to know’’ of
another recorded or perfected lien on
the property in a purchase transaction?
114(b). If so, what would constitute a
‘‘reason to know’’ by the creditor?
2. Borrower Credit History
The Agencies’ own analysis, as well
as work published in academic
journals,136 indicates that borrower
credit history is among the most
important predictors of default. In many
datasets, credit history is proxied using
a credit score, often the FICO score
determined under the credit scoring
model devised by Fair Isaac
Corporation. Among the residential
mortgage loans in the LPS dataset
described above, 13 percent of all loans
defaulted (defined as ever having
missed three or more consecutive
proposed rules at § l.15(d)(9).
e.g., Avery, Robert B., Raphael Bostic,
Paul S. Calem, and Glenn B. Canner, ‘‘Credit Risk,
Credit Scoring, and the Performance of Home
Mortgages,’’ Federal Reserve Bulletin 82(7) 621–48
(1996); Pennington-Cross, Anthony, ‘‘Credit History
and the Performance of Prime and Nonprime
Mortgages,’’ Journal of Real Estate Finance and
Economics 27(3) 279–301 (2003); Calem, Paul and
Susan Wachter, ‘‘Community Reinvestment and
Credit Risk: Evidence from an Affordable-HomeLoan Program,’’ Real Estate Economics 27(1) 105–
134 (1999).
135 See
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136 See,
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payments or ever being in foreclosure).
However, 24.5 percent of residential
mortgage loans taken out by borrowers
with a FICO score of 690 or below
defaulted, compared to a default rate of
7.7 percent among residential mortgage
loans taken out by borrowers with a
FICO score greater than 690. Even
among the higher-FICO group,
differences remained: borrowers with
FICO scores of 691 to 740 had a default
rate of 11.4 percent, while borrowers
with FICO scores above 740 had a
default rate of 4 percent. Thus, in these
data, mortgage borrowers with a FICO
score of 690 or below were more than
six times as likely to default as
borrowers with FICO scores of above
740.
A similar pattern emerges from the
SCF data described above. Although the
SCF data do not record the borrower’s
credit score, they do report several
important contributors to low credit
scores. The most important predictor of
whether a household in the SCF data set
was delinquent on its mortgage payment
was whether it currently was behind on
any non-mortgage debt. The secondmost important variable was whether
the household had filed for bankruptcy
within the past five years. Households
that were current on their non-mortgage
obligations and had not filed for
bankruptcy within the previous five
years had a mortgage delinquency rate
of 0.2 percent, compared to a
delinquency rate of 17.9 percent for
other households.
Data on residential mortgages
purchased or securitized by the
Enterprises also show the importance of
borrower credit scores as a predictor of
default. From 1997 through 2002, loans
that are estimated to meet the proposed
QRM requirements (except for credit
history) had cumulative rates of serious
delinquency ranging from 31 to 44 basis
points if the borrower’s credit score was
above 690, but ranged from 267 to 356
basis points for borrowers with credit
scores of 690 or lower. The data show
that, in the peak years of the housing
bubble (from 2005 to 2007), rates of
serious delinquency for loans that were
estimated to meet the proposed QRM
standards with credit scores above 690
ranged from 186 to 272 basis points,
while similar loans to borrowers with
lower credit scores ranged from 833 to
1,103 basis points.137
In developing the proposal, the
Agencies carefully considered how to
incorporate a borrower’s credit history
into the standards for a QRM. The
Agencies are aware that credit scores are
137 See
Appendix A in the proposed common
rule.
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used often by originators in the loan
underwriting process. However, the
Agencies do not propose to use a credit
score threshold as part of the QRM
definition because such a standard
would require reliance on credit scoring
models developed and maintained by
privately owned entities and such
models may change materially at the
discretion of such entities. There also
may be inconsistencies across the
various credit scoring models used by
consumer reporting agencies, as well as
among different scoring models used by
a single provider. Consequently, in
order to ensure that creditors could
continue to choose among different
credit score providers, the Agencies
would have to determine a cutoff score
under multiple scoring models and
periodically revise the regulation in
response to new scoring models that
might arise.
Instead, the proposed rules define a
set of so-called ‘‘derogatory factors’’
relating to a borrower that would
disqualify a mortgage for such borrower
from qualifying as a QRM. The Agencies
considered how these derogatory factors
related to the credit scores observed in
the data. A 2007 report to Congress by
the Board found that, among all persons
with a FICO score, 42 percent had
scores below 700, 18 percent had scores
between 700 and 749, and 40 percent
had scores of 750 or above.138 Thus, the
median FICO score is somewhere
between 700 and 749. The analysis of
the LPS data found that borrowers with
prime fixed-rate mortgages with FICO
scores below 700 were substantially
more likely than the average of such
borrowers to default. The Board’s report
to Congress also found that any major
derogatory factor, including being
substantially late on any debt payment
(not just a mortgage), as well as
bankruptcy or foreclosure, would push
a borrower’s credit score down
substantially. Thus, the relatively
stringent set of credit history derogatory
factors set forth in § l.15(d)(5) of the
proposed rules is designed to be a
reasonable proxy for the credit score
thresholds associated with low
delinquency rates in the data.
Specifically, under the proposal, a
mortgage loan could qualify as a QRM
only if the borrower was not currently
30 or more days past due, in whole or
in part, on any debt obligation, and the
borrower had not been 60 or more days
past due, in whole or in part, on any
138 See Report to the Congress on Credit Scoring
and Its Effects on the Availability and Affordability
of Credit, Board of Governors of the Federal Reserve
System (August 2007), available at https://
www.federalreserve.gov/boarddocs/rptcongress/
creditscore/creditscore.pdf.
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debt obligation within the preceding 24
months. Further, a borrower must not
have, within the preceding 36 months,
been a debtor in a bankruptcy
proceeding, had property repossessed or
foreclosed upon, engaged in a short sale
or deed-in-lieu of foreclosure, or been
subject to a Federal or State judgment
for collection of any unpaid debt.
The proposal would require that the
originator verify and document, within
90 days prior to the closing of the
mortgage transaction, that the borrower
satisfied these credit history
requirements. The Agencies are
proposing a safe harbor that would
allow an originator to satisfy the
documentation and verification
requirements regarding a borrower’s
credit history by obtaining, no more
than 90 days before the closing of the
mortgage, credit reports from at least
two consumer reporting agencies that
compile and maintain files on
consumers on a nationwide basis.139
Such credit reports must demonstrate
that the borrower satisfies the credit
history requirements for a QRM and the
originator must maintain paper or
electronic copies of such credit reports
in the loan file for the mortgage
transaction. This safe harbor would not
be available if the creditor later obtained
an additional credit report before
closing of the mortgage which indicated
that the borrower did not meet the
proposed rules’ credit history
requirements.
Request for Comment
115. Are the proposed credit history
standards useful and appropriate
indicators of the likelihood that a
borrower might default on a new
residential mortgage loan?
116. Are there additional or different
standards that should be used in
considering how a borrower’s credit
history may affect the likelihood that
the borrower would default on a new
mortgage?
117(a). Should the Agencies include
minimum credit score thresholds as an
additional or alternative QRM standard?
117(b). If so, how might the rules
incorporate privately developed credit
scoring models in a manner that (i)
ensures that borrowers, originators, and
investors have adequate notice, and an
opportunity to comment on, changes to
scoring methodologies that may affect a
borrower’s eligibility for a QRM, (ii)
maintains a level competitive playing
field for providers and developers of
139 The
proposal defines a ‘‘consumer reporting
agency that compiles and maintains files on a
nationwide basis’’ by reference to the definition of
that term in the Fair Credit Reporting Act (15 U.S.C.
1681a(p)). See the proposed rules at § l.15(a)(7).
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credit scores, and (iii) ensures that any
credit scoring methodology used for
QRM purposes is and remains
predictive of a borrower’s default risk?
118. The Agencies request comment
on the appropriateness of the safe
harbor that would allow an originator to
satisfy the documentation and
verification requirements regarding a
borrower’s credit history by obtaining
credit reports from at least two
consumer reporting agencies that
compile and maintain files on
consumers on a nationwide basis.
3. Payment Terms
Section l.15(d)(6) of the proposed
rules addresses the payment terms of a
QRM, based on the terms of the
mortgage transaction at closing.
Consistent with the requirements for a
QM under section 129C(b)(2)(A)(i) of
TILA, the proposed rules would
prohibit QRMs from having, among
other features, payment terms that allow
interest-only payments or negative
amortization. Under the proposed rules,
regularly scheduled principal and
interest payments on the mortgage
transaction may not result in an increase
of the unpaid principal balance of the
mortgage and may not allow the
borrower to defer payment of interest or
repayment of principal.
In addition, consistent with the
requirements for a QM under section
129C(b)(2)(A)(ii) of TILA, the proposed
rules would prohibit the terms of a QRM
from permitting any ‘‘balloon payment,’’
defined for these purposes as a
scheduled payment of principal and
interest that is more than twice as large
as any earlier scheduled payment of
principal and interest. This definition of
a balloon payment is consistent with the
current definition of that term under the
Board’s Regulation Z,140 and somewhat
more restrictive than the definition of a
balloon payment in section
129C(b)(2)(A)(ii) of TILA and applicable
to a QM.141
Under the proposed rules, both fixedrate and adjustable-rate mortgages may
qualify as a QRM. However, the
Agencies are proposing to limit the
amount by which interest rates may
increase on adjustable-rate loans that are
QRMs to reduce the risk of default on
QRMs by limiting the potential for
consumers to face a ‘‘payment shock’’ in
the event that their monthly mortgage
payments were to rise rapidly due to
expiration of ‘‘teaser rate’’ periods in the
140 See 12 CFR 226 Supplement I, comment
32(d)(1)(i)–1 and 12 CFR 226.18(s)(5)(i).
141 Section 129C(b)(2)(A)(ii) of TILA defines a
balloon payment for QM purposes as a scheduled
payment that is more than twice as large as the
average of earlier scheduled payments.
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early years of a mortgage loan or other
interest rate increases. Section
15G(e)(4)(B)(iii) provides that one of the
underwriting and product features the
Agencies may take into consideration in
defining a QRM are those that mitigate
‘‘the potential for payment shock on
adjustable rate mortgages through
product features and underwriting
standards.’’ Under § l.15(d)(6)(iii) of
the proposed rules, in order for a
mortgage that allows the annual rate of
interest to increase after the closing of
the mortgage transaction to be a QRM,
the terms of the mortgage must provide
that any such increase may not exceed:
(a) Two percent (200 basis points) in
any twelve month period and (b) six
percent (600 basis points) over the life
of the mortgage transaction.142
Section l.15(d)(6)(iv) of the proposed
rules also would prohibit a QRM from
containing any prepayment penalty. The
term ‘‘prepayment penalty’’ would be
defined as a penalty imposed solely
because the mortgage obligation is
prepaid in full or in part. For purposes
of this definition, a prepayment penalty
would not include, for example, fees
imposed for preparing and providing
documents in connection with
prepayment, such as a loan payoff
statement, a reconveyance, or other
document releasing the creditor’s
security interest in the one-to-four
family property securing the loan.
When defining a QRM, section 15G
directs the Agencies to take into
consideration underwriting and product
features that historical loan performance
data indicate result in a lower risk of
default, such as a prohibition or
restriction on the use of prepayment
penalties.143 In addition, under section
129C(c)(1)(B) of TILA, prepayment
penalties are prohibited or subject to
significant limitations for certain loans
even if those loans otherwise meet the
QM definition under section 129C(b)(2)
of TILA.144
142 As described more fully below, an originator
also would be required to calculate the borrower’s
front-end and back-end DTI ratios based on the
maximum interest rate permitted during the first
five years of the mortgage transaction.
Consequently, originators of adjustable-rate
mortgages would have to determine that a borrower
had acceptable DTI ratios even if rates rose as
rapidly as possible under the terms of the mortgage
(subject to the annual and lifetime caps described
above).
143 15 U.S.C. 78o–11(e)(4)(B)(v).
144 TILA’s prepayment penalty restriction scheme
is quite complex. Specifically, section 129C(c)(1)(B)
of TILA prohibits prepayment penalties for any
residential mortgage loan with an adjustable rate, or
for those loans where the annual percentage rate
exceeds certain thresholds over the average prime
offer rate for a comparable transaction, based on the
loan’s amount and lien status. In addition, where
permitted, prepayment penalties may not exceed
three percent of the outstanding balance of the loan
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Borrowers with substantial equity in
their properties—that is, a low LTV
ratio—should in principle default
infrequently. If faced with financial
hardship, such borrowers typically can
sell their homes or otherwise tap their
accumulated home equity. To ensure
that QRMs have low default risk
consistent with their complete
exemption from risk retention
requirements, the Agencies are
proposing that the QRM definition
require a sizable equity contribution.
The figure below shows the default
rate among loans in the LPS dataset
considered by the Agencies (and
described above) with the data further
restricted to those loans with fully
documented income in order to better
match the proposed underwriting
characteristics of QRMs. These loans are
divided by their purpose: To purchase
a home, to refinance an existing loan
without increasing its principal balance
(a so-called ‘‘rate and term’’ refinancing),
or to refinance an existing loan and
increase the principal balance (a socalled ‘‘cash out’’ refinancing). Different
types of mortgage transactions (i.e.,
purchase, rate and term refinancing, and
cash-out refinancing) had varying rates
of default.
As shown in the figure below, default
rates increase noticeably among loans
used to purchase homes at LTV ratios
above 80 percent. The precise size of
this increase and the LTV ratio at which
it occurs are likely to vary across
datasets and over time. Nonetheless,
lenders have long experience
underwriting loans with LTV ratios of
80 percent or less and there is
substantial data indicating that loans
with LTV ratios of 80 percent or less
perform noticeably better than those
with LTV ratios above 80 percent.145
Data from the Enterprises concerning
loans purchased or securitized by the
Enterprises also show that first-lien
purchase loans with high LTV ratios are
riskier. The data show that purchase
loans estimated to meet other QRM
standards, but that exceeded the
proposed LTV ratio cap, had serious
delinquency rates 80 to 128 basis points
higher when examining loans originated
from 1997 to 2002, and 287 to 443 basis
points higher for loans originated from
2005 to 2007.146 Based on historical
loan performance data, the Agencies are
proposing a requirement for a LTV ratio
of 80 percent for purchase mortgage
transactions.
According to the LPS dataset, loans
used to refinance existing mortgages
have a greater likelihood of default at
every LTV ratio level than those used to
purchase homes; moreover, the default
rates are steeper for refinance loans than
for purchase loans, suggesting that
refinance loans are more sensitive to the
LTV ratio. Thus, to control risk of
default in a manner consistent with the
complete exemption afforded QRMs, the
Agencies are proposing that these loans
have tighter LTV ratio requirements
than purchase loans.
The proposed rules put a combined
LTV ratio cap for QRMs of 75 percent
on rate and term refinance loans and 70
percent for cash-out refinance loans.147
Again, estimates of the performance of
these loans vary across datasets.
However, because they have historically
performed worse than purchase loans,
and because they are more sensitive to
LTV ratios than purchase loans, the
lower combined LTV ratio caps on
refinance loans should work to reduce
risk of default on these loans.
Again, the data from the Enterprises
indicates that these LTV ratio caps
should significantly reduce the default
rate on QRMs that are refinancing
transactions. These data show that rate
and term refinancings that are estimated
to meet other QRM standards, but are
estimated to have exceeded the
proposed combined LTV cap, had
serious delinquency rates 32 to 70 basis
points higher when examining loans
originated from 1997 to 2002, and 196
to 539 basis points higher for loans
originated from 2005 to 2007. For cashout refinancings that are estimated to
meet other QRM standards, but are
estimated to have exceeded the
proposed combined LTV cap, such
loans had serious delinquency rates 42
to 81 basis points higher when
examining loans originated between
1997 and 2002, and 255 to 405 basis
points higher when examining loans
originated from 2005 to 2007.
in the first year, two percent in the second year, and
one percent in the third year. Creditors who offer
a consumer a loan with a prepayment penalty must
also offer the consumer a loan without a
prepayment penalty. Under section
129C(b)(2)(A)(vii) of TILA, the total ‘‘points and
fees’’ for a QM may not exceed three percent of the
total loan amount, and under section 103(aa)(4) of
TILA, the definition of ‘‘points and fees’’ now
includes the maximum prepayment penalties and
fees which may be charged or collected under the
terms of the credit transaction. TILA also limits
prepayment penalties in section 103(aa)(1)(A)(iii),
which defines a ‘‘high-cost’’ mortgage loan as any
mortgage (regardless of its cost or other terms) in
which the creditor may charge prepayment fees or
penalties more than 36 months after the closing of
the transaction, or in which the fees or penalties
exceed, in the aggregate, more than two (2) percent
of the amount prepaid. And under section 129(c) of
TILA, as amended by the Dodd-Frank Act, high-cost
mortgage loans may not contain prepayment
penalties.
145 While many creditworthy homebuyers seeking
to purchase a home will likely not have the 20
percent down payment required for a QRM, sound
underwriting of these loans may well require the
prudent use of judgment about the borrower’s
ability to repay the loan and other risk mitigants
that are likely to change over time and vary from
borrower to borrower. Such judgments are difficult
to incorporate accurately and effectively into a rule
without introducing substantial complexity and
cost.
146 See Appendix A in the proposed common
rule.
147 See proposed rules at § l.15(a) for the
proposed definition of a ‘‘rate and term refinancing’’
and a ‘‘cash-out refinancing.’’
Request for Comment
119(a). The Agencies request
comment on all aspects of the proposed
rules’ limits on the payment terms of a
QRM. In addition, the Agencies request
comment on the following matters.
119(b). Should additional or different
payment terms be established for
QRMs? Commenters requesting
additional or different limits are
encouraged to provide data indicating
that such additional or different terms
would result in a lower risk of default.
119(c). Would different interest rate
caps, such as a one percent (100 basis
points) increase in any twelve month
period, be more appropriate than the
caps set forth in the proposal? 119(d).
Recognizing the very damaging effects
that prepayment penalties had on some
borrowers during the recent housing
market distress, the proposed rules do
not permit any loans with prepayment
penalties to qualify as a QRM. Often, the
borrower that suffered because of the
existence of such penalties were those
with large, unaffordable payment shocks
as low initial rates expired or those
whose credit standing improved after
origination of the loan, but who were
not able to benefit from such
improvements by refinancing into a
potentially lower rate loan. Given the
tight credit and product standards
proposed for QRMs, such conditions are
less likely to be relevant to QRM
borrowers, and some QRM borrowers
might reasonably benefit from an
opportunity to obtain a mortgage with
modest prepayment penalties in the
early years of the loan in exchange for
lower interest rate. Should the Agencies
permit prepayment penalties in QRM
loans (to the extent otherwise possible
within the limits established for QMs)?
119(e). If so, what, if any, limitations
should apply to such penalties?
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4. Loan-to-Value Ratio
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Request for Comment
120. The Agencies seek comment on
the appropriateness of the proposed
LTV and combined LTV ratios for the
different types of mortgage transactions.
5. Down Payment
If a mortgage transaction is for the
purchase of a one-to-four family
property, then the proposed rules
require that the borrower provide a cash
down payment in an amount equal to at
least the sum of:
(i) The closing costs payable by the
borrower in connection with the
mortgage transaction;
(ii) 20 percent of the lesser of—
(A) The estimated market value of the
one-to-four family property as
determined by a qualifying appraisal (as
described in the following section); and
(B) The purchase price of the one-tofour family property to be paid in
connection with the mortgage
transaction; and
(iii) If the estimated market value of
the one-to-four family property as
determined by a qualifying appraisal is
less than the purchase price of the oneto-four family property to be paid in
connection with the mortgage
transaction, the difference between
these amounts.
For example, the down payment
amount would equal $30,000 on a
mortgage transaction with $10,000 in
borrower-paid closing costs, and where
the purchase price equaled $100,000 on
a property with a qualifying appraisal
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that reflects a $100,000 market value as
follows: (i) $10,000 in closing costs;
plus (ii) $20,000 (based on 20 percent of
the $100,000 purchase price which is
less than or equal to the $100,000
market value); plus (iii) $0 (due to
purchase price being less than or equal
to the market value of the property).
However, the down payment amount
would equal $40,000 on a mortgage
transaction with $10,000 in closing
costs, and where the purchase price
equaled $110,000 on a property with a
qualifying appraisal that reflects a
$100,000 market value as follows: (i)
$10,000 in closing costs; plus
(ii) $20,000 (based on 20 percent of the
$100,000 market value which is less
than the $110,000 purchase price); plus
(iii) $10,000 (difference between the
$110,000 purchase price and the
$100,000 market value).
Because historical data indicate that
borrowers with a meaningful equity
interest in their properties exhibit a
lower risk of default,148 the proposal
does not permit the dilution of a
borrower’s equity position by allowing
the financing of closing costs.
The proposal also provides that the
funds used by the borrower to meet the
20 percent down payment requirement
must come from one or more acceptable
sources of the borrower’s own funds as
specified in the Additional QRM
Standards Appendix to the proposed
rules. The acceptable sources of funds
included in the Additional QRM
Standards Appendix are those that
would be considered acceptable sources
under the ‘‘Acceptable Sources of
Borrower Funds’’ section in the HUD
Handbook (e.g., savings and checking
accounts, cash saved at home, stocks
and bonds, and gifts, including eligible
downpayment assistance programs).
While the down payment must come
from acceptable sources of borrower
funds, which as noted above can
include gifts, the Agencies are
proposing to prohibit the use of any
funds subject to a contractual obligation
by the borrower to repay and any funds
from a person or entity with an interest
in the sale of the property (other than
the borrower). In addition, the Agencies
are proposing to require originators to
verify and document the borrower’s
compliance with the down payment
requirements in accordance with the
verification and documentation
standards set forth in the Additional
QRM Standards Appendix. Again, these
standards are based on the standards in
the HUD Handbook.
148 See Austin Kelly, ‘‘Skin in the Game: Zero
Down Payment Mortgage Default,’’ Federal Housing
Finance Agency, Journal of Housing Research, Vol.
19, No. 2, 2008, available at https://papers.ssrn.com/
sol3/papers.cfm?abstract_id=1330132.
121. The Agencies request comment
on the proposed amount and acceptable
sources of funds for the borrower’s
down payment.
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6. Qualifying Appraisal
After considering a variety of
valuation information sources, the
Agencies are proposing that a QRM be
supported by a written appraisal that
conforms to generally accepted
appraisal standards, as evidenced by the
Uniform Standards of Professional
Appraisal Practice, the appraisal
requirements of the Federal banking
agencies, and applicable laws.149 The
Agencies believe these requirements
will help ensure that the appraisal is
prepared by an independent third party
with the experience, competence, and
knowledge necessary to provide an
accurate and objective valuation based
on the property’s actual physical
condition. These requirements are
intended to ensure the integrity of the
appraisal process and the accuracy of
the estimate of the market value of the
residential property.
Request for Comment
122. Should other valuation
approaches be considered in
determining the value of the real
property pledged on the mortgage
transaction?
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7. Ability To Repay
Section 15G provides that, in defining
QRMs, the Agencies should take into
consideration underwriting and product
features that historical loan performance
data indicate result in a lower risk of
default, such as standards with respect
to the borrower’s residual income,150
after taking account of all monthly
obligations, the ratio of the borrower’s
housing payment to the borrower’s
monthly income, or the ratio of the
borrower’s total monthly installment
payments to the borrower’s income.151
Intuitively, a measure of a borrower’s
debt service burden ought to be an
important predictor of default. These
burdens are often measured as the ratio
149 The appraisal regulations and guidance
promulgated by the Federal banking agencies
generally do not apply to real estate-related
financial transactions that qualify for sale to a U.S.
government agency or to the Enterprises, or in
which the appraisal conforms to the appropriate
Enterprise’s appraisal standards applicable to that
category of real estate. See 12 CFR 34.43(a)(10)
(OCC); 12 CFR 225.63(a)(10); (Board); 12 CFR
323(a)(10) (FDIC). The Interagency Appraisal and
Evaluation Guidelines clarify that such transactions
are expected to meet all of the underwriting
requirements of the appropriate agency or
Enterprise, including its appraisal requirements.
Residential mortgage loans sold to the Enterprises
will, in any case, continue to be required to meet
appraisal standards of the appropriate Enterprise
applicable to that category of real estate.
150 Residual income is the borrower’s remaining
or ‘‘residual’’ monthly income after all of the
borrower’s monthly obligations, including the
residual mortgage loan, have been paid.
151 See 15 U.S.C. 78o–11(e)(4)(B)(ii).
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of the borrower’s mortgage payment to
his gross income (often known as the
‘‘front-end ratio’’) and the ratio of all of
the borrower’s debt payments to his
gross income (often known as the ‘‘backend ratio’’).152
The Agencies’ review found that
historical loan performance data did not
always contain information on the
borrowers’ monthly income and debt
obligations and, where such data were
provided, the information was not
always captured in a consistent manner,
making it difficult to aggregate for
statistical analysis. For example, the
loan performance data from the
Enterprises reflect that borrowers with
lower DTI ratios had lower default rates
before consideration of other
underwriting factors. These data show
that, among all loan types, loans that are
estimated to meet the other proposed
QRM standards, but had a front-end
ratio of more than 28 percent or a backend ratio of more than 36 percent, had
serious delinquency rates 20 to 39 basis
points higher when examining loans
originated from 1997 to 2002, and 236
to 359 basis points higher for loans
originated from 2005 to 2007.153
However, in the LPS data described
above, payment to income ratios did not
add significant predictive power once
the effects of credit history, loan type,
and LTV were considered. These results
could be due to different originators
using different definitions of income
and non-mortgage debt burdens.
Additionally, loan officers and brokers
may only verify and report the
minimum income necessary to qualify a
borrower for a loan (or for the type of
loan or interest rate sought). For
example, two borrowers with the same
loan type and the same reported frontend DTI ratio might actually have
different incomes because one
borrower’s spouse works, but this
additional income was not necessary to
qualify for the loan and so was not
reported.
The rule proposes a front-end ratio
limit of 28 percent and a back-end ratio
limit of 36 percent, which are consistent
with the overall conservative nature of
the QRM standards. These ratios are
consistent with the standards widely
used in the early 1990s that limited
front-end ratios to a maximum of 25 to
28 percent and back-end ratios to a
152 The Agencies’ assessment of the available
information suggested that the residual income
method for assessing the borrowers’ ability to repay
is neither widely used nor consistently calculated.
Therefore, the Agencies are not proposing to require
the use of the residual income method for purposes
of determining a borrower’s ability to repay.
153 See Appendix A to this Supplementary
Information.
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maximum of 33 to 36 percent, with the
higher ratios only available to borrowers
with relatively large down payments.154
As noted above and described more
fully in Appendix A to this
Supplementary Information, loan
performance data from the Enterprises
indicate that these ratios are likely to
help contribute to a set of QRM
standards indicative of loans of very
high credit quality.
For purposes of calculating these
proposed ratios, the proposal would
require originators to use the borrower’s
monthly gross income, as determined in
accordance with the effective income
standards set forth in the HUD
Handbook, which have been
incorporated into the Additional QRM
Standards Appendix to the proposed
rules. In addition, originators would be
required to use the borrower’s monthly
housing debt in calculating the frontend ratio, and the borrower’s total
monthly debt in calculating the backend ratio, as such debt amounts are
defined in the HUD Handbook and
incorporated into the Additional QRM
Standards Appendix. The proposed
rules, however, specifically provide that
an originator must include in the
borrower’s monthly housing debt and
total monthly debt any monthly pro rata
payments for real estate taxes,
insurance, ground rent, special
assessments, and homeowner and
condominium association dues. This
requirement is intended to help ensure
that the borrower has the capacity to
meet these ongoing, housing-related
monthly obligations, even where the
borrower does not pay these obligations
on a monthly basis.
The proposed rules also require that
originators verify and document the
borrower’s monthly gross income,
monthly housing debt, and monthly
total debt in accordance with the
verification and documentation
standards of the HUD Handbook, as
incorporated into the Additional QRM
Standards Appendix.155 The proposed
rules also require the originator to
determine the amount of the monthly
first-lien mortgage payment and, in the
case of refinancing transactions, the
monthly payment for other debt secured
by the property (including any open-end
credit transaction as if fully drawn) that
to the creditor’s knowledge would exist
at the closing of the refinancing
154 See National Association of Realtors,
‘‘Financing the Home Purchase: The Real Estate
Professional’s Guide,’’ Chicago: National
Association of Realtors (1993), at 20.
155 Section 129C(b)(2)(A)(iii) of TILA requires that
the originator of a QM verify and document the
income and financial resources relied upon in
qualifying the borrower for the loan.
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transaction. These determinations
would be based on the maximum
interest rate chargeable during the first
five years after the date on which the
first regular periodic payment will be
due and a payment schedule that fully
amortizes the mortgage over the full
term of the loan, which cannot exceed
30 years. These requirements are based
on those that apply to QMs under
section 129C of TILA.156
Request for Comment
123. The Agencies seek comment on
the appropriateness of the proposed
front-end ratio limit of 28 percent and
the proposed back-end ratio limit of 36
percent.
8. Points and Fees
Section l.15(d)(7) of the proposed
rules reflects the restriction on ‘‘points
and fees’’ for QMs contained in section
129C(b)(2)(A)(vii) of TILA. As with
other standards set forth in TILA for
QMs, the Agencies have considered the
statutory provisions governing points
and fees for QMs and have sought to
ensure that the standards applicable to
QRMs would be no broader than those
that may potentially apply to QMs.157
156 See
section 129C(b)(2)(A)(iv) and (v) of TILA.
129C(b)(2)(C) of TILA defines the term
‘‘points and fees’’ with reference to the definition of
‘‘points and fees’’ in section 103(aa)(4) of TILA,
which deals with ‘‘high-cost’’ mortgages. Under
section 103(aa)(4) of TILA, as amended by the
Dodd-Frank Act, points and fees include: (i) All
items included in the ‘‘finance charge’’ under TILA,
except interest or the time-price differential; (ii) All
compensation paid directly or indirectly by a
consumer or creditor to a mortgage originator (as
defined in section 103(cc)(2) of TILA) from any
source, including a mortgage originator that is also
the creditor in a table-funded transaction; (iii) Each
of the charges listed in section 106(e) of TILA
(except an escrow for future payment of taxes) that
are excluded from the definition of the ‘‘finance
charge’’ (under section 106(e) of TILA, the following
items when charged in connection with any
extension of credit secured by an interest in real
property are not included in the computation of the
finance charge with respect to that transaction: fees
or premiums for title examination, title insurance,
or similar purposes; fees for preparation of loanrelated documents; escrows for future payments of
taxes and insurance; fees for notarizing deeds and
other documents; appraisal fees, including fees
related to any pest infestation or flood hazard
inspections conducted prior to closing; and fees or
charges for credit reports), unless the charge is
reasonable, the creditor receives no direct or
indirect compensation, and the charge is paid to a
third party unaffiliated with the creditor; (iv)
Premiums or other charges payable at or before
closing for any credit life, credit disability, credit
unemployment, or credit property insurance, or any
other accident, loss-of-income, life or health
insurance, or any payments made directly or
indirectly for any debt cancellation or suspension
agreement or contract, except that insurance
premiums or debt cancellation or suspension fees
calculated and paid in full on a monthly basis are
not considered financed by the creditor; (v) The
maximum prepayment fees and penalties that may
be charged or collected under the terms of the credit
transaction; (vi) All prepayment fees or penalties
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Under the proposal, in order for a
mortgage to be a QRM, the total points
and fees payable by the borrower in
connection with the mortgage
transaction may not exceed three
percent of the total loan amount, which
would be calculated in the same manner
as in Regulation Z.158 Under Regulation
Z, the ‘‘total loan amount’’ is calculated
by taking the ‘‘amount financed,’’ as
defined in 12 CFR 226.18(b), and
deducting any ‘‘points and fees’’ that are
financed by the creditor and not
otherwise deducted in calculating the
amount financed. In this way, the three
percent limit on points and fees for
QRMs will be based on the amount of
credit extended to the borrower without
taking into account the financed points
and fees themselves.
For QRMs, the proposed rules would
define ‘‘points and fees’’ consistent with
the current definition of ‘‘points and
fees’’ under the Board’s Regulation Z,
but would include the additional items
added to the TILA definition of ‘‘points
and fees’’ by the Dodd-Frank Act.
Specifically, the term ‘‘points and fees’’
would include: (1) All items required to
be disclosed as ‘‘finance charges’’ under
Regulation Z (12 CFR 226.4(a) and
226.4(b)), except interest or the timeprice differential; (2) All compensation
paid directly or indirectly by a
consumer or creditor to a ‘‘mortgage
originator’’ (as defined in section
103(cc)(2) of TILA) from any source,159
including a mortgage originator that is
also the creditor in a table-funded
transaction; 160 (3) All items excluded
from the ‘‘finance charge’’ under
Regulation Z listed in 12 CFR
226.4(c)(7) (other than amounts held for
that are incurred by the consumer if the consumer
refinances a previous loan made or currently held
by the same creditor or an affiliate of the creditor;
and (vii) Such other charges as the Board
determines to be appropriate.
For purposes of a ‘‘qualified mortgage,’’ section
129C(b)(2)(C) of TILA provides some exceptions to
the definition of ‘‘points and fees’’ under section
103(aa)(4) of TILA. In calculating points and fees for
purposes of the three percent limit applicable to
QMs, points and fees do not include bona fide third
party charges not retained by the mortgage
originator, creditor, or an affiliate of the creditor or
mortgage originator. See section 129C(b)(2)(C)(i) of
TILA. In addition, for purposes of computing the
total points and fees for the three percent QM limit,
the total points and fees excludes certain bona fide
discount points if certain conditions are met. See
section 129C(b)(2)(C)(ii)–(iv) of TILA.
158 See 12 CFR 226.32(a)(1)(ii) and (b)(1).
159 Under section 103(aa)(4)(B) of TILA, as
amended by the Dodd-Frank Act, compensation
paid to a mortgage originator ‘‘from any source’’ is
included in ‘‘points and fees.’’
160 For clarity, the proposal does not include the
phrase ‘‘from any source’’ because the proposal
would include all compensation paid directly or
indirectly by a consumer or creditor to a mortgage
originator, which would necessarily include
compensation from any source.
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future payment of taxes), unless the
charge is reasonable, the creditor and
mortgage originator receive no direct or
indirect compensation in connection
with the charge, and the charge is not
paid to an affiliate of the creditor or
mortgage originator; (4) Premiums or
other charges payable at or before
closing for any credit life, credit
disability, credit unemployment, or
credit property insurance, or any other
accident, loss-of-income, life or health
insurance, or any payments made
directly or indirectly for any debt
cancellation or suspension agreement or
contract; 161 and (5) All prepayment fees
or penalties that are incurred by the
consumer if the consumer refinances a
previous loan made or currently held by
the same creditor or an affiliate of the
same creditor.162
Items excluded from the finance
charge under 12 CFR 226.4(c), 226.4(d)
and 226.4(e) would be excluded from
the proposal’s definition of ‘‘points and
fees,’’ unless those items are specifically
included elsewhere in the definition of
‘‘points and fees.’’ The proposed rules do
not exclude ‘‘bona fide discount points’’
or certain bona fide third-party charges
from ‘‘points and fees.’’ The Agencies are
also not proposing an adjustment to the
limitation on points and fees for smaller
loans as required for QMs under section
129C(b)(2)(D) of TILA.
Request for Comment
124(a). The Agencies request
comment on all aspects of the proposed
definition of ‘‘points and fees’’ for QRM
purposes. In addition, the Agencies seek
comment on the following matters.
124(b). Should the exclusion for ‘‘bona
fide discount points’’ and certain bona
fide third-party charges be included in
the final rule? 124(c). If so, in what
manner? 124(d) Would an adjustment to
the limitation on points and fees for
smaller loans, if implemented under
section 129C(b)(2)(D) of TILA, be
appropriate for QRMs?
9. Assumability Prohibition
Under the proposed rules, a QRM
could not be assumable by any person
who was not a borrower under the
161 All such charges are included in ‘‘points and
fees’’ under section 103(aa)(4)(D) of TILA and, thus,
are included in points and fees under the proposal.
Another amendment to TILA added by the DoddFrank Act (Section 129C(d) of TILA), restricts
creditors from financing certain of these charges.
This prohibition will be implemented when the
Board or CFPB implements that section of TILA.
162 Section 103(aa)(4) of TILA also includes in
‘‘points and fees’’ the maximum prepayment fees
and penalties which may be charged or collected
under the terms of the credit transaction. However,
under the proposed rule, QRMs would not be
permitted to have prepayment penalties.
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original mortgage transaction. If a
mortgage were assumable after
origination or its securitization, it is
possible that the new borrower would
not satisfy the QRM requirements,
which could result in the credit quality
of the mortgage being significantly and
negatively affected. While the rule could
require that the loan essentially be reunderwritten using the QRM standards
in connection with an assumption to
address these concerns, such a
requirement could impose significant
costs on the holder or servicer of the
mortgage, and potentially increase the
cost and reduce the liquidity of QRMs.
10. Default Mitigation
The proposed rules also would
require that the originator of a QRM
incorporate into the mortgage
transaction documents certain
requirements regarding servicing
policies and procedures for the
mortgage, including requirements
regarding loss mitigation actions,
subordinate liens, and responsibility for
assumption of these requirements if
servicing rights with respect to the QRM
are sold or transferred. Timely initiation
of loss mitigation activities often
reduces the risk of subsequent default
on mortgages backing the securitization
transaction. Disclosure of the policies
and procedures governing loss
mitigation activities also will inform
borrowers and provide clarity regarding
the consequences of default.
Specifically, the proposed rules
would require that the QRM mortgage
transaction documents include a
provision obliging the creditor of the
QRM to have servicing policies and
procedures to promptly initiate
activities to mitigate risk of default on
the mortgage loan (within 90 days after
the mortgage loan becomes delinquent,
if such delinquency has not been cured)
and to take loss mitigation actions, such
as engaging in loan modifications, in the
event the estimated net present value of
such action exceeds the estimated net
present value of recovery through
foreclosure, without regard to whether
the particular loss mitigation action
benefits the interests of a particular
class of investors in a securitization.
The loss mitigation policies and
procedures must also take into account
the borrower’s ability to repay and other
appropriate underwriting criteria. The
policies and procedures must include
servicing compensation arrangements
that are consistent with the creditor’s
commitment to engage in loss mitigation
activities.
In addition, under the proposal, the
creditor’s policies and procedures
would be required to provide that the
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creditor will implement procedures for
addressing any whole loan owned by
the creditor (or any of its affiliates) and
secured by a subordinate lien on the
same property that secures a QRM if the
borrower becomes more than 90 days
past due on the QRM. If the QRM will
collateralize any asset-backed securities,
the creditor must disclose those
procedures or require them to be
disclosed to potential investors within a
reasonable period of time prior to the
sale of the asset-backed securities. The
Agencies are proposing inclusion of this
element in the policies and procedures
because modification of the QRM could
affect the status of subordinate
mortgages, and the existence of a
subordinate mortgage could affect the
structuring of actions to mitigate losses
on the QRM.
As proposed, the mortgage originator
must provide disclosure of the foregoing
default mitigation commitments to the
borrower at or prior to the closing of the
mortgage transaction. Also, the mortgage
originator would be required to include
terms in the mortgage transaction
documents under which the creditor
commits to include in its servicing
policies and procedures that it will not
sell transfer, or assign servicing rights
for the mortgage loan unless the transfer
agreement requires the purchaser,
transferee or assignee servicer to abide
by the default mitigation commitments
of the creditor as if the purchaser,
transferee or assignee were the creditor
under this section of the proposed
rule.163
It is noted that there is an ongoing
interagency effort among certain Federal
regulatory agencies, including some of
the Agencies joining in this proposed
rulemaking, to develop national
mortgage servicing standards that would
apply to servicers of residential
163 As noted above, the policies and procedures
prescribed under the proposed rule require the
creditor’s procedures with respect to subordinate
liens held by the creditor or affiliates on the
mortgaged property to be disclosed to potential
investors if the creditor subsequently securitizes the
QRM. In addition, the Agencies expect the
creditor’s commitments to have servicing policies
and procedures as specified in the proposed rule
would be reflected in the servicing agreement(s) for
the securitization, which set forth the terms under
which the servicer will service the securitized
assets, and would thus be disclosed to potential
investors in a securitization offering covered by the
SEC’s Regulation AB. If the servicing is transferred
from the creditor to another entity who acts as
securitization servicer, the Agencies expect these
commitments would nevertheless be carried
forward to the servicing agreements for the
securitizations and disclosed pursuant to
Regulation AB, because the policies and procedures
prescribed under the proposed rule require the
creditor not to transfer QRM servicing unless the
agreement requires the transferee to abide by the
same kind of default mitigation commitments as are
required of the creditor.
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mortgages, including bank and bankaffiliated servicers and servicers that are
not affiliated with a bank.164 These
standards would apply to residential
mortgages regardless of whether the
mortgages are QRMs, are securitized or
are held in portfolio by a financial
institution. The primary objective of this
separate interagency effort is to develop
a comprehensive, consistent, and
enforceable set of servicing standards
for residential mortgages that servicers
would have to meet. In addition to
servicing matters covered in this
proposal, the separate interagency effort
on national mortgage servicing
standards is taking into consideration a
number of other aspects of servicing,
including the quality of customer
service provided throughout the life of
a mortgage; the processing and handling
of customer payments; foreclosure
processing; operational and internal
controls; and servicer compensation and
payment obligations. The agencies
participating in this separate effort
currently anticipate requesting comment
on proposed standards later this year,
with the goal of having final standards
issued shortly afterward. At this time,
with respect to specific servicing
standards, the Agencies are requesting
comment only on those particular
standards included in this proposed
rulemaking.
Request for Comment
125. The Agencies solicit comment on
whether the definition of QRM should
include servicing requirements.
126(a). Should the proposed servicing
requirements be more or less robust?
126(b) If so, how should the proposed
servicing requirements be changed?
127(a). Should servicers be required,
as is proposed, to have policies and
procedures that provide for loss
mitigation activities if the borrower is
90 days delinquent, but default may not
have occurred under the mortgage loan
transaction documents?
127(b). Should the policies and
procedures require, or at least not
prohibit, initiation of loss mitigation
activities, including loan modifications,
when default is reasonably foreseeable?
127(c). What would be the practical
implications of such an approach?
128(a). Should servicers be required,
as is proposed, to have policies and
164 Participating agencies in the effort include the
Federal Reserve Board, the Office of the
Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the Office of Thrift
Supervision, the Federal Housing Finance Agency,
the Department of Housing and Urban Development
(including the Government National Mortgage
Association (Ginnie Mae)), the Consumer Financial
Protection Bureau, and the Department of the
Treasury.
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procedures that provide for loss
mitigation actions for QRMs (within 90
days after delinquency, unless the
delinquency is cured) when the
estimated net present value of the action
would exceed the estimated net present
value of recovery through foreclosure?
128(b). Should those policies and
procedures be required to include
specific actions, such as (i) restructuring
the mortgage loan; (ii) reducing the
borrower’s payments through interest
rate reduction, extension of loan
maturity, or similar actions; (iii) making
principal reductions, or (iv) taking other
loss mitigation action in the event that
the estimated net present value of that
action would exceed the estimated net
present value of recovery though loan
foreclosure?
128(c). What would be the practical
implications of such an approach?
129. The Agencies seek comment on
whether other servicing standards
should be included, consistent with the
statute’s authority.
130(a). What are the practical
implications of the proposed QRM
servicing standards?
130(b). Do commenters envision
operational issues in implementing the
standards?
130(c). If so, please describe.
130(d). Are the standards sufficiently
clear?
130(e). If not, which should be
clarified?
131. Would the proposed QRM
servicing conditions restrict or impede
the ability or willingness of certain
classes of originators to originate QRMs?
132(a). Is the scope of the QRM
servicing standards appropriate?
132(b). Are there alternatives to QRM
servicing standards that would better
address servicing issues?
133(a). Should the servicing
requirements be part of the pooling and
servicing agreement rather than part of
the mortgage transaction documents?
133(b). Should they be included in
both sets of documentation?
134(a). If a creditor or an affiliate has
an ownership interest in a subordinate
lien mortgage and the creditor services
the first lien mortgage, should the
creditor be required to implement predefined processes to address any
potential conflicts of interest when the
first lien loan becomes 90 days past
due?
134(b). What types of processes
should be required?
134(c). Would specification of a
particular process unduly limit the
ability of the creditor to address
different circumstances that may arise?
135(a). Should the Agencies impose a
standard requiring that a particular risk
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mitigation activity maximize the
recovery based on net present value to
avoid potential conflicts of interests
between different classes of investors?
135(b). How would that be
determined?
135(c). Would this approach improve
the ability of servicers to best represent
the interest of all investors?
135(d). What would be the practical
implications under such an approach?
136(a). Are the proposed
compensation requirements
appropriate?
136(b). For example, should the
compensation structure be more
specific, depending on the type of risk
mitigation action deemed appropriate?
136(c). If so, how?
137(a). Pursuant to servicers’
obligations to investors under the terms
of securitization transaction documents,
servicers are generally required to
advance scheduled payments of
principal and interest to investors after
a borrower has become past due for
some period of time (with respect to
private label securities, usually until
foreclosure is started), to the extent that
such monthly advances are expected to
be reimbursed from future payments
and collections or insurance payments
or proceeds of liquidation of the related
mortgage loan. These monthly advances
are intended to maintain a regular flow
of scheduled principal and interest
payments on the certificates rather than
to guarantee or insure against losses.
Does funding of these delinquent
payments create liquidity constraints for
servicers that incent servicers to take
action (e.g., start foreclosure) that may
not be in the investors’ best interest?
137(b). Should the Agencies put
limits on servicers advancing
delinquent mortgagors’ payments of
principal and interest to investors?
137(c). Would such a limitation harm
investors’ interests?
137(d). What are the practical
implications of such an approach?
138(a). Should the Agencies require
servicing standards for a broader class of
securitized residential mortgages?
138(b). If so, how?
139. For commenters responding to
any of the foregoing questions or with
recommendations for different or
additional approaches to servicing
standards, are such approaches
consistent with the statutory factors the
Agencies are directed to take into
account under the QRM exemption?
140. The Agencies are in the process
of developing national mortgage
servicing standards, which would cover
all residential mortgage loans, including
QRMs. In light of this, the Agencies seek
comment on whether the establishment
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of national mortgage servicing standards
is a more effective means to address the
problems associated with servicing of
all loans.
D. Repurchase of Loans Subsequently
Determined To Be Non-Qualified After
Closing
As required by section 15G and
discussed in greater detail in Part IV.B
of this Supplementary Information, the
proposed rules require that the
depositor of the asset-backed security
certify that it has evaluated the
effectiveness of its internal supervisory
controls with respect to the process for
ensuring that all assets that collateralize
the asset-backed security are QRMs and
has concluded that such internal
supervisory controls are effective.
Nevertheless, the Agencies recognize
that, despite the use of robust processes
and procedures, it is possible that one
or more loans included in a QRM
securitization transaction may later be
determined to have not met the QRM
definition due to inadvertent error. For
example, an originator conducting postorigination file reviews for compliance
or internal audit purposes may find that
some aspects of the documentation
required to verify the borrower’s
monthly gross income were not
obtained. If the discovery of such an
error after closing of the securitization
terminated the securitization’s QRM
exemption, then sponsors and investors
may well be unwilling to participate in
the securitization of QRMs. On the other
hand, unless sponsors or depositors face
some penalty for the inclusion in a QRM
securitization transaction of loans that
do not meet the QRM standards,
sponsors and depositors may not have
the proper incentives to use all
reasonable efforts to ensure that
securitizations relying on the QRM
exemption are collateralized only by
loans that meet all of the QRM
standards.
The proposal seeks to balance these
interests by providing that a sponsor
that has relied on the QRM exemption
with respect to a securitization
transaction would not lose the
exemption, with respect to the
transaction, if, after closing of the
securitization transaction, it is
determined that one or more of the
mortgages collateralizing the ABS do
not meet all of the criteria to be a QRM,
provided that certain conditions are
met. First, the depositor must have
certified that it evaluated the
effectiveness of its internal supervisory
controls with respect to the process for
ensuring that all of the loans that
collateralize the ABS are QRMs and
concluded that its internal supervisory
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controls are effective, as required by
§ l.15(b)(4) of the proposed rules.
Second, the sponsor must repurchase
the loan(s) determined to not be QRMs
from the issuing entity at a price at least
equal to the remaining principal balance
and accrued interest on the loan(s). The
sponsor must complete this repurchase
no later than ninety (90) days after the
determination that the loan(s) does not
satisfy the QRM requirements. Third,
the sponsor must promptly notify (or
cause to be notified) all investors of the
ABS of any loan(s) that are required to
be repurchased by the sponsor pursuant
to this repurchase obligation, including
the principal amount of the repurchased
loan(s) and the cause for such
repurchase.
These conditions are intended to
provide a sponsor with the opportunity
to correct inadvertent errors by
promptly repurchasing any nonqualified loan(s) and removing such
non-qualifying loan(s) from the pool,
while protecting investors. Moreover, in
light of this buy-back requirement,
sponsors should continue to have a
strong economic incentive to ensure that
all loans backing a QRM securitization
satisfy all of the conditions applicable to
QRMs prior to closing of the transaction.
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Request for Comment
141(a). Should the Agencies require,
as a condition to qualify for the QRM
exemption, that the sponsor repurchase
the entire pool of loans collateralizing
the ABS if the amount or percentage of
the loans that are required to be
repurchased due to the failure to meet
the QRM standards reaches a certain
threshold?
141(b). If so, what threshold would be
appropriate?
142(a). Should the Agencies permit a
sponsor, within the first four months
after the closing of a QRM
securitization, to substitute a
comparable QRM loan for a residential
mortgage loan that is determined, postclosing, to not be a QRM (in lieu of
purchasing the loan for cash)?
142(b). If so, is four months an
appropriate period or should the rule
allow more or less time?
E. Request for Comment on Possible
Alternative Approach
As discussed previously, the
approach taken by the proposal to
implementing the exemption for QRMs
within the broader context of section
15G is to limit QRMs to mortgages of
very high credit quality, while
providing sponsors considerable
flexibility in how they meet the risk
retention requirements for loans that do
not qualify as QRMs (or for another
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exemption). An alternative approach to
implementing the exemption for QRMs
within the context of section 15G would
be to create a broader definition of a
QRM that includes a wider range of
mortgages of potentially lower credit
quality, and make the risk retention
requirements stricter for non-QRM
mortgages, such as by, for example,
providing sponsors with less flexibility
in how they retain risk (e.g., requiring
vertical risk retention or increasing the
base risk retention requirement), in
order to provide additional incentives to
originate QRM loans. Under this type of
alternative approach, the proposed QRM
standards could be modified as
follows—
(a) If the mortgage transaction is a
purchase transaction or rate and term
refinancing, the combined LTV ratio of
the mortgage transaction could not
exceed 90 percent (with no restriction
on the existence of a subordinate lien at
closing of a purchase transaction);
(b) If the mortgage transaction is a
cash-out refinancing, the combined LTV
ratio of the mortgage transaction could
not exceed 75 percent;
(c) The borrower’s required cash
down payment on a purchase mortgage
could be reduced to—
(1) 10 percent (rather than the
proposed 20 percent) of the lesser of the
property’s market value or purchase
price, plus
(2) The closing costs payable by the
borrower in connection with the
mortgage transaction; and
(d) A borrower’s maximum front-end
DTI ratio could be increased to—
(1) 33 percent, if payments under the
mortgage could not increase by more
than 20 percent over the life of the
mortgage; or
(2) 28 percent, if payments under the
mortgage could increase by more than
20 percent over the life of the mortgage;
(e) A borrower’s maximum back-end
DTI ratio would be increased to—
(1) 41 percent, if payments under the
mortgage could not increase by more
than 20 percent over the life of the
mortgage; or
(2) 38 percent, if payments under the
mortgage could increase by more than
20 percent over the life of the mortgage;
and
(f) Mortgage guarantee insurance or
other types of insurance or credit
enhancements provided by third parties
could be taken into account in
determining whether the borrower met
the applicable combined LTV
requirement, but such insurance or
enhancements would not alter the 90
percent maximum combined LTV for
purchase transactions and rate and term
refinancings and 75 percent maximum
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combined LTV for cash-out
refinancings.
Request for Comment
143. The Agencies seek comment on
the potential benefits and costs of the
alternative approach, with a broader
QRM exemption combined with a
stricter set of risk retention
requirements for non-QRM mortgages.
144(a). If such an alternative approach
were to be adopted, what stricter risk
retention requirements would be
appropriate in order to provide
additional incentives to underwrite a
greater share of origination volume
within the QRM definition?
144(b). Should such stricter
requirements involve the form of risk
retention or a higher amount of risk
retention?
144(c). Are there other changes that
would achieve the same objective?
145. How would this approach help to
ensure high quality loan underwriting
standards and align the interests of
investors?
146(a). Would this approach have the
practical effect of exempting the
securitization of most residential loans
from the risk retention requirement?
146(b). If so, how would this
positively and/or negatively affect
investors in such securitizations?
146(c). Would an offering of an ABS
backed by loans complying with the
lower standards in the alternative
approach adequately promote the
necessary alignment of incentives
among originators, sponsors, and
investors?
147. What impact might a broader
QRM definition have on the pricing,
liquidity, and availability of loans that
might fall outside the broader QRM
boundary?
148. Would the lower QRM standards
under the alternative approach be
consistent with the requirement that
QRMs be fully exempted from section
15G’s risk retention requirements?
149. How could this type of
alternative approach be designed to
limit the likelihood that loans with
significant credit risk are included in
the pool and thus not subject to risk
retention?
V. Reduced Risk Retention
Requirements for ABS Backed by
Qualifying Commercial Real Estate,
Commercial or Automobile Loans
Under Section 15G, the regulations
issued by the Agencies must include
underwriting standards for residential
mortgages, commercial real estate (CRE)
loans, commercial loans, and
automobile loans, as well as any other
asset class that the Federal banking
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agencies and the Commission deem
appropriate.165 These underwriting
standards, which are to be established
by the Federal banking agencies, must
specify terms, conditions, and
characteristics of a loan within such
asset class that indicate low credit risk
with respect to the loan.166 Section 15G
provides that the Agencies must allow
a securitizer to retain less than five
percent of the credit risk of loans within
an asset class that meet the
underwriting standards set jointly by
the Federal banking agencies if such
loans are securitized through the
issuance of an ABS.167
The following discussion addresses
the underwriting standards established
by the Federal banking agencies for CRE
loans, commercial loans, and
automobile loans.
A. Asset Classes
As directed by section 15G, § l.18 to
§ l.20 of the proposed rules include
underwriting standards for CRE loans,
commercial loans, and automobile loans
that would allow ABS backed
exclusively by loans that meet these
underwriting standards to qualify for a
less than five percent risk retention
requirement. As discussed in further
detail in Part IV of this Supplementary
Information, the proposed rules provide
a complete exemption from the risk
retention requirements for securitization
transactions that are collateralized
solely by residential mortgages that
qualify as QRMs. Accordingly, the
proposed rules do establish separate
rules for securitizations of residential
mortgages that have terms, conditions
and characteristics that indicate a low
credit risk as required by section
15G(c)(2)(B). The Agencies do not
propose to establish additional
underwriting standards for residential
mortgages that would be different from
those set forth in the QRM standards. In
determining not to propose additional
standards, the Agencies considered,
among other things, whether requiring
risk retention greater than zero percent
but less than five percent would provide
an adequate incentive to sponsors and
originators to underwrite assets meeting
those standards.
Although the Agencies recognize that
securitization markets include
securitizations collateralized by various
subcategories of assets with unique
characteristics, the Agencies believe that
the asset classes specified in section
15G (e.g., residential mortgages,
commercial mortgages, commercial
165 See
15 U.S.C. 78o–11(c)(2)(A).
id. at sec. 78o–11(c)(2)(B).
167 See id. at sec. 78o–11(c)(1)(B)(ii).
166 See
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loans and automobile loans) capture a
predominance of all ABS issuances by
dollar volume where the underlying
pool is comprised of relatively
homogeneous assets. Moreover, general
information for ABS issuances
collateralized exclusively by CRE,
commercial, and automobile loans is
widely available and, due to the
homogeneity of the underlying pool,
lends itself to the establishment of
uniform underwriting standards
establishing low credit risk for all of the
assets within the pool. These
characteristics also should facilitate the
ability of investors and supervisors to
monitor a sponsor’s compliance with
the proposed standards and disclosure
requirements in a timely and
comprehensive manner.
In contrast, many of the other types of
ABS issuances are collateralized by
assets that exhibit significant
heterogeneity, or assets that by their
nature exhibit relatively high credit risk.
Such factors make it difficult to develop
underwriting standards establishing low
credit risk that can be, as a practical
matter, applicable to an entire class of
underlying assets in the manner
described under section 15G.
Accordingly, for purposes of the
proposed rules, the Federal banking
agencies and the Commission do not
propose to establish asset classes in
addition to those set forth in section
15G.
Request for Comment
150(a). Should underwriting
standards be developed for residential
mortgage loans that are different from
those proposed for the QRM definition
and under which a sponsor would be
required to retain more than zero but
less than five percent of the credit risk?
150(b). If so, what should those
underwriting standards be and how
should they differ from those
established under the QRM provisions?
150(c). For example, should such
underwriting standards allow for a loanto-value ratio of up to 90 percent for
purchase mortgage loans if there is
mortgage insurance that would provide
investors similar amounts of loss
protection upon default as would be
provided by a mortgage with a loan-tovalue ratio of 80 percent?
150(d). If additional underwriting
standards were established for
residential mortgages, what amount of
risk retention less than five percent
should be required for loans meeting
such standards, and should it be
required to be held in a particular form?
151. If any new underwriting
standards for residential mortgages were
to be established and permit the
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inclusion of mortgage guarantee
insurance or other types of insurance or
credit enhancements, what financial
eligibility standards should be
incorporated for mortgage insurance or
financial product providers?
152. Should additional asset classes
beyond those specified in section 15G
be established and, if so, how should
the associated underwriting standards
for such additional asset classes be
defined? Commenters are encouraged to
provide supporting data regarding the
prevalence of each asset class in the
ABS market, as well as loan-level
performance data that provides
information on the characteristics,
terms, and conditions of the underlying
loans and that may be useful in
developing standards that identify loans
within such asset class that have low
credit risk.
B. ABS Collateralized Exclusively by
Qualifying CRE Loans, Commercial
Loans, or Auto Loans
Section 15G(c)(1)(B)(ii) provides that
a sponsor of an ABS issuance
collateralized exclusively by loans that
meet the underwriting standards
prescribed by the Federal banking
agencies under section 15G(c)(2)(B)
shall be required to retain less than five
percent of the credit risk of the
securitized loans. The Agencies are
proposing a zero percent risk retention
requirement (that is, the sponsor would
not be required to retain any portion of
the credit risk) for ABS issuances
collateralized exclusively by loans from
one of the asset classes specified in the
proposed rules, and which meet the
proposed underwriting standards. In
proposing a zero risk retention
requirement for ABS backed by
qualifying loans within these asset
classes, the Agencies considered several
factors. As discussed below, the
underwriting standards the Agencies
propose are, as is appropriate for a zero
percent risk retention requirement, very
conservative. In addition, the Agencies
were concerned that establishing a risk
retention requirement between zero and
five percent for qualifying assets within
these asset classes may not sufficiently
incent securitizers to allocate the
resources necessary to ensure that the
collateral backing an ABS issuance
satisfies the proposed underwriting
standards, as there may be significant
compliance costs to structure and
maintain the retention piece of a
securitization structure (irrespective of
how it is calibrated) and provide
required disclosures to investors.
Sections l.18 to l.20 of the
proposed rules establish underwriting
standards for CRE loans, commercial
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Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules
loans, and automobile loans that are
designed to ensure that loans in these
asset classes, which qualify for a zero
risk retention requirement, are of very
low credit risk. The proposed
underwriting standards are based on the
Federal banking agencies’ expertise and
supervisory experience with respect to
the credit risk of the loans in each of the
prescribed asset classes. Commercial,
CRE and automobile loans that meet the
conservative underwriting standards
included in the proposed rules are
referred to as ‘‘qualifying’’ commercial,
CRE and automobile loans.
The Federal banking agencies have
sought to make the standards for
qualifying commercial loans, CRE loans
and automobile loans, transparent to,
and verifiable by, originators,
securitizers, investors and supervisors.
To facilitate compliance with the rule,
as well as the supervision and
enforcement of the rule, the proposed
standards are generally prescriptive,
rather than principle-based.
The Agencies recognize that many
prudently underwritten CRE,
commercial and automobile loans will
not meet the underwriting standards set
forth in § l.18 to § l.20 of the
proposed rules. For example, the
Agencies note that the proposed
standards are significantly more prudent
and conservative than those required to
attain a ‘‘pass’’ credit under the Federal
banking agencies’ supervisory practices.
Sponsors of ABS backed by loans that
do not meet the underwriting standards
will be required to retain some of the
credit risk of the securitized loans in
accordance with the proposed
regulation (unless another exemption is
available). However, as noted
previously, the proposed rules provide
sponsors with several options for
complying with the risk retention
requirements of section 15G so as to
reduce the potential for these
requirements to disrupt securitization
markets or materially affect the flow or
pricing of credit to borrowers and
businesses. Moreover, the national pool
of commercial loans, CRE loans and
automobile loans that do not meet the
standards set forth in § l.18 to § l.20
of the proposed rules should be
sufficiently large, and include enough
prudently underwritten loans, so that
ABS backed by such loans will be
routinely issued and purchased by a
wide variety of investors. As a result,
the market for such securities should be
relatively liquid.
Request for Comment
153. The Agencies request comment
on the appropriateness of a total
exemption for sponsors of ABS
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issuances collateralized exclusively by
qualifying CRE, commercial, or
automobile loans that meet the
underwriting standards set forth in
§ l.18 to § l.20 of the proposed rules.
Commenters who support a partial
exemption are encouraged to provide
information regarding the methodology
the Agencies should use to calibrate the
retention requirement, in a manner that
considers the relative risk of the
securitization transaction, both within
and across the proposed asset classes.
C. Qualifying Commercial Loans
For an ABS issuance collateralized
exclusively by commercial loans to
qualify for a zero percent risk retention
requirement, the commercial loans must
satisfy the underwriting standards set
forth in § l.18 of the proposed rules.
The proposed rules define a commercial
loan as any secured or unsecured loan
to a company or an individual for
business purposes, other than a loan to
purchase or refinance a one-to-four
family residential property, a loan for
the purpose of financing agricultural
production, or a loan for which the
primary source (that is, 50 percent or
more) of repayment is expected to be
derived from rents collected from
persons or entities that are not affiliates
of the borrower. Commercial loans
encompass a wide variety of credit types
and terms. However, these loans
generally are similar in that the primary
source of repayment is revenue from the
business operations of the borrower.
The standards for a qualifying
commercial loan use measures that are
consistent with, but more prudent and
conservative than, industry standards
for evaluating the financial condition
and repayment capacity of a borrower.
1. Ability To Repay
The historical performance of a
borrower with respect to its outstanding
loan obligations is, generally, a useful
measure for evaluating whether the
borrower will likely satisfy new debt
obligations. However, even where a
borrower has a consistent and
documented record of satisfactory
performance on prior debt obligations,
the originator also must ensure that the
borrower’s financial condition has not
changed in a way that could adversely
affect its capacity to satisfy new loan
obligations. Accordingly, under § l.18
of the proposed rules, the originator of
a qualifying commercial loan must
verify and document the financial
condition of the borrower as of the end
of the borrower’s two most recently
completed fiscal years. In addition, the
originator must conduct an analysis of
the borrower’s ability to service its
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24131
overall debt obligations during the next
two years, based on reasonable
projections. A commercial loan would
meet the standards in the proposed
rules only if the originator determines
that, during the borrower’s two most
recently completed fiscal years and the
two-year period after the closing of the
commercial loan, the borrower had, or
is expected to have: (1) A total liabilities
ratio 168 of 50 percent or less; (2) a
leverage ratio 169 of 3.0 or less; and (3)
a debt service coverage (DSC) ratio 170 of
1.5 or greater.
Under the proposed rules, the loan
payments under the commercial loan
must be determined based on straightline amortization of principal and
interest that fully amortize the debt over
a term that does not exceed five years
from the closing date for the loan. In
addition, the loan documentation must
require payments no less frequently
than quarterly over a term that does not
exceed five years. The Federal banking
agencies believe these proposed
methods for assessing a borrower’s
financial condition and ability to repay
are consistent with industry standards
for evaluating the financial condition
and repayment capacity of a borrower.
The proposal does not require that a
commercial loan be secured by
collateral in order to be a qualifying
commercial loan. However, where the
loan is made on a secured basis, the
proposed rules include several
conditions designed to ensure that the
collateral is maintained and available to
be used to satisfy the borrower’s
obligations under the loan, if necessary.
For example, if the commercial loan is
originated on a secured basis, the
originator must obtain a first-lien
security interest on the pledged
property and include covenants in the
loan agreement that require the
borrower to maintain the condition of
the collateral and permit the originator
to inspect the collateral and the books
and records of the borrower. The loan
documentation for the commercial loan
also must include covenants that require
the borrower to: (a) Pay all applicable
taxes, fees, charges and claims where
168 Total liabilities ratio equals the borrower’s
total liabilities, determined in accordance with
GAAP divided by the sum of the borrower’s total
liabilities and equity, less the borrower’s intangible
assets, with each component determined in
accordance with GAAP.
169 The leverage ratio equals the borrower’s total
debt divided by the borrower’s annual income
before expenses for interest, tax, depreciation, and
amortization (EBITDA), as determined in
accordance with GAAP.
170 The DSC ratio equals the borrower’s EBITDA,
as of the most recently completed fiscal year
divided by the sum of the borrower’s annual
payments for principal and interest on any debt
obligation.
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nonpayment could give rise to a lien
against the collateral; (b) take any action
necessary to perfect or defend the
security interest (or priority of the
security interest) of the originator (or
any subsequent holder of the loan) in
the collateral against claims adverse to
the lender’s interest; and (c) maintain
insurance that protects against loss on
the collateral at least up to the amount
of the loan, and that names the
originator (or any subsequent holder of
the loan) as an additional insured or
loss payee.
2. Risk Management and Monitoring
Requirements
To mitigate default risk during
periods of economic stress or when the
financial condition of the borrower
otherwise deteriorates, the proposed
rules require the loan documentation to
include covenants that restrict the
borrower’s ability to incur additional
debt or transfer or pledge its assets.
Specifically, the proposed rules require
the loan documentation to provide
certain covenants, including a covenant
to provide to the originator (or any
subsequent holder) and the servicer
financial information and supporting
schedules on an ongoing basis, but not
less frequently than quarterly. The
covenants must also prohibit the
borrower from retaining or entering into
a debt arrangement that permits
payments-in-kind, and place limitations
on the transfer of any of the borrower’s
assets, on the borrower’s ability to create
other security interests with respect to
any of its assets, and on any change to
the name, location, or organizational
structure of the borrower (or any other
party that pledges collateral for the
loan). The loan documentation must
also include covenants designed to
protect the value of any collateral
pledged to secure the loan that require
the borrower (and any other party that
pledges collateral for the loan) to: (a)
Maintain insurance protecting against
loss on any collateral at least up to the
amount of the loan and names the
originator (or any subsequent holder) as
an additional insured, loss payee, or
similar beneficiary; (b) pay any taxes,
charges, claims and fees where
nonpayment could give rise to a lien
against any collateral securing the loan;
(c) take any action necessary to perfect
or defend the security interest of the
originator or any subsequent holder of
the loan in the collateral for the
commercial loan or the priority thereof,
and to defend the collateral against
claims adverse to the lender’s interest;
(d) permit the originator or any
subsequent holder of the loan, and the
servicer of the loan, to inspect the
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collateral and the books and records of
the borrower; and (e) maintain the
physical condition of any collateral for
the loan.
Request for Comment
154(a). Are the proposed standards
appropriate for a qualifying commercial
loan? 154(b) Are these standards
sufficient and appropriate to ensure that
qualifying commercial loans are of very
low credit risk?
155. Are the metrics to measure a
borrower’s financial capacity, and the
specified parameter for each metric, an
appropriate standard?
D. Qualifying CRE Loans
Section l.19 of the proposed rules
provides the underwriting standards for
qualifying CRE loans. Such standards
focus predominately on the following
criteria: The borrower’s ability to repay
the loan; the value of, and the
originator’s security interest in, the
collateral; the LTV ratio; and whether
the loan documentation includes the
appropriate covenants to protect the
collateral.
For purposes of the proposed rules, a
CRE loan is defined as a loan secured
by a property with five or more singlefamily units, or by nonfarm nonresidential real property, the primary
source (50 percent or more) of
repayment for which is expected to be
derived from: (a) The proceeds of the
sale, refinancing, or permanent
financing of the property; or (b) rental
income associated with the property
other than rental income that is derived
from any affiliate of the borrower.
However, under the proposal, a CRE
loan does not include a land
development and construction loan
(including one-to-four family residential
or commercial construction loans),
loans on raw or unimproved land, a
loan to a real estate investment trust
(REIT), or an unsecured loan.
1. Ability To Repay
The Federal banking agencies believe
that prudent underwriting standards
should require the originator to verify
and document the capacity of the
borrower, or income from the
underlying collateral, to repay the loan.
For qualifying CRE loans, the proposed
underwriting standards focus on both
the sufficiency of the CRE property’s net
operating income (NOI) 171 less
171 Section l.16 of the proposed rules defines
NOI as income generated by a CRE property, net of
all expenses that have been deducted for federal
income tax purposes (except depreciation, debt
service expenses, and federal and state income
taxes) and any unusual or nonrecurring income
items.
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replacement reserves to support the
payment of principal and interest over
the full term of the CRE loan, as well as
the financial condition of the borrower
(independent of the CRE property’s NOI
less replacement reserves) to repay other
outstanding debt obligations.
Specifically, the proposed rules
generally require the borrower to have a
DSC ratio 172 of 1.7 or greater. The
proposed rules, however, would allow a
CRE loan on properties with a
demonstrated history of stable NOI to
have a slightly lower (1.5) DSC ratio. To
qualify for the lower DSC ratio
requirement, the CRE loan must be
secured by either (1) a residential
property (other than a hotel, motel, inn,
hospital, nursing home, or other similar
facility where dwellings are not leased
to residents) that consists of five or more
dwelling units primarily for residential
use, and where at least 75 percent of the
CRE property’s NOI is derived from
residential rents and tenant amenities
(such as a swimming pool, gym
membership, or parking fees); or (2)
commercial nonfarm real property
(other than a multi-family property or a
hotel, inn or similar property) that is
occupied by, and derives at least 80
percent of its aggregate gross revenue
from, one or more ‘‘qualified tenants.’’
Under the proposed rules, a qualified
tenant is defined as a tenant that (1) is
subject to a triple net lease 173 that is
current and performing with respect to
the CRE property, or (2) was subject to
a triple net lease that has expired,
currently is leasing the property on a
month-to-month basis, has occupied the
property for at least three years prior to
closing, and is current and performing
with respect to all obligations associated
with the CRE property. All outstanding
triple net leases must have a remaining
maturity of at least six months, unless
the tenant leases the property on a
month-to-month basis as described
above.
Under the proposed rules, the
originator of a qualifying CRE loan must
also determine whether the borrower
has the ability to service its other
outstanding debt obligations, net of any
income generated from the CRE (based
on the NOI). This requirement is
intended to ensure that the CRE remains
a reliable source of repayment and
172 Under § l.16 of the proposed rules (definition
of ‘‘Debt service coverage (DSC) ratio’’), the DSC
ratio for a CRE loan equals the CRE property’s
annual NOI less the annual replacement reserve of
the CRE property at the time of origination divided
by the sum of the borrower’s annual payments for
principal and interest on any debt obligation.
173 For purposes of the proposed rules, a triple net
lease means a lease pursuant to which the lessee is
required to pay rent as well as taxes, insurance, and
maintenance expenses associated with the property.
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security for the CRE loan, and not other
debts of the borrower, over the full loan
term. Accordingly, under the proposed
rules, the originator must conduct an
analysis of the borrower’s ability, and
determine that the borrower has the
ability, to service all outstanding debt
obligations over the two years following
the origination date for the loan, based
on reasonable projections and including
the new debt obligation. A borrower’s
historical performance in satisfying debt
obligations is often an indicator of
whether the borrower will satisfy a new
debt obligation. Accordingly, as part of
this analysis, the originator also must
document and verify that the borrower
has satisfied all debt obligations over a
look-back period of at least two years.
The proposed rules generally require
that a qualifying CRE loan have a fixed
stated interest rate to reduce the
potential for the borrower to experience
payment shock. However, the proposed
rules allow the interest rate to be
adjustable if the borrower obtains, prior
to or concurrently with the origination
date for the CRE loan, a derivative
product that effectively results in the
borrower paying a fixed interest rate on
the CRE loan. Commercial borrowers
often purchase a derivative (such as an
interest rate swap) that effectively
‘‘convert’’ an adjustable rate into a fixed
rate. In addition, the proposed standards
for qualifying CRE loans would prohibit
terms that (1) permit the borrower to
defer principal or interest payments; (2)
allow the originator to establish an
interest reserve to fund all or part of a
payment on the loan; or, (3) provide a
maturity date that is earlier than ten
years following the closing date for the
loan. Further, the loan payment amount
must be based on straight-line
amortization of the debt over the term
of the loan not to exceed twenty (20)
years, with payments made no less
frequently than monthly over a term of
at least ten (10) years.
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2. Loan-to-Value Requirement
The Agencies believe that prudent
underwriting standards should limit the
amount an originator may advance
relative to the market value of the CRE
property. Therefore, the Federal banking
agencies are proposing to require a
combined loan-to-value (CLTV) ratio of
less than or equal to 65 percent for
qualifying CRE loans. However, the
recent crisis has demonstrated that the
use of very low capitalization rates
generally results in significantly higher
market values for some CRE properties.
Where the capitalization rate used in the
appraisal is less than the 10-year
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interest rate swap rate 174 plus 300 basis
points, the maximum CLTV ratio
requirement will be 60 percent to
mitigate the effect of an artificially low
capitalization rate.
3. Valuation of the Collateral
Because the credit risk of a CRE loan
is closely linked with the commercial
real estate collateralizing the loan, the
proposed rules include several
conditions relating to the collateral. For
example, under § l.19(b) of the
proposed rules, the originator of a
qualifying CRE loan must determine
whether the purchase price for the CRE
property that secures the loan reflects
the current market value of the property,
so as to ensure that the collateral is
sufficient to recover any unpaid
principal in the event of default, and
that the borrower has sufficient equity
in the property to incent continued
performance of all loan obligations
during an economic downturn or when
the CRE property’s NOI may not be
sufficient to cover loan payments. To
determine the value of the CRE
property, the proposed rules require the
originator to obtain an appraisal
prepared not more than six months
before the origination date for the loan,
in accordance with the Uniform
Standards of Professional Appraisal
Practice and the appraisal requirements
of the Federal banking agencies for the
CRE property securing the loan. The
appraisal report must provide an ‘‘as is’’
opinion of the current market value of
the CRE property, which includes an
income approach that uses a discounted
cash flow analysis based on the CRE
property’s actual NOI. These
requirements are intended to help
ensure that the appraisal is prepared by
an independent third party with the
experience, competence, and knowledge
necessary to provide an accurate and
objective valuation based on the CRE
property’s actual physical condition.
Environmental hazards, such as
ground water contamination and the
presence of lead or other harmful
chemicals or substances, may
potentially jeopardize the value of CRE
property as well as the borrower’s
ability to repay the loan. Accordingly,
under the proposed rules, the originator
also must conduct an environmental
risk assessment of the CRE property
securing a qualifying CRE loan and,
based on this assessment, take
appropriate measures to mitigate any
risk of loss to the value of the CRE
property. Appropriate measures may
174 The 10-year interest rate swap rate is as
reported on the previous day’s Federal Reserve
Statistical Release H.15: Selected Interest Rates.
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include a reduction in the loan amount
sufficient to reflect potential losses;
however, where the assessment reveals
significant environmental hazards,
originators are encouraged to reconsider
the primary loan decision. The
originator can have a qualified third
party perform the assessment, but
remains responsible for ensuring that
appropriate measures are taken to
mitigate any risk of loss due to
environmental risks.
4. Risk Management and Monitoring
Requirements
Under § l.19(b) of the proposed
rules, the CRE loan documentation must
provide certain covenants that are
generally designed to facilitate the
ability of the originator to monitor and
manage credit risk over the full term of
the loan. In developing the proposed
covenants, the Federal banking agencies
reviewed the supporting loan
documentation for several recent ABS
issuances collateralized by CRE loans.
The proposed covenants are generally
consistent with those provided in such
loan documentation and, therefore,
should reflect current industry practice
and impose minimal compliance
burden.
As with the covenants required for
commercial loans (as discussed in the
previous section), the covenants for CRE
loans require certain information be
provided to the originator (or any
subsequent holder) and the servicer
financial on an ongoing basis.
Additionally, with respect to CRE loans
in particular, such information must
include information on existing,
maturing, and new leasing or rent-roll
activity, as appropriate for the CRE
property. This should assist the
originator in monitoring volatility in the
repayment capacity of the borrower,
with respect to the CRE property’s NOI
and the borrower’s financial condition.
The loan documentation for a
qualifying CRE loan also must include
covenants restricting the ability of the
borrower to create additional security
interests with respect to the CRE
property and covenants designed to
help maintain the value of, and protect
the originator’s (or any subsequent
holder’s) security interest in, the
collateral. These covenants are
substantially the same as the covenants
required for commercial loans (as
discussed above). Additionally, a
covenant must be included that requires
the borrower to comply with all legal or
contractual obligations applicable to the
collateral. Finally, the loan
documentation must include a covenant
that prohibits the borrower from
pledging the CRE property as security
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for another loan, even where doing so
results in the creation of a subordinate
lien. The Agencies note, however, that
the proposed rules provide an exception
for loans that finance the purchase of
machinery and equipment that is
pledged as additional collateral for the
CRE loan. This restriction is intended to
ensure that the CRE property remains a
reliable source of repayment and
security for the CRE loan and the
borrower does not become
overleveraged, which could threaten the
borrower’s ability to repay the CRE loan.
The proposed covenants must be
applicable to the borrower as well as
any other party who provides collateral
for the loan.
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Request for Comment
156(a). Are the proposed requirements
for a qualifying CRE loan appropriate?
156(b). Are these standards sufficient
to ensure that qualifying CRE loans have
very low credit risk?
157. Are the DSC metrics employed
for measuring a borrower’s financial
capacity, and the specified parameter
for each type of CRE property, an
appropriate standard?
158. The Agencies are proposing the
same DSC ratio (1.5) for qualifying
leased CRE loans and qualifying
multifamily CRE loans, where the DSC
analysis is based on at least two years
of actual performance. The Agencies
request comment whether the risk of
default for qualifying non-Enterprise
multifamily CRE loans is demonstrably
lower as to justify a lower DSC ratio
(such as 1.3). For example, the Agencies
acknowledge that several highlypublicized defaults on large multifamily
CRE loans had a much weaker structure
(e.g., pro-forma underwritten DSC ratio
or DSC ratio lower than 1.2) than what
is contained in the proposed rules.
Commenters should provide relevant
criteria to be applied to qualify for a
reduced DSC ratio and multifamily CRE
loan performance data supporting the
conclusion that multifamily loans
meeting such criteria, as a class, have a
correspondingly reduced risk of default
to support a reduced DSC ratio for such
loans.
D. Qualifying Automobile Loans
§ l.20 of the proposed rules provides
underwriting standards for qualifying
automobile loans. Although automobile
loans involve secured financing, the
collateral represents a highly
depreciable asset. Accordingly, in
developing the proposed underwriting
standards for qualifying automobile
loans, the Federal banking agencies
sought to establish conservative
requirements that are consistent with
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underwriting standards commonly used
by the industry for unsecured
installment credits. The proposed rules
define an automobile loan as a loan to
an individual to finance the purchase of,
and secured by a first lien on, a
passenger car or other passenger
vehicle, such as a minivan, van, sportutility vehicle, pickup truck, or similar
light truck for personal, family, or
household use. Under the proposed
rules, an automobile loan would not
include: (a) Any loan to finance fleet
sales; (b) a personal cash loan secured
by a previously purchased automobile;
(c) a loan to finance the purchase of a
commercial vehicle or farm equipment
that is not used for personal, family, or
household purposes; (d) any lease
financing; or (e) a loan to finance the
purchase of a vehicle with a salvage
title.175 A qualifying automobile loan
may be for a new 176 or used vehicle.177
1. Ability To Repay
A borrower’s ability to repay an
automobile loan primarily hinges on the
amount of the borrower’s monthly total
debt obligations in relation to the
borrower’s monthly income. The
Agencies have sought to establish
standards for the verification and
documentation of a borrower’s ability to
repay an automobile loan that will help
ensure that the loan is of very low credit
risk. At the same time, the proposed
standards seek to reflect the nature of
automobile loans and allow originators
to make qualifying automobile loans
without undue burden or disruption to
existing methods for making automobile
loans. For example, originators of
automobile loans typically do not verify
all of a borrower’s income and debt
obligations prior to making an
automobile loan and requiring an
originator to do so could significantly
limit any incentive an originator might
otherwise have to underwrite loans in
accordance with the standards for a
175 Under the proposed rules, a new vehicle is
one that is not a used vehicle and has not been
previously sold to an end user. A used vehicle is
any vehicle driven more than the limited use
necessary in transporting or road testing the vehicle
prior to the initial sale of the vehicle and does not
include any vehicle sold only for scrap or parts
(title documents surrendered to the State and a
salvage certificate issued). Salvage title is a form of
vehicle title branding by an insurance company
paying a claim on the vehicle, where the vehicle
title notes that the vehicle has been severely
damaged and/or deemed a total loss and
uneconomical to repair.
176 A new vehicle is one that is not a used vehicle
and has not been previously sold to an end user.
177 A used vehicle is any vehicle driven more
than the limited use necessary in transporting or
road testing the vehicle prior to the initial sale of
the vehicle and does not include any vehicle sold
only for scrap or parts (title documents surrendered
to the State and a salvage certificate issued).
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qualifying automobile loan. The Federal
banking agencies have sought to balance
these considerations in developing the
proposed underwriting standards.
Under the proposed rules, the
borrower under a qualifying automobile
loan must have a monthly DTI ratio of
less than or equal to 36 percent,
consistent with the proposed DTI ratio
requirement for QRM loans. The
originator must make this
determination, and document the
underlying analysis, upon origination of
the loan.
Originators typically consider a
borrower’s income and debts in the
credit approval process; however, the
income history requirements of and the
type of information considered by the
originator vary widely across the
industry. The Agencies believe that the
use of consistent underwriting
standards, to the extent practical and
consistent with industry practice,
should reduce implementation burden
and ensure that all ABS issuances that
qualify for an exemption from the risk
retention requirement of the proposed
rules are collateralized by high-quality,
low credit risk loans. Based on the
Federal banking agencies’ supervisory
experience in overseeing automobile
lending, and in an effort to address
these inconsistencies, the Federal
banking agencies propose to require that
originators verify and document the
borrower’s income using payroll stubs,
tax returns, profit and loss statements,
or other similar documentation, and that
originators verify that all outstanding
debts reported in a borrower’s credit
report are incorporated into the
calculation of the borrower’s ratio of
total debt to monthly income (DTI ratio).
For the borrower’s monthly debt
obligations, the Agencies propose to
require the originator to obtain
information from the borrower about all
monthly housing payments (rent- or
mortgage-related, including any
property taxes, insurance, and home
owners association fees), plus any of the
following that are dependent on the
borrower’s income for payment: (1)
Monthly payments on all debt and lease
obligations (such as installment loans or
credit card loans), including the
monthly amount due on the automobile
loan; (2) estimated monthly amortizing
payments for any term debt, debts with
other than monthly payments, and debts
not in repayment (for example, deferred
student loans, interest-only loans); and
(3) any required monthly alimony, child
support, or court-ordered payments.
These elements are generally consistent
many of the elements taken into account
for the DTI requirement for the QRM
standards.
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2. Loan Terms
The Federal banking agencies have
found that, in supervising credit risk for
such highly depreciable assets as
automobiles, a fixed payment amount
helps ensure that a borrower will have
the ability to repay a loan over the life
of the credit. Therefore, the proposed
rules require qualifying automobile
loans to provide for a fixed interest rate.
In addition, under the proposal, the
monthly payment must be calculated
using straight-line amortization for the
term of the loan, not to exceed five
years, with the first payment due within
45 days of the closing date. The
proposed rules also prohibit loan terms
that permit a borrower to defer
repayment of principal or interest.
If the loan is for a new vehicle, the
proposal would require the loan
agreement provide a maturity date for
the loan that does not exceed 5 years
from the date of closing. If the loan is
for a used vehicle, the loan agreement
must provide that the term of the loan,
plus the difference between the current
model year and the vehicle’s model
year, cannot exceed 5 years. In addition,
under the proposed rules, the
transaction documents must require that
the originator, subsequent holder of the
loan, or any agent of the originator or
subsequent holder maintain physical
possession of the vehicle title until the
loan is repaid in full and the borrower
has satisfied all obligations under the
loan agreement.
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3. Reviewing Credit History
The supervisory experience of the
Federal banking agencies has shown
that the historical payment performance
of a borrower often is indicative of the
borrower’s ability to manage debt and
willingness to repay a new loan.
Accordingly, the proposed rules require
the originator to verify and document,
within 30 days of the origination date
for a qualifying automobile loan, that
the borrower (1) is not currently 30 days
or more past due, in whole or in part,
on any debt obligation and (2) has not
been 60 days or more past due on, in
whole or in part, on any debt obligation
within the past 24 months.
Additionally, the originator must verify
and document that, within the previous
36 months, the borrower was not a
debtor in any bankruptcy proceeding,
subject to a Federal or State judgment
for collection of any unpaid debt or
foreclosure, repossession, deed in lieu
of foreclosure, or short sale, and has not
had any personal property repossessed.
These credit history standards are the
same as those established for QRMs.
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Similar to the safe harbor proposed in
§ l.15 of the proposed rules for the
QRM requirements, the Federal banking
agencies are proposing a safe harbor that
would allow an originator to satisfy the
documentation and verification
requirements regarding a borrower’s
credit history. Under the proposal, an
originator of a qualifying automobile
loan will be deemed to have complied
with the verification and documentation
requirements related to the borrower’s
credit history (as described above) if, no
more than 90 days before the
automobile loan closing, the originator
(1) obtains a credit report regarding the
borrower from at least two consumer
reporting agencies that compile and
maintain files on consumers on a
nationwide basis (within the meaning of
15 U.S.C. 1681a(p)); and (2) determines,
based on the information in such credit
reports, that the borrower meets the
credit history requirements related
described above. This safe harbor would
not be available if the originator obtains
a subsequent credit report before the
closing of the automobile loan
transaction that indicates that the
borrower does not meet the credit
history requirements.
4. Loan-to-Value
Limitations relative to the amount
financed are critical for automobile
lending because the collateral is subject
to such rapid depreciation. Therefore,
under the proposed rules, an originator
must document that, at the time of the
closing of the automobile loan, the
borrower tendered a minimum down
payment from the borrower’s personal
funds and trade-in allowance,178 if any,
that is sufficient to pay (1) the full cost
of vehicle title, tax, and registration fees,
as well as any dealer-imposed fees, and
(2) 20 percent of the purchase price of
the automobile. Under § l.16 of the
proposed rules, the purchase price of a
new automobile is the net amount the
consumer paid for the vehicle after any
manufacturer, dealer, or financing
incentive payments or cash rebates are
applied. However, for a used
automobile, the purchase price is the
lesser of either the actual purchase price
or the value of the automobile, as
determined by a nationally recognized
automobile pricing agency (for example,
178 Under § l.16 of the proposed rules, a tradein allowance is the amount a vehicle purchaser is
given as a credit at the purchase of a vehicle for the
fair exchange of the borrower’s existing vehicle to
compensate the dealer for some portion of the
vehicle purchase price, except that such amount
shall not exceed the trade-in value of the used
vehicle, as determined by a nationally recognized
automobile pricing agency and based on the
manufacturer, year, model, features, and condition
of the vehicle.
PO 00000
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N.A.D.A. or Kelley Blue Book) based on
the manufacturer, year, model, features,
and condition of the vehicle.
An illustration of how to determine
the minimum down payment is
provided below.
DOWN PAYMENT DETERMINATION
$30,000 .......
$2,000 .........
$1,000 .........
$27,000 .......
$5,400 .........
$2,700 .........
$8,100 .........
$18,900 .......
Invoice Purchase Price.
Manufacturer Cash Rebate.
Dealer Incentive.
Purchase Price.
20% of Purchase Price.
Tax, Title, and License.
Down Payment Requirement.
Maximum Loan Amount.
Request for Comment
159(a). Are the proposed requirements
for a qualifying automobile loan
appropriate?
159(b). Are these standards sufficient
and appropriate to ensure that
qualifying automobile loans have very
low credit risk?
160. Are the DTI ratios employed for
measuring a borrower’s financial
capacity an appropriate standard?
E. Buy-Back Requirements for ABS
Issuances Collateralized Exclusively by
Qualifying Commercial, CRE or
Automobile Loans
Under the proposed rules, for a
securitizer to qualify for a zero percent
risk retention requirement under
§ l.18, § l.19 or § l.20, as applicable,
the depositor must have (and certify that
it has) effective internal supervisory
controls with respect to its process for
ensuring that all assets that collateralize
the ABS meet the applicable
underwriting standards set forth in
§ l.18, § l.19 or § l.20, as applicable,
of the proposed rules. The Federal
banking agencies recognize that, despite
the use of reasonable processes and
procedures by a depositor or sponsor, it
is possible that one or more loans
included in a securitization transaction
may later be determined to have not met
the underwriting standards set forth in
§ l.18, § l.19 or § l.20, as applicable,
of the proposed rules due to inadvertent
error. For example, an originator
conducting post-origination file reviews
for compliance or internal audit
purposes may find that some aspects of
the documentation required to verify the
borrower’s monthly income were not
obtained. The Agencies are concerned
that if an error that is discovered after
closing of the securitization were to
make the issuance ineligible for the
proposed exemption, then sponsors and
investors may well be less willing to
participate in securitization transactions
that are structured to meet the
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underwriting standards of § l.18,
§ l.19 or § l.20, as applicable, of the
proposed rules. On the other hand, if
there is no penalty for including in a
securitization transaction a loan that
does not meet such underwriting
standards, sponsors and other
participants in the securitization may
not have the proper incentives to ensure
that the issuance is collateralized
exclusively by qualifying commercial,
CRE, or automobile loans.
The proposal seeks to balance these
interests by providing that a sponsor
that has relied on an exemption from
the retention requirement under § l.18,
§ l.19 or § l.20, as applicable, of the
proposed rules would not lose the
exemption, if, after closing of the
securitization transaction, it is
determined that one or more of the
loans collateralizing the ABS do not
meet all of the applicable criteria under
§ l.18, § l.19 or § l.20, as applicable,
of the proposed rules provided that:
(a) The depositor certified the
effectiveness of its internal supervisory
controls for ensuring all of the loans
backing the ABS are qualified loans
under § l.18, § l.19 or § l.20, as
applicable, of the proposed rules;
(b) The sponsor repurchases the
loan(s) determined to not meet the
underwriting standards set forth in
§ l.18, § l.19 or § l.20, as applicable,
of the proposed rules from the issuing
entity at a price at least equal to the
remaining principal balance and
accrued interest on the loan(s) no later
than ninety (90) days after the
determination that the loans do not
satisfy the underwriting standards set
forth in § l.18, § l.19 or § l.20, as
applicable, of the proposed rules; and
(c) The sponsor discloses to the
investors of the ABS any loan(s) that are
repurchased by the sponsor, including
the principal amount of such
repurchased loan(s) and the cause for
such repurchase.
These conditions, which are identical
to those applicable to QRMs, are
intended to provide the sponsor with
the opportunity to correct inadvertent
errors by repurchasing any nonqualified loan(s) and removing such
non-qualifying loan(s) from the ABS,
while protecting investors. Moreover, in
light of the buy-back requirement,
sponsors should continue to have a
strong economic incentive to ensure that
all loans backing a securitization subject
to zero risk retention under § l.18,
§ l.19 or § l.20, as applicable, of the
proposed rules satisfy all of the
conditions applicable to such loans
under § l.18, § l.19 or § l.20, as
applicable, of the proposed rules.
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Request for Comment
161(a). The Agencies seek comment
on whether the sponsor should be
required to repurchase the entire pool of
loans collateralizing the ABS if the
amount or percentage of the loans that
are required to be repurchased due to
the failure to meet the underwriting
standards under § l.18, § l.19 or
§ l.20, as applicable, of the proposed
rules reaches a certain threshold. 161(b).
If so, what threshold would be
appropriate?
VI. General Exemptions
Section 15G(c)(1)(G) and section
15G(e) of the Exchange Act require the
Agencies to provide a total or partial
exemption from the risk retention
requirements for certain types of ABS or
securitization transactions. In addition,
section 15G(e)(1) permits the Federal
banking agencies and the Commission
jointly to adopt or issue additional
exemptions, exceptions, or adjustments
to the risk retention requirements of the
rules, including exemptions, exceptions,
or adjustments for classes of institutions
or assets, if the exemption, exception, or
adjustment would: (A) help ensure high
quality underwriting standards for the
securitizers and originators of assets that
are securitized or available for
securitization; and (B) encourage
appropriate risk management practices
by the securitizers and originators of
assets, improve the access of consumers
and businesses to credit on reasonable
terms, or otherwise be in the public
interest and for the protection of
investors.179
Consistent with these provisions,
section l.21 of the proposed rules
exempts certain types of ABS or
securitization transactions from the
credit risk retention requirements of the
rule. Certain of these exemptions would
appear in the rules of all Agencies, and
others would appear only in the rules of
certain Agencies, reflecting the different
scope of the Agencies’ rulewriting
authority.
A. Exemption for Federally Insured or
Guaranteed Residential, Multifamily,
and Health Care Mortgage Loan Assets
Proposed § l.21(a)(1) would
implement section 15G(e)(3)(B) of the
Exchange Act, which exempts from the
risk retention requirements any
residential, multifamily, or health care
facility mortgage loan asset, or
securitization based directly or
indirectly on such an asset, that is
insured or guaranteed by the United
States or an agency of the United
179 See
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Frm 00048
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States.180 Section 15G expressly clarifies
that Fannie Mae, Freddie Mac, and the
Federal Home Loan Banks are not
agencies of the United States,181 and the
proposed rules include a specific
provision making clear that the
exemptions that apply to ABS that is
issued, guaranteed or insured by a U.S.
government agency or that is backed by
loans insured or guaranteed by a U.S.
government agency do not apply where
the issuer, insurer or guarantor is Fannie
Mae, Freddie Mac, or a Federal Home
Loan Bank.182
Proposed § l.21(a)(1)(i) would
exempt any securitization transaction
that is collateralized solely (excluding
cash and cash equivalents) by
residential, multifamily, or health care
facility mortgage loan assets if the assets
are insured or guaranteed as to the
payment of principal and interest by the
United States or an agency of the United
States. Currently, the federal
government insures or guarantees
residential, multifamily, and healthcare
facility loans through a variety of
programs. Some examples include FHA
insurance on single family mortgage
loans which insures the lender at
approximately 100 percent of losses
including advanced taxes, insurance
and foreclosure costs. The Department
of Veterans Administration also
guarantees between 25 percent and 50
percent of lender losses in the event of
residential borrower defaults. United
States Department of Agriculture Rural
Development also guarantees a sliding
amount against loss of up to 90 percent
of the original loan amount for single
family loans. Each of the agencies sets
underwriting and servicing standards,
and in the case of some multifamily
programs underwrites the mortgage
itself. The agencies charge a fee or
premium for the insurance/guaranty,
and monitor the performance of
participating lenders and borrowers.
Proposed § l.21(a)(1)(ii) would
exempt any securitization transaction
that involves the issuance of ABS if the
ABS are insured or guaranteed as to the
payment of principal and interest by the
United States or an agency of the United
States and that are collateralized solely
(excluding cash and cash equivalents)
180 See
15 U.S.C. 78o–11(e)(3)(B).
15 U.S.C. 78o–11(c)(1)(G)(ii), (e)(3)(B).
182 See section 15 U.S.C. 78o–11(c)(1)(G) and
(e)(3)(B) and the proposed rules at § l.21(c). At this
time, the Federal Home Loan Banks do not, and are
not authorized to, issue or guarantee asset-backed
securities. Similarly, neither Fannie Mae, Freddie
Mac, nor the Federal Home Loan Banks insure or
guarantee individual loans, and none is authorized
to do so. These references are included in § l.21(c)
in order to conform the rule of construction to that
which is required by section 15G(e)(3) of the
Exchange Act.
181 See
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by residential, multifamily, or health
care facility mortgage loan assets, or
interests in such assets. Thus, proposed
§ l.21(a)(1)(ii) would exempt ABS the
payment of principal and interest on
which is guaranteed by the United
States or an agency of the United States
and that is collateralized by ABS that
itself is backed by residential,
multifamily, or health care facility
mortgage loan assets. Examples of
securitization transactions that would
be exempted under § l.21(a)(1)(ii)
include securities guaranteed by the
Government National Mortgage
Association (Ginnie Mae). Ginnie Mae
guarantees the issuance of securities by
approved lender/issuers. These
mortgage-backed securities (MBS) are
collateralized solely by federally
insured or guaranteed loans. The
insurance or guarantee protects the
lender from some or all of the credit loss
on the loan in the event of a borrower
default. Upon issuance of the security,
the issuer is obligated to advance from
its own funds principal and interest to
the investors if the borrower fails to pay
the mortgage. Ginnie Mae guarantees to
the investors that, in the event the issuer
defaults on this obligation, Ginnie Mae
will ensure the investors are paid.
Ginnie Mae provides a similar guarantee
for Real Estate Mortgage Investment
Conduits (REMICs) and Platinum
Securities, which are collateralized by
Ginnie Mae MBS.
Although, historically, federally
insured/guaranteed loans have been
securitized largely through Ginnie Mae,
and Ginnie Mae is statutorily restricted
to guaranteeing only securities
collateralized by federally insured/
guaranteed loans, this regulation would
exempt a private securitization from risk
retention to the extent it is collateralized
solely by loans with federal insurance or
guarantees. In addition, in cases where
private securitization may be used the
proposed rules do not limit the
exemption based on the federal housing
program involved or the nature of the
government’s insurance or guaranty
coverage.
Request for Comments
162(a). Have the Agencies
appropriately implemented the
exemption in section 15G(e)(3)(B) of the
Exchange Act? 162(b). Why or why not?
163. Are we correct in believing the
federal department or agency issuing,
insuring, or guaranteeing the ABS or
collateral will monitor the quality of the
assets securitized?
164(a). While it appears that Congress
may have intended to exempt all
existing federal insurance or guarantee
programs for residential, multifamily, or
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health care facility mortgage loans,
comments are requested on the
proposed rules where private
securitization may be used in the
following areas. Are there risks in
exempting assets or ABS that are not
significantly insured or guaranteed by a
federal agency? 164(b). If so, what level
of federal guarantee or insurance should
be required? 164(c). Would inclusion of
additional requirements be appropriate
in the public interest and for the
protection of investors? 164(d). Why or
why not? 164(e). Would inclusion of
additional requirements be disruptive to
any federal guarantee or insurance
programs established or authorized by
Congress? 164(f). If so, how and to what
extent?
B. Other Exemptions
Section 15G(c)(1)(G)(ii) of the
Exchange Act separately requires the
rules of the Agencies to provide for a
total or partial exemption from risk
retention requirements for
securitizations of assets that are issued
or guaranteed by the United States or an
agency of the United States as the
Federal banking agencies and the
Commission jointly determine
appropriate in the public interest and
the protection of investors.183 This
exemptive authority is broader than the
statutory exemption in section
15G(e)(3)(B) because it permits the
exemption of any securitization of assets
that are issued or guaranteed by the
United States or any agency of the
United States (and not just those based
on residential, multifamily, or health
care facility mortgage loan assets).
Proposed § l.21(b)(1) fully exempts any
securitization transaction if the assetbacked securities issued in the
transaction are (i) collateralized solely
(excluding cash and cash equivalents)
by obligations issued by the United
States or an agency of the United States;
(ii) collateralized solely (excluding cash
and cash equivalents) by assets that are
fully insured or guaranteed as to the
payment of principal and interest by the
United States or an agency of the United
States (other than those referred to in
paragraph (a)(1)(i) of this section); 184 or
(iii) fully guaranteed as to the timely
payment of principal and interest by the
United States or any agency of the
United States. This exemption is being
proposed because payments of principal
and interest on the ABS, or on the
183 See
15 U.S.C. 78o–11(c)(1)(G).
avoid confusion, the proposed rules
provide that these assets do not include the types
of federally insured or guaranteed residential,
mortgage, and health care mortgage loan assets that
are covered by the exemption in proposed
§ l.21(a).
184 To
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collateral backing the ABS, would be
backed by the United States or an
agency of the United States and, thus,
the exemption should be appropriate in
the public interest and for the protection
of investors. The federal department or
agency issuing, insuring or guaranteeing
the ABS or collateral would monitor the
quality of the assets securitized,
consistent with the relevant statutory
authority.185
Proposed § l.21(a)(2) provides an
exemption from the risk retention
requirements of the rules for any
securitization transaction that is
collateralized solely (excluding cash
and cash equivalents) by loans or other
assets made, insured, guaranteed, or
purchased by any institution that is
subject to the supervision of the Farm
Credit Administration, including the
Federal Agricultural Mortgage
Corporation. This provision implements
the exemption for these types of assets
included in section 15G(e)(3)(A) of the
Exchange Act.186
Section 15G(c)(1)(G)(iii) requires that
the rules of the Agencies provide a total
or partial exemption for an ABS if the
security is (i) issued or guaranteed by
any State of the United States, or by any
political subdivision of a State or
territory, or by any public
instrumentality of a State or territory
that is exempt from the registration
requirements of the Securities Act by
reason of section 3(a)(2) of the Securities
Act 187 or (ii) defined as a qualified
scholarship funding bond in section
150(d)(2) of the Internal Revenue Code
of 1986.188 In light of the special
treatment afforded such securities by
Congress, the directive in section
15G(c)(1)(G)(iii), and the role of the
State or municipal entity in issuing,
insuring, or guaranteeing the ABS or
collateral, the Agencies are proposing to
exempt such ABS from the risk
retention requirements of the rule as an
exemption that is appropriate in the
public interest and for the protection of
investors.189
Request for Comments
165(a). Have the Agencies
appropriately implemented the
exemption in section 15G(e)(3)(A) of the
Exchange Act and the exemptive
185 See
12 U.S.C. 78o–11(e)(2).
15 U.S.C. 78o–11(e)(3)(A).
187 15 U.S.C. 77c(a)(2).
188 See 26 U.S.C. 150(d)(2). Such bonds are those
issued by a not-for-profit corporation established
and operated exclusively for the purpose of
acquiring student loans incurred under the Higher
Education Act of 1965, and organized at the request
of a State or a political subdivision of a State. See
10 U.S.C. chapter 28.
189 See §§ l.21(a)(3) and (4) of the proposed
rules.
186 See
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authority in section 15G(c)(1)(G)(ii) and
(iii)? 165(b). Why or why not?
166(a). Is the proposed exemption for
ABS issued or guaranteed by a State or
municipal entity appropriate? 166(b). Is
it under or over-inclusive? 166(c). There
may be some ABS in which the sponsor
is a municipal entity (i.e., a State or
Territory of the United States, the
District of Columbia, any political
subdivision of any State, Territory or the
District of Columbia, or any public
instrumentality of one or more States,
Territories or the District of Columbia),
however, the ABS are issued by a
special purpose entity, that is created at
the direction of the municipal entity,
but are not issued or guaranteed by the
municipal entity. Should the rules also
exempt from the risk retention
requirements asset-backed securities
where the sponsor is a municipal entity?
166(d). There are some municipal ABS
that are issued by a municipal entity
and exempt by reason of Section 3(a)(2)
of the Securities Act but may include
assets originated using the same
underwriting criteria as private label
securitizations. Should the rules, as
proposed, exempt them?
167(a). Are there any ABS that are
collateralized solely by obligations
issued by the United States or an agency
of the United States where the process
of packaging and securitizing those
obligations may raise issues that the risk
retention requirement was designed to
address? 167(b). For example, would a
securitization by a non-governmental
securitizer of debt issued by the
Tennessee Valley Authority raise any
issues such that the Agencies should
provide only a partial exemption?
167(c). If so, what type of transactions
and how should the Agencies determine
the amount and form of risk retention to
be required?
C. Exemption for Certain
Resecuritization Transactions
Section l.21(a)(5) of the proposed
rules would exempt from the credit risk
retention requirements certain
resecuritization transactions that meet
two conditions.190 First, the transaction
must be collateralized solely by existing
ABS issued in a securitization
transaction for which credit risk was
retained as required under the rule or
which was exempted from the credit
risk retention requirements of the rule
(hereinafter 15G-compliant ABS).
Second, the transaction must be
190 In a resecuritization transaction, the asset pool
underlying the ABS issued in the transaction
comprises one or more asset-backed securities. In
this section, we refer to the securities issued in a
resecuritization transaction as ‘‘resecuritization
ABS.’’
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structured so that it involves the
issuance of only a single class of ABS
interests and provides for the passthrough of all principal and interest
payments received on the underlying
ABS (net of expenses of the issuing
entity) to the holders of such class. The
holder of a resecuritization ABS
structured as a single-class pass-through
has a fractional undivided interest in
the pool of underlying ABS and in the
distributions of principal and interest
(including prepayments) from these
underlying ABS. Accordingly, the
principal and interest payments
allocated to each holder are identical
(less any fees associated with the
resecuritization) to those that would
occur if that holder were to hold
individual securities representing the
same fractional interest in each of the
underlying ABS.191 Thus, a
resecuritization ABS structured as a
single-class pass-through would not
alter the level or allocation of credit risk
and interest rate risk on the underlying
ABS.
The Agencies propose to adopt this
exemption under the general exemption
provisions of section 15G(e)(1) of the
Exchange Act. Under that provision, the
Agencies may jointly adopt or issue
exemptions, exceptions, or adjustments
to the risk retention rules, if such
exemption, exception, or adjustment
would: (A) help ensure high quality
underwriting standards for the
securitizers and originators of assets that
are securitized or available for
securitization; and (B) encourage
appropriate risk management practices
by the securitizers and originators of
assets, improve the access of consumers
and businesses to credit on reasonable
terms, or otherwise be in the public
interest and for the protection of
investors.192 As noted above, all of the
ABS underlying a resecuritization that
would be exempted under proposed
§ l.21(a)(5) would already have been
issued in a securitization transaction in
which the sponsor has retained credit
risk in accordance with the rule, or for
which an exemption from the rule was
available. Accordingly, the
resecuritization of a single-class pass191 According to the staff of the FHFA, Fannie
Mae Mega Certificates are an example of a singleclass pass-through resecuritization. FHFA staff have
indicated that these certificates represent a
fractional undivided beneficial ownership interest
in the pool of underlying ABS (typically MBS,
REMICs and other Mega Certificates) and in the
principal and interest distributions from those
underlying ABS. The proposed exemption in
§ l.21(a)(5) of the proposed rules would be
available to any sponsor of a securitization
transaction that is structured in accordance with the
rule’s requirements.
192 15 U.S.C. 78o–11(e)(1).
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through would neither increase nor
reallocate the credit risk inherent in that
underlying 15G-compliant ABS.
Furthermore, because this type of
resecuritization may be used to combine
15G-compliant ABS backed by smaller
asset pools, the exemption for this type
of resecuritization could improve the
access of consumers and businesses to
credit on reasonable terms by allowing
for the creation of an additional
investment vehicle for these smaller
pools. The exemption would allow the
creation of ABS that may be backed by
more geographically diverse pools than
those that can be achieved by the
pooling of individual assets as part of
the issuance of the underlying 15Gcompliant ABS, which could also
improve access to credit on reasonable
terms.
Under the proposed rules, sponsors of
resecuritizations that are not structured
purely as single-class pass-through
transactions would be required to meet
the credit risk retention requirements
with respect to such resecuritizations
unless another exemption for the
resecuritization is available, regardless
of whether the sponsor of the initial
securitization transaction retained credit
risk under the rule or whether an
exemption applied to the initial
securitization transaction. Thus,
resecuritizations that re-tranche the
credit risk of the underlying ABS would
be subject to separate risk retention
requirements under the proposed
rules.193 Similarly, under the proposed
rules, resecuritizations that re-tranche
the prepayment risk of the underlying
ABS, or that are structured to achieve a
sequential paydown of tranches, would
not be exempted. In these
resecuritizations, although losses on the
underlying ABS would be allocated to
holders in the resecuritization on a pro
rata basis, holders of longer duration
classes in the resecuritization could be
193 For example, under the proposed rules, the
sponsor of a collateralized debt obligation (CDO)
would not meet the proposed conditions of the
exemption and therefore would be required to
retain risk in accordance with the rule with respect
to the CDO, regardless of whether the underlying
ABS have been drawn exclusively from 15Gcompliant ABS. See 15 U.S.C. 78o–11(c)(1)(F). In a
typical CDO transaction, a securitizer pools
interests in the mezzanine tranches from many
existing ABS and uses that pool to collateralize the
CDO. Repayments of principal on the underlying
ABS interests are allocated so as to create a senior
tranche, as well as supporting mezzanine and
equity tranches of increasing credit risk.
Specifically, as periodic principal payments on the
underlying ABS are received, they are distributed
first to the senior tranche of the CDO and then to
the mezzanine and equity tranches in order of
increasing credit risk, with any shortfalls being
borne by the most subordinate tranche then
outstanding.
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exposed to a higher level of credit risk
than holders of shorter duration classes.
Section 15G does not apply to ABS
issued before the effective date of the
Agencies’ final rules.194 As a practical
matter, private-label ABS issued before
the effective date of the final rules will
typically not be 15G-compliant ABS,
because such ABS will not have been
structured to meet the rule’s risk
retention requirements. ABS issued
before the effective date that meets the
terms of an exemption of the type
proposed under __.21 (General
exemptions) or __.11 (Fannie Mae and
Freddie Mac ABS) could serve as 15Gcompliant ABS.
Request for Comment
168(a). Are there other types of
resecuritization transactions backed
solely by 15G-compliant ABS that
should be exempt from the risk
retention requirements? 168(b). If so,
what principles and factors should the
Agencies use in considering whether
other types of resecuritizations backed
by 15G-compliant ABS should be
exempted from the risk retention
requirements of section 15G? 168(c).
Should the Agencies consider granting
an exemption only if it is clear that the
resecuritization transaction does not
expose investors in the resecuritization
to different levels or types of credit risk
in the securitized assets than the
underlying 15G-compliant ABS?
169(a). Should the rule provide an
exemption for a sequential-pay
resecuritization that is collateralized
only by 15G-compliant ABS? In this
type of resecuritization, the rights to
principal repayment of the holders of
the different classes differ solely with
respect to the timing of such
repayments. Longer duration classes
receive no payments of principal until
shorter duration classes have been paid
off in full and principal shortfalls are
allocated on a pro-rata basis based upon
the unpaid principal balance of each
class. As the shorter duration classes are
paid off, the unpaid principal balances
of the longer duration classes begin to
represent a larger portion of the total
unpaid principal balances of the
underlying ABS and, therefore, the
longer duration classes are allocated an
ever-increasing percentage of credit
losses as the ABS matures. 169(b). If an
exemption for sequential-pay
resecuritizations backed by 15Gcompliant ABS is appropriate, how
could such an exemption be written to
194 See 15 U.S.C. 78o–11(i) (regulations become
effective with respect to residential mortgagebacked ABS 1 year after publication of the final
rules in the Federal Register, and 2 years for all
other ABS).
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ensure the exemption is limited to this
particular structure?
170(a). Should the Agencies provide
an exemption for prepayment-tranched
resecuritizations that are backed solely
by 15G-compliant ABS? This form of
resecuritization involves the sponsor of
the resecuritization creating tranches
based on the prepayments of the
underlying ABS (i.e., prepayments
received by the ABS in the first-level
ABS securitization). One type of
prepayment-tranched resecuritization is
a planned amortization class (PAC)
resecuritization. PAC bonds receive
principal payments based on the level of
prepayments and will have their
expected duration if the actual speed of
prepayments on the underlying ABS
falls within a designated range. In order
to create a PAC bond with greater
certainty of cash flow than the
underlying ABS, one or more support
(SUP) classes that are highly sensitive to
varying levels of prepayment are created
as part of the same transaction. If the
rate of prepayments is faster than that
assumed in the creation of the PAC, the
SUPs receive more principal in order to
prevent an overpayment of principal on
the PAC. If the rate of prepayment is
slower, principal is redirected from the
SUPs in order to achieve the specified
repayment schedule on the PAC. In
either case, credit losses are allocated on
a pro rata basis based on the unpaid
principal balance attributable to each
class. Accordingly, the effect of fasterthan-expected rates of prepayment will
tend to expose holders of the PAC bonds
to relatively greater losses than the
holders of the SUPs, while slower-thanexpected rates of prepayment will tend
to have the opposite effect. Moreover, in
transactions where more than one PAC
bond is created, the distribution of
principal repayments to the PACs are
based on priority and, therefore, the
holders of the PACs are exposed to
levels of credit risk that differ from that
of the underlying ABS. 170(b). If an
exemption of prepayment-tranched
resecuritizations or certain types of such
resecuritizations (such as PAC
structures) is appropriate, how could an
exemption be written to ensure that the
exemption does not extend to other
resecuritizations?
171. As noted above, the proposed
exemptions require the underlying ABS
be 15G-compliant ABS. In practice,
initially this may mean that only
resecuritizations based on ABS
guaranteed by Fannie Mae and Freddie
Mac will qualify for this exemption.
Does this raise any competitive or other
issues and if so, how can they be
mitigated without eliminating the
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24139
requirement there be risk retention on
the underlying ABS?
172(a). Is the proposed language for
this exemption appropriate? 172(b).
Does any portion of the exemption
cause an ambiguity that should be
addressed?
D. Additional Exemptions
Consistent with section15G of the
Exchange Act, § l.23(b) of the proposed
rules provides that the Federal banking
agencies and the Commission, in
consultation with FHFA and HUD, may
jointly adopt or issue additional
exemptions, exceptions or adjustments
to the credit risk retention requirements,
including exemptions, exceptions or
adjustments for classes of institutions or
assets in accordance with section
15G(e).195 In addition, § l.23(a) of the
proposed rules recognizes that the
Agencies with rulewriting authority
under section 15G(b) 196 with respect to
the type of assets involved may jointly
provide a total or partial exemption of
any individual securitization
transaction, as such Agencies determine
may be appropriate in the public
interest and for the protection of
investors, as permitted by section
15G(c)(1)(G)(i).197 The Agencies expect
to coordinate with each other to
facilitate the processing, review and
action on requests for such written
interpretations or guidance, or
additional exemptions, exceptions or
adjustments.
Request for Comments
173(a). Are there securitization
transactions that would not be covered
by the exemptions in the proposed rules
that should be exempted from risk
retention requirements pursuant to
section 15G(e)(3) of the Exchange Act?
173(b). If so, what are the features and
characteristics of such securitization
transactions that would properly
exempt them from risk retention
requirements pursuant to section
15G(e)(3)?
E. Safe Harbor for Certain ForeignRelated Transactions
The proposed rules include a safe
harbor provision for certain
predominantly foreign transactions
based on the limited nature of the
transactions’ connections with the
United States and U.S. investors. The
proposed safe harbor is intended solely
to provide clarity that the Agencies
would not apply the requirements of the
proposed rules to transactions that meet
195 15
U.S.C. 78o–11(e).
U.S.C. 78o–11(b).
197 15 U.S.C. 78o–11(c)(1)(G)(i).
196 15
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all of the conditions of the safe harbor.
The proposed safe harbor should not be
interpreted as reflecting the views of
any Agency as to the potential scope of
transactions or persons subject to
section 15G or the proposed rules.
As set forth in section l.23 of the
proposed rules, the safe harbor provides
that the rule’s risk retention
requirements would not apply to a
securitization transaction if certain
conditions are met, including: (i) The
securitization transaction is not required
to be and is not registered under the
Securities Act; (ii) no more than 10
percent of the dollar value by proceeds
(or equivalent if sold in a foreign
currency) of all classes of ABS interests
sold in the securitization transaction are
sold to U.S. persons or for the account
or benefit of U.S. persons; 198 (iii)
neither the sponsor of the securitization
transaction nor the issuing entity is (A)
chartered, incorporated, or organized
under the laws of the U.S., or a U.S.
State or Territory or (B) the
unincorporated branch or office located
in the U.S. of an entity not chartered,
incorporated, or organized under the
laws of the U.S., or a U.S. State or
Territory (collectively, a U.S.-located
entity); (iv) no more than 25 percent of
the assets collateralizing the ABS sold
in the securitization transaction were
acquired by the sponsor, directly or
indirectly, from a consolidated affiliate
of the sponsor or issuing entity that is
a U.S.-located entity.199
The safe harbor is intended to exclude
from the proposed risk retention
requirements transactions in which the
effects on U.S. interests are sufficiently
remote so as not to significantly impact
underwriting standards and risk
management practices in the United
States or the interests of U.S. investors.
Accordingly, the conditions for use of
the safe harbor limit involvement by
persons in the U.S. with respect to both
assets being securitized in a transaction
and the ABS sold in connection with
the transaction. The safe harbor would
not be available for any transaction or
series of transactions that, although in
technical compliance with the
198 The proposed rules include a definition of
‘‘U.S. person’’ that is substantially the same as the
definition of ‘‘U.S. person’’ in the Commission’s
Regulation S, although Regulation S relates solely
to the application of section 5 of the Securities Act
(12 U.S.C. 77e). See proposed rules at § l.23 and
17 CFR 203.902(k). Additionally, the 10 percent
threshold is consistent with other Commission
exemptive rules relating to cross-border offerings
under which the Commission has provided
accommodations for not applying its rules even
though there is a limited offering of securities in the
United States. See Securities Act Rules 801 and 802
(17 CFR 230.801 and 802).
199 See proposed rules at § l.23.
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conditions of the safe harbor, is part of
a plan or scheme to evade the
requirements of section 15G and the
proposed rules.
Request for Comment
174(a). Are there any extra or special
considerations relating to these
circumstances that we should take into
account? 174(b). Should the more than
10 percent proceeds trigger be higher or
lower (e.g., 0 percent, 5 percent, 15
percent, or 20 percent)?
Appendix A to the Supplementary
Information
The tables below show the estimated
effects of the proposed QRM standards
based on data for all residential
mortgage loans purchased or securitized
by the Enterprises between 1997 and
2009. The first set of results shows rates
of serious delinquency (SDQ), that is,
loans that are 90 days or more
delinquent, or are in the process of
foreclosure. The second set of results
shows volume, in dollars of unpaid
principal balance (UPB).
Because the data that FHFA routinely
receives from the Enterprises does not
include all the factors needed to identify
QRM eligible loans, the universe of
loans within the data set that would
qualify as a QRM under the proposed
standards was estimated based on four
of the most significant QRM elements:
(i) Product type (i.e. excluding nonowner occupied loans, low or no
documentation loans, interest-only or
negative amortization loans, loans with
balloon payments, and ARM loans that
permit payment shocks in excess of the
range permitted by the proposed QRM
standards); (ii) front-end and back-end
DTI ratios; (iii) LTV ratios; and (iv)
credit history.
Because of data limitations, proxies
were used for certain of these QRM
standards. FHFA does not have
individual credit items in the data set
used for analysis, such as previous
bankruptcies or foreclosures involving
the borrower, or current or recent
borrower delinquencies on other debt
obligations. However, borrowers with
such credit issues would tend to have
much lower credit scores than other
borrowers (all else being equal). To
proxy the credit history restrictions in
the proposed QRM definition, borrowers
with FICO scores below 690 were
deemed to not satisfy the proposed
QRM credit history standards for
purposes of the analysis.
In addition, the analysis uses first-lien
LTV ratios as a proxy for combined LTV
when relevant. The Agencies do not
believe that this proxy would produce a
large discrepancy for analysis of loans
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originated before 2002 or after 2007, but
it may understate the proposed QRM
definition’s effects, both on volume and
on rates of SDQ, for originations from
2002 to 2007, as second liens were
increasingly used during this period.
(That is, the proposed QRM definition
would likely cause a greater decrease in
SDQ rates and loan volumes than
estimated through the use of this proxy.)
Other proposed QRM factors may
differ somewhat for this analysis. The
QRM proposal is based on current FHA
definitions of income, and standards for
full documentation of income and full
appraisals. The data used in this
analysis for purposes of estimating
whether a loan would meet the DTI and
LTV ratios in the proposed QRM
standards, however, is based on
Enterprise definitions of income, and
Enterprise documentation and appraisal
requirements that prevailed at the time
the loans were originated. While there
may be some circumstances in which
the different standards and definitions
would have led to a different QRM
eligibility estimate, the Agencies do not
believe that these differences would
have a material impact on the analysis.
For example, the Enterprises did not
always require an interior appraisal in
cases where the default risk was judged
to be low and the down payment was
substantial. While loans originated to
these standards would not be QRM
eligible under this proposal, it is likely
that the QRM standard would induce
originators to require full appraisals
going forward, and thus cause these
loans to be QRM eligible.
For the first set of results concerning
SDQ rates, the first column shows the
‘‘QRM qualifying’’ population. This is
the SDQ rate for all loans that are
estimated as meeting the proposed QRM
standards. The last column in the first
set of results shows the SDQ rate for all
loans purchased or securitized by the
Enterprises in that year. Thus, the
difference between the first and last
column show the cumulative estimated
effect of the set of proposed QRM
standards on SDQ for that cohort of
loans. The intermediate columns show
the SDQ rate for the population of loans
in the relevant year that are estimated to
meet every QRM standard other than the
standard(s) indicated at the top of the
column. For example, the second
column, headed Product Type, shows
the estimated effect of allowing low or
no documentation loans, interest-only
or negative amortization loans, loans
with balloon payments, or ARM loans
that permit payment shocks in excess of
the range permitted by the proposed
QRM standards, while still prohibiting
loans with credit history (as proxied
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through the use of credit scores), an LTV
ratio, or debt-to-income ratios that
would disqualify them for QRM status.
These columns show the differences
between the base QRM SDQ rate and the
higher risk population within each
column. The analysis is shown
separately for all loans, for purchases,
for rate and term refinances, and for
cash out refinances.
The second set of results shows the
volume of Enterprise mortgages
purchased or securitized that are
estimated to have met the proposed
QRM standards. The last column shows
total dollar originations purchased or
securitized by the Enterprises for each
year. The first column shows the
percent of that volume estimated to be
QRM eligible. The intermediate
columns show the estimated effect on
that volume for the population of loans
that are estimated to meet the proposed
QRM standards other than the one
identified at the top of the column. For
example, the second column, headed
Product Type, shows the estimated
effect on the percentage of Enterprise
volume that would be QRM eligible by
allowing loans that do not conform to
the Product Type standards for
QRMs,200 while still prohibiting loans
with a credit history (as proxied by
credit scores), an LTV ratio, or debt-toincome ratios that would disqualify the
loan for QRM status. These columns
show the differences between the base
QRM qualifying percentage and the
higher risk population.
ALL LOANS
Year
QRM
Product type
PTI/DTI
LTV
FICO
All loans
Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification
Requirements
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
0.42%
0.39%
0.44%
0.32%
0.31%
0.33%
0.55%
0.95%
1.86%
2.72%
2.37%
0.68%
0.04%
+0.05%
+0.10%
+0.13%
+0.43%
+0.35%
+0.41%
+0.64%
+1.72%
+5.30%
+7.49%
+6.34%
+1.48%
+0.06%
+0.39%
+0.31%
+0.34%
+0.20%
+0.27%
+0.32%
+0.66%
+1.16%
+2.36%
+3.35%
+3.59%
+1.64%
+0.11%
+0.61%
+0.52%
+0.78%
+0.83%
+0.59%
+0.73%
+1.06%
+1.58%
+2.31%
+3.73%
+4.39%
+1.68%
+0.09%
+3.08%
+2.34%
+3.12%
+2.94%
+2.52%
+2.34%
+2.95%
+4.27%
+6.46%
+7.90%
+8.66%
+5.15%
+0.50%
+2.30%
+1.68%
+2.31%
+2.77%
+2.27%
+2.09%
+2.40%
+4.33%
+8.13%
+13.93%
+17.12%
+5.94%
+0.24%
Total ....................................
0.69%
+2.99%
+1.38%
+0.99%
+3.73%
+5.27%
Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
20.44%
23.29%
19.48%
16.44%
19.37%
22.37%
24.57%
17.03%
14.41%
11.52%
10.72%
17.39%
30.52%
+3.75%
+2.17%
+3.16%
+3.70%
+3.01%
+4.28%
+4.55%
+6.35%
+6.74%
+7.11%
+5.44%
+4.64%
+3.38%
+13.04%
+13.30%
+14.83%
+17.00%
+14.33%
+15.35%
+16.68%
+17.68%
+18.78%
+17.59%
+16.14%
+22.01%
+24.47%
+13.74%
+17.10%
+12.95%
+8.40%
+13.11%
+10.72%
+10.02%
+6.25%
+5.45%
+3.91%
+4.95%
+9.22%
+15.26%
+5.81%
+6.24%
+5.37%
+4.53%
+4.62%
+4.62%
+4.98%
+4.34%
+3.36%
+2.73%
+2.24%
+2.12%
+1.74%
$286,497,878,371
691,033,994,509
481,450,519,442
356,779,731,420
1,039,412,013,403
1,385,056,256,240
1,924,265,340,603
937,643,914,289
939,069,358,457
887,443,942,464
1,027,460,511,244
793,136,249,487
1,176,445,135,548
Total ....................................
19.79%
+4.62%
+17.36%
+9.86%
+3.91%
11,925,694,845,477
PURCHASE LOANS
Year
QRM
Product type
PTI/DTI
LTV
FICO
All loans
srobinson on DSKHWCL6B1PROD with PROPOSALS
Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification
Requirements
1997
1998
1999
2000
2001
2002
2003
2004
2005
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
0.42%
0.46%
0.40%
0.29%
0.38%
0.48%
0.93%
1.16%
2.13%
200 That is, low or no documentation loans,
interest-only or negative amortization loans, loans
VerDate Mar<15>2010
18:07 Apr 28, 2011
Jkt 223001
+0.03%
+0.04%
+0.12%
+0.38%
+0.35%
+0.50%
+0.72%
+1.97%
+6.18%
+0.36%
+0.30%
+0.30%
+0.17%
+0.28%
+0.32%
+0.78%
+1.24%
+2.49%
with a balloon payment, or ARM loans that permit
PO 00000
Frm 00053
Fmt 4701
Sfmt 4702
+0.80%
+0.90%
+0.98%
+0.83%
+0.97%
+1.28%
+1.84%
+2.53%
+2.87%
+3.13%
+2.70%
+3.05%
+2.51%
+2.72%
+2.61%
+3.29%
+3.93%
+5.94%
+2.44%
+2.13%
+2.23%
+2.29%
+2.59%
+2.70%
+3.50%
+4.71%
+8.61%
payment shocks in excess of the range permitted by
the proposed QRM standards.
E:\FR\FM\29APP2.SGM
29APP2
24142
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules
PURCHASE LOANS—Continued
Year
2006
2007
2008
2009
QRM
Product type
PTI/DTI
LTV
FICO
All loans
...........................................
...........................................
...........................................
...........................................
2.76%
2.33%
0.64%
0.07%
+8.69%
+6.76%
+1.36%
+0.09%
+3.28%
+3.31%
+1.42%
+0.09%
+3.29%
+4.33%
+2.10%
+0.07%
+6.78%
+6.79%
+4.73%
+0.63%
+13.63%
+16.51%
+5.62%
+0.23%
Total ....................................
1.01%
+3.84%
+1.56%
+1.28%
+3.69%
+6.39%
Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
20.74%
22.08%
19.86%
18.17%
19.57%
18.43%
18.03%
16.71%
15.67%
13.57%
12.39%
17.33%
27.06%
+4.40%
+2.99%
+4.02%
+4.21%
+4.20%
+5.80%
+6.81%
+9.21%
+10.22%
+9.37%
+6.88%
+6.08%
+7.02%
+14.02%
+15.33%
+17.29%
+19.37%
+18.76%
+18.86%
+19.38%
+20.88%
+22.25%
+21.75%
+19.94%
+26.06%
+33.83%
+12.11%
+13.09%
+10.39%
+7.56%
+7.94%
+6.12%
+5.32%
+3.25%
+2.51%
+2.02%
+3.27%
+6.40%
+8.18%
+5.55%
+6.23%
+4.93%
+4.45%
+4.92%
+4.51%
+4.42%
+3.78%
+2.92%
+2.48%
+1.95%
+1.86%
+1.89%
$171,316,168,314
243,827,154,269
252,736,885,540
259,462,348,244
334,671,388,428
378,648,800,742
428,404,858,343
397,943,548,815
433,917,427,310
459,040,004,449
504,879,485,500
321,485,446,505
225,983,942,704
Total ....................................
17.57%
+6.69%
+20.69%
+5.89%
+3.63%
4,412,317,459,162
NO CASH-OUT REFINANCINGS
Year
QRM
Product type
PTI/DTI
LTV
FICO
All loans
Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification
Requirements
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
0.37%
0.33%
0.46%
0.40%
0.27%
0.28%
0.46%
0.77%
1.43%
2.74%
2.86%
0.70%
0.04%
+0.06%
+0.11%
+0.17%
+0.66%
+0.32%
+0.27%
+0.42%
+1.01%
+3.09%
+6.44%
+7.94%
+1.80%
+0.03%
+0.43%
+0.27%
+0.43%
+0.31%
+0.24%
+0.28%
+0.54%
+0.97%
+1.92%
+3.70%
+5.20%
+1.94%
+0.11%
+0.32%
+0.36%
+0.66%
+0.70%
+0.50%
+0.65%
+0.88%
+1.25%
+1.96%
+3.72%
+5.39%
+1.55%
+0.10%
+2.94%
+2.15%
+3.26%
+3.69%
+2.21%
+2.01%
+2.69%
+4.09%
+6.46%
+8.57%
+10.27%
+5.25%
+0.48%
+2.00%
+1.41%
+2.47%
+4.11%
+1.97%
+1.63%
+1.71%
+3.36%
+6.54%
+13.99%
+19.45%
+5.78%
+0.24%
Total ....................................
0.44%
+1.65%
+0.90%
+0.82%
+3.11%
+3.47%
srobinson on DSKHWCL6B1PROD with PROPOSALS
Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
21.04%
25.24%
20.34%
13.66%
22.56%
28.69%
31.06%
22.37%
16.42%
10.24%
9.41%
20.16%
32.80%
+3.12%
+1.92%
+2.44%
+2.31%
+2.89%
+4.46%
+4.48%
+5.15%
+4.93%
+6.22%
+5.15%
+4.61%
+3.01%
+11.92%
+12.34%
+12.42%
+11.72%
+13.21%
+15.27%
+16.76%
+16.81%
+16.06%
+13.03%
+12.27%
+20.18%
+22.10%
+15.76%
+18.72%
+14.98%
+10.37%
+15.14%
+11.65%
+11.22%
+8.76%
+8.46%
+6.20%
+6.36%
+10.87%
+16.44%
+6.12%
+6.40%
+6.23%
+5.06%
+4.72%
+4.90%
+5.22%
+5.07%
+3.82%
+2.73%
+2.16%
+2.06%
+1.63%
$72,883,400,278
302,723,323,315
140,480,199,806
48,878,241,470
390,566,245,690
584,998,514,202
920,098,549,172
269,562,391,201
169,162,254,192
131,792,837,483
196,852,210,903
231,714,054,542
637,544,819,174
Total ....................................
25.50%
+3.95%
+16.25%
+12.53%
+4.23%
4,097,257,041,427
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18:07 Apr 28, 2011
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24143
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules
CASH-OUT REFINANCINGS
Year
QRM
Product type
PTI/DTI
LTV
FICO
All loans
Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification
Requirements
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
0.51%
0.39%
0.52%
0.51%
0.31%
0.31%
0.51%
0.89%
1.70%
2.61%
2.14%
0.72%
0.03%
+0.18%
+0.20%
+0.23%
+0.70%
+0.33%
+0.40%
+0.64%
+1.29%
+2.71%
+3.77%
+3.46%
+1.39%
+0.05%
+0.48%
+0.37%
+0.42%
+0.41%
+0.23%
+0.28%
+0.60%
+1.08%
+2.22%
+3.34%
+3.37%
+1.73%
+0.10%
+0.54%
+0.42%
+0.56%
+0.81%
+0.52%
+0.61%
+1.12%
+1.51%
+2.55%
+4.05%
+3.84%
+1.44%
+0.07%
+3.12%
+2.09%
+3.05%
+4.26%
+2.67%
+2.57%
+3.11%
+4.92%
+7.11%
+9.06%
+9.99%
+5.47%
+0.44%
+2.20%
+1.44%
+2.27%
+3.88%
+2.30%
+2.15%
+2.57%
+4.71%
+8.34%
+14.42%
+16.66%
+6.52%
+0.24%
Total ....................................
0.70%
+2.01%
+1.40%
+1.12%
+4.50%
+5.85%
Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
18.17%
21.25%
17.05%
10.03%
15.19%
17.13%
19.05%
12.16%
11.77%
8.93%
8.93%
14.78%
28.36%
+2.23%
+1.30%
+1.84%
+2.40%
+1.90%
+2.67%
+2.99%
+3.34%
+3.14%
+4.00%
+3.39%
+2.75%
+1.52%
+10.98%
+11.88%
+11.63%
+9.66%
+11.01%
+12.30%
+14.53%
+13.83%
+15.67%
+13.17%
+12.61%
+18.34%
+22.56%
+16.86%
+20.45%
+17.04%
+10.90%
+16.10%
+13.58%
+11.60%
+8.15%
+7.74%
+5.81%
+6.70%
+11.41%
+17.99%
+6.32%
+5.91%
+5.28%
+4.46%
+4.18%
+4.33%
+5.00%
+4.43%
+3.71%
+3.12%
+2.75%
+2.52%
+1.87%
$42,298,309,778
144,483,516,925
88,233,434,096
48,439,141,706
314,174,379,286
421,408,941,296
575,761,933,088
270,137,974,274
335,989,676,955
296,611,100,532
325,728,814,842
239,936,748,440
312,916,373,670
Total ....................................
15.81%
+2.75%
+14.39%
+11.78%
+3.89%
3,416,120,344,887
srobinson on DSKHWCL6B1PROD with PROPOSALS
VII. Solicitation of Comments on Use of
Plain Language
• What else could we do to make the
regulation easier to understand?
Section 722 of the Gramm-LeachBliley Act, Public Law 106–102, sec.
722, 113 Stat. 1338, 1471 (Nov. 12,
1999), requires the Federal banking
agencies to use plain language in all
proposed and final rules published after
January 1, 2000. The Federal banking
agencies invite your comments on how
to make this proposal easier to
understand. For example:
• Have we organized the material to
suit your needs? If not, how could this
material be better organized?
• Are the requirements in the
proposed regulation clearly stated? If
not, how could the regulation be more
clearly stated?
• Does the proposed regulation
contain language or jargon that is not
clear? If so, which language requires
clarification?
• Would a different format (grouping
and order of sections, use of headings,
paragraphing) make the regulation
easier to understand? If so, what
changes to the format would make the
regulation easier to understand?
VIII. Administrative Law Matters
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Jkt 223001
A. Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act
(RFA) generally requires that, in
connection with a notice of proposed
rulemaking, an agency prepare and
make available for public comment an
initial regulatory flexibility analysis that
describes the impact of a proposed rule
on small entities.201 However, the
regulatory flexibility analysis otherwise
required under the RFA is not required
if an agency certifies that the rule will
not have a significant economic impact
on a substantial number of small entities
(defined in regulations promulgated by
the Small Business Administration to
include banking organizations with total
assets of less than or equal to $175
million) and publishes its certification
and a short, explanatory statement in
the Federal Register together with the
rule.
As of September 30, 2010, there were
approximately 590 small national banks.
201 See
PO 00000
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Frm 00055
Fmt 4701
Sfmt 4702
For the reasons provided below, the
OCC certifies that the proposed rule, if
adopted in final form, would not have
a significant economic impact on a
substantial number of small entities.
Accordingly, a regulatory flexibility
analysis is not required.
As discussed in the ‘‘Supplementary
Information’’ above, section 941 of the
Dodd-Frank Act 202 generally requires
the Federal banking agencies and the
Commission, and, in the case of the
securitization of any residential
mortgage asset, together with HUD and
FHFA, to jointly prescribe regulations,
that (i) require a securitizer to retain not
less than 5 percent of the credit risk of
any asset that the securitizer, through
the issuance of an asset-backed security
(ABS), transfers, sells, or conveys to a
third party; and (ii) prohibit a
securitizer from directly or indirectly
hedging or otherwise transferring the
credit risk that the securitizer is
required to retain under section 15G.
Although the proposed rule would
apply directly only to securitizers,
202 Codified at section 15G of the Exchange Act,
17 U.S.C. 78o–11.
E:\FR\FM\29APP2.SGM
29APP2
srobinson on DSKHWCL6B1PROD with PROPOSALS
24144
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules
subject to certain considerations, section
15G authorizes the Agencies to permit
securitizers to allocate at least a portion
of the risk retention requirement to the
originator(s) of the securitized assets.
Section 15G provides a total
exemption from the risk retention
requirements for securitizers of certain
securitization transactions, such as an
ABS issuance collateralized exclusively
by ‘‘qualified residential mortgage’’
(QRM) loans, and further authorizes the
Agencies to establish a lower risk
retention requirement for securitizers of
ABS issuances collateralized by other
asset types, such as commercial,
commercial real estate (CRE), and
automobile loans, which satisfy
underwriting standards established by
the Federal banking agencies.
The risk retention requirements of
section 15G apply generally to a
‘‘securitizer’’ of ABS, where securitizer
is defined to mean (i) an issuer of an
ABS; or (ii) a person who organizes and
initiates an asset-backed transaction by
selling or transferring assets, either
directly or indirectly, including through
an affiliate, to the issuer. Section 15G
also defines an ‘‘originator’’ as a person
who (i) through the extension of credit
or otherwise, creates a financial asset
that collateralizes an asset-backed
security; and (ii) sells an asset directly
or indirectly to a securitizer.
The proposed rule implements the
credit risk retention requirements of
section 15G. Section 15G requires the
Agencies to establish risk retention
requirements for ‘‘securitizers’’. The
proposal would, as a general matter,
require that a ‘‘sponsor’’ of a
securitization transaction retain the
credit risk of the securitized assets in
the form and amount required by the
proposed rule. The Agencies believe
that imposing the risk retention
requirement on the sponsor of the
ABS—as permitted by section 15G—is
appropriate in light of the active and
direct role that a sponsor typically has
in arranging a securitization transaction
and selecting the assets to be
securitized. The OCC is aware of only
six small banking organizations that
currently sponsor securitizations (one of
which is a national bank, two are state
member banks, and three are state
nonmember banks based on September
30, 2010 information) and, therefore, the
risk retention requirements of the
proposed rule, as generally applicable to
sponsors, would not have a significant
economic impact on a substantial
number of small national banks.
Under the proposed rule a sponsor
may offset the risk retention
requirement by the amount of any
vertical risk retention ABS interests or
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18:07 Apr 28, 2011
Jkt 223001
eligible horizontal residual interest
acquired by an originator of one or more
securitized assets if certain
requirements are satisfied, including,
the originator must originate at least 20
percent of the securitized assets, as
measured by the aggregate unpaid
principal balance of the asset pool. In
determining whether the allocation
provisions of the proposal would have
a significant economic impact on a
substantial number of small banking
organizations, the Federal banking
agencies reviewed September 30, 2010
Call Report data to evaluate the
securitization activity and approximate
the number of small banking
organizations that potentially could
retain credit risk under allocation
provisions of the proposal.203
The Call Report data indicates that
approximately 329 small banking
organizations, 54 of which are national
banks, originate loans for securitization,
namely ABS issuances collateralized by
one-to-four family residential mortgages.
The majority of these originators sell
their loans either to Fannie Mae or
Freddie Mac, which retain credit risk
through agency guarantees and would
not be able to allocate credit risk to
originators under this proposed rule.
Additionally, based on publiclyavailable market data, it appears that
most residential mortgage-backed
securities offerings are collateralized by
a pool of mortgages with an unpaid
aggregate principal balance of at least
$500 million.204 Accordingly, under the
proposed rule a sponsor could
potentially allocate a portion of the risk
retention requirement to a small
banking organization only if such
organization originated at least 20
percent ($100 million) of the securitized
mortgages. As of September 30, 2010,
only one small banking organization
reported an outstanding principal
203 Call Report Schedule RC–S provides
information on the servicing, securitization, and
asset sale activities of banking organizations. For
purposes of the RFA analysis, the Agencies
gathered and evaluated data regarding (1) net
securitization income, (2) the outstanding principal
balance of assets sold and securitized by the
reporting entity with servicing retained or with
recourse or other seller-provided credit
enhancements, and (3) assets sold with recourse or
other seller-provided credit enhancements and not
securitized by the reporting bank.
204 Based on the data provided in Table 1, page
29 of the Board’s ‘‘Report to the Congress on Risk
Retention’’, it appears that the average MBS
issuance is collateralized by a pool of
approximately $620 million in mortgage loans (for
prime MBS issuances) or approximately $690
million in mortgage loans (for subprime MBS
issuances). For purposes of the RFA analysis, the
agencies used an average asset pool size $500
million to account for reductions in mortgage
securitization activity following 2007, and to add an
element of conservatism to the analysis.
PO 00000
Frm 00056
Fmt 4701
Sfmt 4702
balance of assets sold and securitized of
$100 million or more.205
The OCC seeks comments on whether
the proposed rule, if adopted in final
form, would impose undue burdens, or
have unintended consequences for,
small national banks and whether there
are ways such potential burdens or
consequences could be minimized in a
manner consistent with section 15G of
the Exchange Act.
Board: The Regulatory Flexibility Act
(5 U.S.C. 603(b)) generally requires that,
in connection with a notice of proposed
rulemaking, an agency prepare and
make available for public comment an
initial regulatory flexibility analysis that
describes the impact of a proposed rule
on small entities.206 Under regulations
promulgated by the Small Business
Administration, a small entity includes
a commercial bank or bank holding
company with assets of $175 million or
less (each, a small banking
organization).207 The Board has
considered the potential impact of the
proposed rules on small banking
organizations supervised by the Board
in accordance with the Regulatory
Flexibility Act.
For the reasons discussed in Part II of
this Supplementary Information, the
proposed rules define a securitizer as a
‘‘sponsor’’ in a manner consistent with
the definition of that term in the
Commission’s Regulation AB and
provide that the sponsor of a
securitization transaction is generally
responsible for complying with the risk
retention requirements established
under section 15G. The Board is
unaware of any small banking
organization under the supervision of
the Board that has acted as a sponsor of
an ABS transaction 208 (based on
September 30, 2010 data).209 As of
September 30, 2010, there were
approximately 2861 small banking
organizations supervised by the Board,
which includes 2412 bank holding
companies, 398 state member banks, 9
Edge and agreement corporations and 42
205 The OCC notes that this finding assumes that
no portion of the assets originated by small banking
organizations were sold to securitizations that
qualify for an exemption from the risk retention
requirements under the proposed rule.
206 See 5 U.S.C. 601 et seq.
207 13 CFR 121.201.
208 For purposes of the proposed rules, this would
include a small bank holding company; state
member bank; Edge corporation; agreement
corporation; foreign banking organization; and any
subsidiary of the foregoing.
209 Call Report Schedule RC–S; Data based on the
Reporting Form FR 2866b; Structure Data for the
U.S. Offices of Foreign Banking Organizations; and
Aggregate Data on Assets and Liabilities of U.S.
Branches and Agencies of Foreign Banks based on
the quarterly form FFIEC 002.
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U.S. offices of foreign banking
organizations.
The proposed rules permit, but do not
require, a sponsor to allocate a portion
of its risk retention requirement to one
or more originators of the securitized
assets, subject to certain conditions
being met. In particular, a sponsor may
offset the risk retention requirement by
the amount of any vertical risk retention
ABS interests or eligible horizontal
residual interest acquired by an
originator of one or more securitized
assets if certain requirements are
satisfied, including, the originator must
originate at least 20 percent of the
securitized assets, as measured by the
aggregate unpaid principal balance of
the asset pool. A sponsor using this risk
retention option remains responsible for
ensuring that the originator has satisfied
the risk retention requirements. In light
of this option, the Board has considered
the impact of the proposed rules on
originators that are small banking
organizations.
The September 30, 2010 regulatory
report data 210 indicates that
approximately 329 small banking
organizations, 37 of which are small
banking organizations that are
supervised by the Board, originate loans
for securitization, namely ABS
issuances collateralized by one-to-four
family residential mortgages. The
majority of these originators sell their
loans either to Fannie Mae or Freddie
Mac, which retain credit risk through
agency guarantees and would not be
able to allocate credit risk to originators
under this proposed rule. Additionally,
based on publicly-available market data,
it appears that most residential
mortgage-backed securities offerings are
collateralized by a pool of mortgages
with an unpaid aggregate principal
balance of at least $500 million.211
Accordingly, under the proposed rule a
210 Call Report Schedule RC–S provides
information on the servicing, securitization, and
asset sale activities of banking organizations. For
purposes of the RFA analysis, the Agencies
gathered and evaluated data regarding (1) net
securitization income, (2) the outstanding principal
balance of assets sold and securitized by the
reporting entity with servicing retained or with
recourse or other seller-provided credit
enhancements, and (3) assets sold with recourse or
other seller-provided credit enhancements and not
securitized by the reporting bank.
211 Based on the data provided in Table 1, page
29 of the Board’s ‘‘Report to the Congress on Risk
Retention’’, it appears that the average MBS
issuance is collateralized by a pool of
approximately $620 million in mortgage loans (for
prime MBS issuances) or approximately $690
million in mortgage loans (for subprime MBS
issuances). For purposes of the RFA analysis, the
agencies used an average asset pool size $500
million to account for reductions in mortgage
securitization activity following 2007, and to add an
element of conservatism to the analysis.
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sponsor could potentially allocate a
portion of the risk retention requirement
to a small banking organization only if
such organization originated at least 20
percent ($100 million) of the securitized
mortgages. As of September 30, 2010,
only one small banking organization
supervised by the Board reported an
outstanding principal balance of assets
sold and securitized of $100 million or
more.212
In light of the foregoing, the proposed
rules would not appear to have a
significant economic impact on
sponsors or originators supervised by
the Board. The Board seeks comment on
whether the proposed rules would
impose undue burdens on, or have
unintended consequences for, small
banking organizations, and whether
there are ways such potential burdens or
consequences could be minimized in a
manner consistent with section 15G of
the Exchange Act.
FDIC: The Regulatory Flexibility Act
(RFA) generally requires that, in
connection with a notice of proposed
rulemaking, an agency prepare and
make available for public comment an
initial regulatory flexibility analysis that
describes the impact of a proposed rule
on small entities.213 However, a
regulatory flexibility analysis is not
required if the agency certifies that the
rule will not have a significant
economic impact on a substantial
number of small entities (defined in
regulations promulgated by the Small
Business Administration to include
banking organizations with total assets
of less than or equal to $175 million)
and publishes its certification and a
short, explanatory statement in the
Federal Register together with the rule.
As of September 30, 2010, there were
approximately 2,768 small FDICsupervised institutions, which includes
2,639 state nonmember banks and 129
state chartered savings banks. For the
reasons provided below, the FDIC
certifies that the proposed rule, if
adopted in final form, would not have
a significant economic impact on a
substantial number of small entities.
Accordingly, a regulatory flexibility
analysis is not required.
As discussed in the SUPPLEMENTARY
INFORMATION above, section 941 of the
Dodd-Frank Act 214 generally requires
the Federal banking agencies and the
Commission, and, in the case of the
212 The FDIC notes that this finding assumes that
no portion of the assets originated by small banking
organizations were sold to securitizations that
qualify for an exemption from the risk retention
requirements under the proposed rule.
213 See 5 U.S.C. 601 et seq.
214 Codified at section 15G of the Exchange Act,
17 U.S.C. 78o–11.
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securitization of any residential
mortgage asset, together with HUD and
FHFA, to jointly prescribe regulations,
that (i) require a securitizer to retain not
less than 5 percent of the credit risk of
any asset that the securitizer, through
the issuance of an asset-backed security
(ABS), transfers, sells, or conveys to a
third party; and (ii) prohibit a
securitizer from directly or indirectly
hedging or otherwise transferring the
credit risk that the securitizer is
required to retain under section 15G.
Although the proposed rule would
apply directly only to securitizers,
subject to certain considerations, section
15G authorizes the Agencies to permit
securitizers to allocate at least a portion
of the risk retention requirement to the
originator(s) of the securitized assets.
Section 15G provides a total
exemption from the risk retention
requirements for securitizers of certain
securitization transactions, such as an
ABS issuance collateralized exclusively
by ‘‘qualified residential mortgage’’
(QRM) loans, and further authorizes the
Agencies to establish a lower risk
retention requirement for securitizers of
ABS issuances collateralized by other
asset types, such as commercial,
commercial real estate (CRE), and
automobile loans, which satisfy
underwriting standards established by
the Federal banking agencies.
The risk retention requirements of
section 15G apply generally to a
‘‘securitizer’’ of ABS, where securitizer
is defined to mean (i) an issuer of an
ABS; or (ii) a person who organizes and
initiates an asset-backed transaction by
selling or transferring assets, either
directly or indirectly, including through
an affiliate, to the issuer. Section 15G
also defines an ‘‘originator’’ as a person
who (i) through the extension of credit
or otherwise, creates a financial asset
that collateralizes an asset-backed
security; and (ii) sells an asset directly
or indirectly to a securitizer.
The proposed rule implements the
credit risk retention requirements of
section 15G. The proposal would, as a
general matter, require that a ‘‘sponsor’’
of a securitization transaction retain the
credit risk of the securitized assets in
the form and amount required by the
proposed rule. The Agencies believe
that imposing the risk retention
requirement on the sponsor of the
ABS—as permitted by section 15G—is
appropriate in view of the active and
direct role that a sponsor typically has
in arranging a securitization transaction
and selecting the assets to be
securitized. The FDIC is aware of only
six small banking organizations that
currently sponsor securitizations (one of
which is a national bank, two are state
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member banks, and three are state
nonmember banks based on September
30, 2010 information) and, therefore, the
risk retention requirements of the
proposed rule, as generally applicable to
sponsors, would not have a significant
economic impact on a substantial
number of small state nonmember
banks.
Under the proposed rule a sponsor
may offset the risk retention
requirement by the amount of any
vertical risk retention ABS interests or
eligible horizontal residual interest
acquired by an originator of one or more
securitized assets if certain
requirements are satisfied, including,
the originator must originate at least 20
percent of the securitized assets, as
measured by the aggregate unpaid
principal balance of the asset pool. In
determining whether the allocation
provisions of the proposal would have
a significant economic impact on a
substantial number of small banking
organizations, the Federal banking
agencies reviewed September 30, 2010
Call Report data to evaluate the
securitization activity and approximate
the number of small banking
organizations that potentially could
retain credit risk under allocation
provisions of the proposal.215
The Call Report data indicates that
approximately 329 small banking
organizations, 241 of which are state
nonmember banks, originate loans for
securitization, namely ABS issuances
collateralized by one-to-four family
residential mortgages. The majority of
these originators sell their loans either
to Fannie Mae or Freddie Mac, which
retain credit risk through agency
guarantees, and therefore would not be
allocated credit risk under the proposed
rule. Additionally, based on publiclyavailable market data, it appears that
most residential mortgage-backed
securities offerings are collateralized by
a pool of mortgages with an unpaid
aggregate principal balance of at least
$500 million.216 Accordingly, under the
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215 Call
Report Schedule RC–S provides
information on the servicing, securitization, and
asset sale activities of banking organizations. For
purposes of the RFA analysis, the Agencies
gathered and evaluated data regarding (1) net
securitization income, (2) the outstanding principal
balance of assets sold and securitized by the
reporting entity with servicing retained or with
recourse or other seller-provided credit
enhancements, and (3) assets sold with recourse or
other seller-provided credit enhancements and not
securitized by the reporting bank.
216 Based on the data provided in Table 1, page
29 of the Board’s ‘‘Report to the Congress on Risk
Retention’’, it appears that the average MBS
issuance is collateralized by a pool of
approximately $620 million in mortgage loans (for
prime MBS issuances) or approximately $690
million in mortgage loans (for subprime MBS
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proposed rule a sponsor could
potentially allocate a portion of the risk
retention requirement to a small
banking organization only if such
organization originated at least 20
percent ($100 million) of the securitized
mortgages. As of September 30, 2010,
only one small banking organization
reported an outstanding principal
balance of assets sold and securitized of
$100 million or more.217
The FDIC seeks comment on whether
the proposed rule, if adopted in final
form, would impose undue burdens, or
have unintended consequences for,
small state nonmember banks and
whether there are ways such potential
burdens or consequences could be
minimized in a manner consistent with
section 15G of the Exchange Act.
SEC: The Commission hereby
certifies, pursuant to 5 U.S.C. 605(b),
that the proposed rule, if adopted,
would not have a significant economic
impact on a substantial number of small
entities. The proposed rule implements
the risk retention requirements of
section 15G of the Exchange Act, which,
in general, requires the securitizer of a
asset-backed securities (ABS) to retain
not less than five percent of the credit
risk of the assets collateralizing the
ABS.218 Under the proposed rule, the
risk retention requirements would apply
to ‘‘sponsors’’, as defined in the
proposed rule. Based on our data, we
found only one sponsor that would meet
the definition of a small broker-dealer
for purposes of the Regulatory
Flexibility Act.219 Accordingly, the
Commission does not believe that the
proposed rule, if adopted, would have a
significant economic impact on a
substantial number of small entities.
FHFA: Pursuant to section 605(b) of
the Regulatory Flexibility Act, FHFA
hereby certifies that the proposed rule
will not have a significant economic
impact on a substantial number of small
entities.
B. Paperwork Reduction Act
1. Request for Comment on Proposed
Information Collection
Certain provisions of the proposed
rule contain ‘‘collection of information’’
requirements within the meaning of the
issuances). For purposes of the RFA analysis, the
agencies used an average asset pool size $500
million to account for reductions in mortgage
securitization activity following 2007, and to add an
element of conservatism to the analysis.
217 The FDIC notes that this finding assumes that
no portion of the assets originated by small banking
organizations were sold to securitizations that
qualify for an exemption from the risk retention
requirements under the proposed rule.
218 See 17 U.S.C. 78o–11.
219 5 U.S.C. 601 et seq.
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Paperwork Reduction Act of 1995
(‘‘PRA’’), 44 U.S.C. 3501–3521. In
accordance with the requirements of the
PRA, the Agencies may not conduct or
sponsor, and the respondent is not
required to respond to, an information
collection unless it displays a currently
valid Office of Management and Budget
(OMB) control number. The information
collection requirements contained in
this joint notice of proposed rulemaking
have been submitted by the FDIC, OCC,
and the Commission to OMB for
approval under section 3506 of the PRA
and section 1320.11 of OMB’s
implementing regulations (5 CFR part
1320). The Board reviewed the proposed
rule under the authority delegated to the
Board by OMB.
Comments are invited on:
(a) Whether the collections of
information are necessary for the proper
performance of the agencies’ functions,
including whether the information has
practical utility;
(b) The accuracy of the estimates of
the burden of the information
collections, including the validity of the
methodology and assumptions used;
(c) Ways to enhance the quality,
utility, and clarity of the information to
be collected;
(d) Ways to minimize the burden of
the information collections on
respondents, including through the use
of automated collection techniques or
other forms of information technology;
and
(e) Estimates of capital or start up
costs and costs of operation,
maintenance, and purchase of services
to provide information.
All comments will become a matter of
public record. Commenters may submit
comments on aspects of this notice that
may affect disclosure requirements and
burden estimates at the addresses listed
in the ADDRESSES section of this
Supplementary Information. A copy of
the comments may also be submitted to
the OMB desk officer for the agencies:
By mail to U.S. Office of Management
and Budget, 725 17th Street, NW.,
#10235, Washington, DC 20503 or by
facsimile to 202–395–6974, Attention,
Commission and Federal Banking
Agency Desk Officer.
2. Proposed Information Collection
Title of Information Collection: Credit
Risk Retention.
Frequency of response: Event
generated.
Affected Public: 220
220 The affected public of the FDIC, OCC, and
Board is assigned generally in accordance with the
entities covered by the scope and authority section
of their respective proposed rule. The affected
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FDIC: Insured state non-member
banks, insured state branches of foreign
banks, and certain subsidiaries of these
entities.
OCC: National banks, Federal savings
associations, Federal branches or
agencies of foreign banks, or any
operating subsidiary thereof.
Board: FDIC-insured state member
banks. For § l.15(d)(13) the Board’s
respondents also include bank holding
companies, foreign banking
organizations, Edge or agreement
corporations, any nonbank financial
company (as defined in § l.1(c)(5)),
savings and loan holding companies, (as
defined in 12 U.S.C. 1467a, on and after
the transfer date established under
section 311 of the Dodd-Frank Act (12
U.S.C. 5411)), or any subsidiary of the
foregoing.
SEC: All entities other than those
assigned to the FDIC, OCC, or Board.
Abstract: The notice sets forth
permissible forms of risk retention for
securitizations that involve issuance of
asset-backed securities. The information
requirements in joint regulations
proposed by the three Federal banking
agencies and the Commission are found
in §§ l.4, l.5, l.6, l.7, l.8, l.9,
l.10, l.12, l.13, l.15, l.18, l.19,
and l.20. The Agencies believe that the
disclosure and recordkeeping
requirements associated with the
various forms of risk retention will
enhance market discipline, help ensure
the quality of the assets underlying a
securitization transaction, and assist
investors in evaluating transactions.
Compliance with the information
collections would be mandatory.
Responses to the information collections
would not be kept confidential and,
except as provided below, there would
be no mandatory retention period for
proposed collections of information.
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Section-by-Section Analysis
Section l.4 sets forth the conditions
that must be met by sponsors electing to
use the vertical risk retention option.
Section l.4(b)(1) requires disclosure of
the amount of each class of ABS
interests retained and required to be
retained by the sponsor and § l.4(b)(2)
requires disclosure of material
assumptions used to determine the
aggregate dollar amount of ABS interests
issued in the transaction.
Section l.5 specifies the conditions
that must be met by sponsors using the
horizontal risk retention option,
including disclosure of the amount of
the eligible horizontal residual interest
public of the Commission is based on those entities
not already accounted for by the FDIC, OCC, and
Board.
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retained by the sponsor and the amount
required to be retained (§ l.5(c)(1)(i));
disclosure of the material terms of the
eligible horizontal residual interest
(§ l.5(c)(1)(ii)); disclosure of the dollar
amount to be placed in a cash reserve
account and the amount required to be
placed in the account (§ l.5(c)(2)(i)), if
applicable; disclosure of the material
terms governing the cash reserve
account (§ l.5(c)(2)(ii)), if applicable;
and disclosure of material assumptions
and methodology used in determining
the aggregate dollar amount of ABS
interests issued in the transaction
(§ l.5(c)(3)).
Section l.6 identifies the
requirements for sponsors opting to use
the hybrid L-shaped risk retention
method, including disclosures in
compliance with those set forth for the
vertical and horizontal risk retention
methods (§ l.6(b)).
Section l.7 requires sponsors using a
revolving master trust structure for
securitizations to disclose the amount of
seller’s interest retained by the sponsor
and the amount the sponsor is required
to retain (§ l.7(b)(1)); the material terms
of the seller’s interest retained by the
sponsor (§ l.7(b)(2)); and the material
assumptions and methodology used in
determining the aggregate dollar amount
of ABS issued in the transaction
(§ l.7(b)(3)).
Section l.8 discusses the
representative sample method of risk
retention and requires that the sponsor
adopt and adhere to policies and
procedures to, among other things,
document the material characteristics
used to identify the designated pool and
randomly select assets using a process
that does not take account of any asset
characteristic other than the unpaid
balance (§ l.8(c)); maintaining, until all
ABS interests are paid in full,
documentation that clearly identifies
the assets included in the representative
sample (§ l.8(c)); obtaining an agreed
upon procedures report from an
independent public accounting firm
(§ l.8(d)(1)); disclose the amount of
assets included in the representative
sample and retained by the sponsor and
the amount of assets required to be
retained by the sponsor (§ l.8(g)(1)(i));
disclose prior to sale a description of the
material characteristics of the
designated pool (§ l.8(g)(1)(ii));
disclose prior to sale a description of the
policies and procedures used by the
sponsor to ensure compliance with
random selection and equivalent risk
determination requirements
(§ l.8(g)(1)(iii)); confirm prior to sale
that the required agreed upon
procedures report was obtained
(§ l.8(g)(1)(iv)); disclose the material
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assumptions and methodology used in
determining the aggregate dollar amount
of ABS interests issued in the
transaction (§ l.8(g)(1)(v)); and disclose
after sale the performance of the pool of
assets in the securitization transaction
as compared to performance of assets in
the representative sample (§ l.8(g)(2));
and disclose to holders of the assetbacked securities information
concerning the assets in the
representative sample (§ l.8(g)(3)).
Section l.9 addresses the
requirements for sponsors utilizing the
ABCP conduit risk retention approach.
The requirements for the ABCP conduit
risk retention approach include
disclosure of each originator-seller with
a retained eligible horizontal residual
interest and the form, amount, and
nature of the interest (§ l.9(b)(1));
disclosure of each regulated liquidity
provider providing liquidity support to
the ABCP conduit and the form,
amount, and nature of the support
(§ l.9(b)(2)); maintenance of policies
and procedures that are reasonably
designed to monitor regulatory
compliance by each originator-seller of
the eligible ABCP conduit
(§ l.9(c)(2)(i)); and notice to holders of
the ABS interests issued in the
transaction in the event of originatorseller regulatory non-compliance
(§ l.9(c)(2)(ii)).
Section l.10 sets forth the
requirements for sponsors utilizing the
commercial mortgage-backed securities
risk retention option, and includes
disclosures of the name and form of
organization of the third-party
purchaser (§ l.10(a)(5)(i)), the thirdparty purchaser’s experience
(§ l.10(a)(5)(ii)), other material
information (§ l.10(a)(5)(iii)), the
amount and purchase price of eligible
horizontal residual interest retained by
the third-party purchaser and the
amount that the sponsor would have
been required to retain (§ l.10(a)(5)(iv)
and (v)), a description of the material
terms of the eligible residual horizontal
interest retained by the third-party
purchaser (§ l.10(a)(5)(vi)), the material
assumptions and methodology used to
determine the aggregate amount of ABS
interests issued by the issuing entity
(§ l.10(a)(5)(vii)), representations and
warranties concerning the securitized
assets and factors used to determine the
assets should be included in the pool
(§ l.10(a)(5)(viii)); sponsor
maintenance of policies and procedures
to monitor third-party compliance with
regulatory requirements
(§ l.10(b)(2)(A)); and sponsor notice to
holders of ABS interests in the event of
third-party non-compliance with
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regulatory requirements
(§ l.10(b)(2)(B)).
Section l.12 requires the
establishment of a premium cash
reserve account, in addition to the
sponsor’s base risk retention
requirement, in instances where the
sponsor structures a securitization to
monetize excess spread on the
underlying assets. The premium cash
reserve account would be used to
‘‘capture’’ the premium received on sale
of such tranches for purposes of
covering losses on the underlying assets
and would require the sponsor to make
disclosures regarding the dollar amount
required by regulation to be placed in
the account and any other amounts
placed in the account by the sponsor
(§ l.12(d)(1)) and the material
assumptions and methodology used in
determining fair value of any ABS
interest that does not have a par value
and that was used in calculating the
amount required for the premium
capture cash reserve account
(§ l.12(d)(2)).
Section l.13 sets forth the conditions
that apply when the sponsor of a
securitization allocates to originators of
securitized assets a portion of the credit
risk it is required to retain, including
disclosure of the name and form of
organization of any originator with an
acquired and retained interest
(§ l.13(a)(2)); maintenance of policies
and procedures that are reasonably
designed to monitor originator
compliance with retention amount and
hedging, transferring and pledging
requirements (§ l.13(b)(2)(A)); and
notice to holders of ABS interests in the
transaction in the event of originator
non-compliance with regulatory
requirements (§ l.13(b)(2)(B)).
Section l.15 provides an exemption
from the risk retention requirements for
qualified residential mortgages that
meet certain specified criteria including
certification by the depositor of the
asset-backed security that it has
evaluated the effectiveness of its
internal supervisory controls and
concluded that the controls are effective
(§ l.15(b)(4)(i)), and sponsor disclosure
prior to sale of asset-backed securities in
the issuing entity of a copy of the
certification to potential investors
(§ l.15(b)(4)(iii)). In addition
§ l.15(e)(3) provides that a sponsor that
has relied upon the exemption shall not
lose the exemption if it complies with
certain specified requirements,
including prompt notice to the holders
of the asset-backed securities of any
loan repurchased by the sponsor.
Section l.15 also contains additional
information collection requirements on
the mortgage originator to include terms
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in the mortgage transaction documents
under which the creditor commits to
having servicing policies and
procedures (§ l.15(d)(13)(i)) and to
provide disclosure of the foregoing
default mitigation commitments to the
borrower at or prior to the closing of the
mortgage transaction (§ l.15(d)(13)(ii)).
Sections l.18, l.19, and l.20
provide exemptions from the risk
retention requirements for qualifying
commercial real estate loans,
commercial mortgages, and auto loans
that meet specified criteria. Each section
requires that the depositor of the assetbacked security certify that it has
evaluated the effectiveness of its
internal supervisory controls and
concluded that its controls are effective
(§§ l.18(b)(7)(i), l.19(b)(10)(i), and
l.20(b)(9)(i)); that the sponsor provide
a copy of the certification to potential
investors prior to the sale of assetbacked securities (§§ l.18(b)(7)(iii),
l.19(b)(10)(iii), and l.20(b)(9)(iii));
and that the sponsor promptly notify the
holders of the securities of any loan
included in the transaction that is
required to be repurchased by the
sponsor (§§ l.18(c)(3), l.19(c)(3), and
l.20(c)(3)).
Estimated Paperwork Burden
Estimated Burden per Response:
§ l.4—Vertical risk retention:
disclosures—2 hours.
§ l.5—Horizontal risk retention:
disclosures—2.5 hours.
§ l.6—L-Shaped risk retention:
disclosures—3 hours.
§ l.7—Revolving master trusts:
disclosures—2.5 hours.
§ l.8—Representative sample:
recordkeeping—120 hours;
disclosures—23.25 hours.
§ l.9—Eligible ABCP conduits:
recordkeeping—20 hours;
disclosures—3 hours.
§ l.10—Commercial mortgage-backed
securities: recordkeeping—20
hours; disclosures—19.75 hours.
§ l.12—Premium capture cash reserve
account: disclosures—1.75 hours.
§ l.13—Allocation of risk retention:
recordkeeping—20 hours;
disclosures—2.5 hours.
§ l.15—Exemption for qualified
residential mortgages:
recordkeeping—40 hours;
disclosures—9.25 hours.
§ l.18—Exemption for qualifying CRE
loans: recordkeeping—40 hours;
disclosures—1.25 hours.
§ l.19—Exemption for qualifying
commercial mortgages:
recordkeeping—40 hours;
disclosures—1.25 hours.
§ l.20—Exemption for qualifying auto
loans: recordkeeping—40 hours;
disclosures—1.25 hours.
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FDIC
Number of Respondents: 90 sponsors
and 4,715 creditors.
Total Estimated Annual Burden:
59,463 hours.
OCC
Number of Respondents: 30 sponsors
and 1,650 creditors.
Total Estimated Annual Burden:
20,483 hours.
Board
Number of Respondents: 20 sponsors
and 7,636 creditors.
Total Estimated Annual Burden:
70,430 hours.
Commission
Number of Respondents: 104 sponsors
and 1,500 creditors.
Total Estimated Annual Burden:
37,166 hours.
Commission’s explanation of the
calculation:
To determine the total paperwork
burden for the requirements contained
in this proposed rule the Agencies first
estimated the universe of sponsors that
would be required to comply with the
proposed disclosure and recordkeeping
requirements. The Agencies estimate
that approximately 243 unique sponsors
conduct ABS offerings per year. This
estimate was based on 2010 data
reported on the commercial bank Call
Report (FFIEC 031 and 041) and from
the ABS database AB Alert. Of the 243
sponsors, the Agencies have assigned
8 percent of these sponsors to the Board,
12 percent to the OCC, 37 percent to the
FDIC, and 43 percent to the
Commission.
Next, the Agencies estimated the
burden per response that would be
associated with each disclosure and
recordkeeping requirement. In some
cases, the proposed rule is estimated to
incur only an incremental burden on
respondents. For example, in the
representative sample option, the
proposed rule requires that the sponsor
cause to be disclosed information
regarding the securitized assets, but the
Agencies believe similar information
regarding the securitized assets are
already being made to investors, and
therefore the proposed rule would only
incur an incremental burden on
sponsors.
Next, the Agencies estimated how
frequent the entities would make the
required disclosure by estimating the
proportionate amount of offerings per
year for each agency. In making this
determination, the estimate was based
on the average number of ABS offerings
from 2004 through 2009, and therefore,
we estimate the total number of annual
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offerings per year to be 1,700.221 We
also made the following additional
estimates:
• 12 offerings per year will be subject
to disclosure and recordkeeping
requirements under sections § l.12 and
§ l.13, which are divided equally
among the four agencies (i.e., 3 offering
per year per agency);
• 100 offerings per year will be
subject to disclosure and recordkeeping
requirements under section § l.15,
which are divided proportionately
among the agencies based on the entity
percentages described above (i.e., 8
offerings per year subject to § l.15 for
the Board; 12 offerings per year subject
to § l.15 for the OCC; 37 offerings per
year subject to § l.15 for the FDIC; and
43 offerings per year subject to § l.15
for the Commission); and
• 40 offerings per year will be subject
to disclosure and recordkeeping
requirements under § l.18, § l.19, and
§ l.20, respectively, which are divided
proportionately among the agencies
based on the entity percentages
described above (i.e., 3 offerings per
year subject to each section for the
Board, 5 offerings per year subject to
each section for the OCC; 15 offerings
per year subject to each section for the
FDIC, and 17 offerings per year subject
to each section for the Commission).
To obtain the estimated number of
responses (equal to the number of
offerings) for each option in Part B of
the proposed rule, the Agencies
multiplied the number of offerings
estimated to be subject to the base risk
retention requirements (i.e., 1,480) 222
by the sponsor percentages described
above. The result was the number of
base risk retention offerings per year per
agency. For the Commission, this was
calculated by multiplying 1,480
offerings per year by 43 percent, which
equals 636 offerings per year. This
number was then divided by the
number of base risk retention options (7)
to arrive at the estimate of the number
of offerings per year per agency per base
risk retention option. For the
Commission, this was calculated by
dividing 636 offerings per year by 7
options, resulting in 91 offerings per
year per base risk retention option.
221 We use the ABS issuance data from AssetBacked Alert on the initial terms of offerings, and
we supplement that data with information from
Securities Data Corporation (SDC). This estimate
includes registered offerings and offerings made
under Securities Act Rule 144A. We also note that
this estimate is for offerings that are not exempted
under §§ l.21 and l.22 of the proposed rule.
222 Estimate of 1,700 offerings per year minus the
estimate of the number of offerings qualifying for
an exemption under § l.15, § l.18, § l.19, and
§ l.20 (220 total).
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The total estimated annual burden for
each Agency was then calculated by
multiplying the number of offerings per
year per section for such Agency (except
with respect to the recordkeeping
burden hours under § l.8 and
§ l.15(d)(13) as described below) by the
number of burden hours estimated for
the respective section, then adding these
subtotals together. For example, under
§ l.4, the Commission multiplied the
estimated number of offerings per year
per § l.4 (i.e., 91 offerings per year) by
the disclosure burden hour estimate for
§ l.4 of 2.0 hours. Thus, the estimated
annual burden hours for respondents to
which the Commission accounts for the
burden hours under § l.4 is 182 hours
(91 * 2.0 hours = 182 hours). For the
recordkeeping burden estimate under
§§ l.8(c) andl.8(d)(2), instead of using
the number of offerings per year per
base risk retention option, the Agencies
multiplied the number of recordkeeping
burden hours by the number of unique
sponsors assigned to such Agency per
year (i.e., 104 in the case of the
Commission).223 The reason for this is
that the Agencies considered it possible
that sponsors may establish these
policies and procedures during the year
independent on whether an offering was
conducted, with a corresponding agreed
upon procedures report obtained from a
public accounting firm each time such
policies and procedures are established.
To obtain an estimate for the number
of burden hours required by
§ l.15(d)(13), the Agencies multiplied
the estimate of the number of creditors
assigned to such Agency for purposes of
this risk retention rule by an estimate of
the number of hours that it will take
creditors to perform a one-time update
to their systems to account for the
requirements of this section, which we
estimate to be 8 hours.224 This estimate
was added to the other disclosure and
recordkeeping burden estimates as
described above to achieve a total
estimated annual burden for
respondents assigned to the
Commission.
For disclosures made at the time of
the securitization transaction,225 the
Commission allocates 25 percent of
these hours (1,009 hours) to internal
burden for all sponsors. For the
remaining 75 percent of these hours,
(3,028 hours), the Commission uses an
estimate of $400 per hour for external
* 43% = 104.
creditors * 8 hours = 12,000 hours
225 These are the disclosures required by
§§ l.4(b)(1)–(2); l.5(c)(1)(i)–(ii), (2)(i)–(ii), and (3);
l.6(b); l.7(b)(1)–(3); l.8(g)(1)(i)–(iv) and (g)(3);
l.9(b)(1)–(2); l.10(a)(5)(i)–(viii); l.12(d)(1)–(3);
l.13(a)(2); l.15(b)(4)(iii); l.18(b)(7)(iii);
l.19(b)(10)(iii); and l.20(b)(9)(iii).
24149
costs for retaining outside professionals
totaling $1,211,200. For disclosures
made after the time of sale in a
securitization transaction,226 the
Commission allocated 75 percent of the
total estimated burden hours (892
hours) to internal burden for all
sponsors. For the remaining 25 percent
of these hours (297 hours), the
Commission uses an estimate of $400
per hour for external costs for retaining
outside professionals totaling $118,800.
With respect to the agreed upon
procedures report by an independent
public accounting firm under the
representative sample option, the
Commission allocated 100 percent of
the total estimated burden hours (4,160
hours 227) to retaining outside
professionals at an estimate of $400 per
hour, for a total cost of $1,664,000.
FHFA: The proposed regulation does
not contain any FHFA information
collection requirement that requires the
approval of OMB under the Paperwork
Reduction Act.
HUD: The proposed regulation does
not contain any HUD information
collection requirement that requires the
approval of OMB under the Paperwork
Reduction Act.
C. Commission Economic Analysis
1. Introduction
As discussed above, Section 15G of
the Exchange Act, as added by section
941(b) of the Dodd-Frank Act, generally
requires the Agencies to jointly
prescribe regulations, that (i) require a
sponsor to retain not less than five
percent of the credit risk of any asset
that the sponsor, through the issuance of
an ABS, transfers, sells, or conveys to a
third party, and (ii) prohibit a sponsor
from directly or indirectly hedging or
otherwise transferring the credit risk
that the sponsor is required to retain
under section 15G and the Agencies’
implementing rules.228
Section 15G of the Exchange Act
exempts certain types of securitization
transactions from these risk retention
requirements and authorizes the
Agencies to exempt or establish a lower
risk retention requirement for other
types of securitization transactions. For
example, section 15G specifically
provides that a sponsor shall not be
required to retain any part of the credit
risk for an asset that is transferred, sold,
or conveyed through the issuance of
223 243
224 1,500
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226 These are the disclosures required by
§§ l.8(g)(2); l.9(c)(2)(ii); l.10(b)(2)(B);
l.13(b)(2)(B); l15(e)(3); l.18(c)(3); l19(c)(3); and
l.20(c)(3).
227 40 * 104 = 4,160 hours.
228 See 15 U.S.C. 78o–11(b), (c)(1)(A) and
(c)(1)(B)(ii).
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ABS by the sponsor, if all of the assets
that collateralize the ABS are qualified
residential mortgages (QRMs), as that
term is jointly defined by the
Agencies.229 In addition, section 15G
states that the Agencies must permit a
sponsor to retain less than five percent
of the credit risk of commercial
mortgages, commercial loans, and
automobile loans that are transferred,
sold, or conveyed through the issuance
of ABS by the sponsor if the loans meet
underwriting standards established by
the Federal banking agencies.230
Section 15G requires the Agencies to
prescribe risk retention requirements for
‘‘securitizers,’’ which the Agencies
interpret are depositors or sponsors of
ABS. The proposal would require that a
‘‘sponsor’’ of a securitization transaction
to retain the credit risk of the
securitized assets in the form and
amount required by the proposed rule.
The Agencies believe that imposing the
risk retention requirement on the
sponsor of the ABS is appropriate in
light of the active and direct role that a
sponsor typically has in arranging a
securitization transaction and selecting
the assets to be securitized.
In developing the proposed rules, the
Agencies have taken into account the
diversity of assets that are securitized,
the structures historically used in
securitizations, and the manner in
which sponsors may have retained
exposure to the credit risk of the assets
they securitize. The proposed rules
provide several options sponsors may
choose from in meeting the risk
retention requirements of section 15G,
including, but not limited to, retention
of a five percent ‘‘vertical’’ slice of each
class of interests issued in the
securitization or retention of a five
percent ‘‘horizontal’’ first-loss interest in
the securitization, as well as other risk
retention options that take into account
the manners in which risk retention
often has occurred in credit card
receivable and automobile loan and
lease securitizations and in connection
with the issuance of asset-backed
commercial paper. The proposed rules
also include a special ‘‘premium
capture’’ mechanism designed to
prevent a sponsor from structuring an
ABS transaction in a manner that would
allow the sponsor to effectively negate
or reduce its retained economic
exposure to the securitized assets by
immediately monetizing the excess
spread created by the securitization
transaction. In designing these options
and the proposed rules in general, the
229 See
15 U.S.C. 78o–11(c)(1)(C)(iii), (4)(A) and
(B).
230 See
id. at § 78o–11(c)(1)(B)(ii) and (2).
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Agencies have sought to ensure that the
amount of credit risk retained is
meaningful—consistent with the
purposes of section 15G—while
reducing the potential for the proposed
rules to negatively affect the availability
and costs of credit to consumers and
businesses.
As required by section 15G, the
proposed rules provide a complete
exemption from the risk retention
requirements for ABS that is
collateralized solely by QRMs and
establish the terms and conditions
under which a residential mortgage
would qualify as a QRM. In developing
the proposed definition of a QRM, the
Agencies carefully considered the terms
and purposes of section 15G, public
input, and the potential impact of a
broad or narrow definition of QRMs on
the housing and housing finance
markets.
As discussed in greater detail in Part
IV of this Supplementary Information,
the proposed rule would generally
prohibit QRMs from having product
features that contributed significantly to
the high levels of delinquencies and
foreclosures since 2007—such as terms
permitting negative amortization,
interest-only payments, or significant
interest rate increases—and also would
establish underwriting standards
designed to ensure that QRMs are of
very high credit quality consistent with
their exemption from risk retention
requirements. These underwriting
standards include, among other things,
maximum front-end and back-end debtto-income ratios of 28 percent and 36
percent, respectively; a maximum loanto-value ratio of 80 percent in the case
of a purchase transaction (with a lesser
combined LTV permitted for refinance
transactions); a 20 percent down
payment requirement in the case of a
purchase transaction; and credit history
restrictions.
The proposed rules also would not
require a sponsor to retain any portion
of the credit risk associated with a
securitization transaction if the ABS
issued are exclusively collateralized by
qualified assets (QAs)—commercial
loans, commercial mortgages, or
automobile loans that meet
underwriting standards included in the
proposed rule for the individual asset
class.
The Commission is sensitive to the
costs and benefits imposed by its rules.
The discussion below focuses on the
costs and benefits of the decisions made
by the Commission, together with the
other Agencies, to fulfill the mandates
of the Dodd-Frank Act within its
permitted discretion, rather than the
costs and benefits of the mandates of the
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Dodd-Frank Act itself. For instance, the
analysis below assumes as a baseline
that a standard for QRM is in place,
since such a standard is mandated by
statute. Rather than assessing the
economic costs and benefits of
implementing such a standard, the
analysis below focuses on the relative
costs and benefits of alternative QRM
standards. Similarly, the analysis
assumes the following: A risk retention
requirement of at least 5 percent for
non-qualified mortgages and nonqualified assets, 0% for QRMs and less
than 5 percent for qualified assets. Thus,
our analysis below examines the costs
and benefits of alternative
implementations of a risk retention
requirement meeting the mandates of
the Dodd-Frank Act, rather than the
existence of a risk retention
requirement. Although our intent is to
limit the economic analysis of this rule
to decisions made by the Commission,
to the extent that the Commission’s
discretion is exercised to further the
benefits intended by the Dodd-Frank
Act, the two types of benefits might not
be entirely separable.
Section 23(a)(2) of the Exchange Act
requires the Commission, when making
rules under the Exchange Act, to
consider the impact on competition that
the rules would have, and prohibits the
Commission from adopting any rule that
would impose a burden on competition
not necessary or appropriate in
furtherance of the Exchange Act.231
Further, Section 2(b) of the Securities
Act of 193381 and Section 3(f) of the
Exchange Act requires the
Commission,232 when engaging in
rulemaking where we are required to
consider or determine whether an action
is necessary or appropriate in the public
interest, to consider, in addition to the
protection of investors, whether the
action will promote efficiency,
competition and capital formation. The
Commission has considered and
discussed below the effects of the
proposed rules on efficiency,
competition, and capital formation, as
well as the benefits and costs associated
with the Commission’s decisions in the
proposed rulemaking.
2. Risk Retention Methods for NonQRMs and Non-Qualifying Assets
(‘‘QAs’’)
The proposed rules require not less
than 5 percent risk retention for all nonQRMs and non-QAs. The form of the
retention is to be chosen from a menu
of options, which should provide
flexibility to sponsors in meeting the
231 15
232 17
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U.S.C. 78c(f).
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risk retention requirement mandated by
Section 15G, as added by the DoddFrank Act. Section 15G directs the
Agencies to set appropriate risk
retention rules, which will require the
retention of no less than 5 percent of the
credit risk in the securitized assets for
all ABS classes not exempt from the
requirement. Section 15G provides for a
risk retention exemption for sponsors of
ABS backed solely by QRMs and for
certain other sponsors or ABS asset
classes as discussed below and a less
than five percent risk retention
requirement for QAs.
Empirical evidence points to a
significant heterogeneity of
securitization structures, practices and
risk characteristics across ABS asset
classes.233 Accordingly, allowing
sponsors to choose a form of risk
retention from a menu of options
provides them with the flexibility of
choosing the form that best suits their
operational and financing preferences.
By including most of the risk retention
forms currently observed in the
marketplace, the Agencies’ proposal
benefits sponsors, originators, and
investors alike by limiting disruption to
current securitization practices to the
extent possible. Historically, most
sponsors have been exposed to some
level of credit risk by retaining an
economic interest in the pools they
securitize in the form of first-loss or prorata positions.234 Thus, the proposed
rule allows sponsors that have existing
risk retention programs to minimize
their compliance costs resultant from
the statute’s mandate. Without the
flexibility allowed by a broad menu-ofoptions approach, there likely would be
an increase in borrowing costs to
sponsors and to the borrowers whose
loans are in the securitized pools. In
some cases, this increase could be large
enough to make certain types of
securitizations economically unfeasible.
It is possible that the flexibility
allowed by the proposed approach to
implementing the risk retention
mandate of Section 15G might result in
some sponsors choosing risk retention
methods that do not align fully their
incentives with those of investors. In
such cases, underwriting standards and
pool selection procedures may not
233 See Board of Governors of the Federal Reserve
System, Report to the Congress on Risk Retention,
October 2010 available at https://federalreserve.gov/
boarddocs/rptcongress/securitization/
riskretention.pdf.
234 For example, Chen, Liu, and Ryan (2008) show
that banks retain more risk when loans have higher
or less externally verifiable credit risk. See
Characteristics of Securitizations that Determine
Issuers’ Retention of the Risks of the Securitized,
Weitzu Chen, Chi-Chun Liu, and Stephen Ryan
(2008), The Accounting Review, 2008.83.5.1181.
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improve. If investors are reluctant to
invest in ABS where a sponsor has
selected such a suboptimal risk
retention method, risk retention might
not have the effect of facilitating capital
formation. To the extent that such
reluctance on part of investors provides
sponsors with the incentive to choose
risk retention methods that investors
demand, this effect on capital formation
is mitigated.
An integral part of the proposed rules
are new risk retention disclosure
requirements specifically tailored to
each of the permissible forms of risk
retention. The required disclosure
would provide investors with
information on the sponsor’s retained
interest in an ABS transaction, such as
the amount and form of the interest
retained and the assumptions used in
determining the aggregate value of ABS
to be issued. This information would
benefit investors by providing them
with an efficient mechanism to monitor
compliance with the proposed rules and
make informed investment decisions.
However, compliance costs to sponsors
would increase, since sponsors would
now have to prepare and provide these
disclosures to investors.
Therefore, the Commission believes
that the proposed menu-of-options
approach and the accompanying
disclosures will have no competitive
effects, and will implement the
mandates of Section 15G without
causing economic inefficiencies or
hindering capital formation.235
Vertical Risk Retention Method
By requiring the retention of five
percent of each interest backed by the
securitized asset pool, regardless of
whether the interest is certificated or
not, the vertical risk retention method is
the most straightforward method to
implement. The transparency and ease
of verification of this method will likely
benefit investors to the extent that they
view their ability to discern a sponsor’s
risk retention important. This provides
the sponsor an interest in the entire
structure of the securitization
transaction. However, the vertical risk
retention method requires a sponsor to
bear only a small fraction of the losses
incurred by the pool, thus possibly
failing to align sufficiently originators’
and sponsors’ interests with those of
investors when it comes to the
origination and underwriting of riskier
asset classes. Since 5 percent is a lower
bound on the risk required to be
retained, it is possible some sponsors
235 As discussed in the introduction, this
statement refers to the choice made by the
Commission and other agencies by having proposed
a menu of options rather than the statutory mandate
to require risk retention.
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may hold more if it were economically
optimal.
Horizontal Risk Retention Method
This method exposes a sponsor to the
first 5 percent of all pool-asset losses
and thus results in the sponsor retaining
substantially more than five percent of
the credit risk in a securitization. That
is, a sponsor will be exposed to 100
percent of all losses as long as those
losses are up to 5 percent. Therefore,
this method imposes a significant
disincentive on sponsors of poorly
underwritten assets. As a result, the
horizontal method of risk retention
should benefit investors by aligning
their incentives with those of originators
and sponsors when originating and
underwriting riskier asset classes.
Since the retention of a horizontal
first-loss position in securitizations
leaves the sponsor holding a significant
amount of risk, it is possible that for less
risky asset classes a 5 percent risk
retention might be unnecessarily high.
For such asset classes, a sponsor might
be constrained to raising external
financing for only 95 percent of the
asset pool, while the market might have
allowed for a smaller equity interest. As
a result, the sponsor might have to incur
additional financing costs which would
have the effect of impeding capital
formation.
The retention of a first-loss position
has been a common market practice for
many asset classes, so this method
should not be unnecessarily disruptive
and should therefore impose limited
additional costs on sponsors. The effect
would be that of no decrease in
efficiency and no new impediment to
capital formation.
Premium Capture Cash Reserve Account
Securitization transactions often
contain pools of assets that are expected
to earn substantially higher returns
compared to the financing rates on the
ABS issued in the securitization. This is
generally referred to as excess spread. In
situations where there is substantial
excess spread, the sponsor can obtain
significant economic income by selling
an interest based on the excess spread.
If the sponsor is able to recover more
than 5 percent of the balance of the pool
in a short period of time, then the
sponsor would be left with limited
economic interest in the securitization.
This is particularly true if defaults occur
later in the life of pool assets. For this
reason, the proposed rules prohibit the
cash flows from the excess spread (or
cash proceeds from selling it) to be
distributed to the sponsor. This benefits
investors by helping to ensure that the
incentive-alignment objectives of the
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proposed rules are achieved. However,
this may reduce the flexibility of
sponsors in structuring their deals, thus
imposing a cost.
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L-Shaped Method
Another risk retention option in the
proposed rules would allow a sponsor,
subject to certain conditions, to use an
equal combination of a vertical risk
retention and horizontal risk retention
as a means of retaining the required five
percent exposure to the credit risk of the
securitized assets. This form of risk
retention is referred to as an ‘‘L-Shaped’’
form of risk retention because it
combines both vertical and horizontal
forms. Overall, this has the benefits and
costs associated with the two
approaches as described above. Also,
the proposed requirement that the
sponsor retain 50 percent vertical and
50 percent horizontal facilitates the
monitoring of the risk retention
compliance by investors, Agencies and
other market participants.
Representative Sample Method
The representative sample method
requires risk retention of a randomly
selected loan pool that is ‘‘similar’’ in
risk attributes to the securitized loans
prior to a securitization. Since it may be
costly to ensure the true ‘‘randomness’’
of the selection or ‘‘representativeness’’
of the sample, and since sponsors’ prior
knowledge of the sample selection bias
might alter their incentives to put wellunderwritten assets into the pool, this
method may not fulfill its incentivealignment benefits without mechanisms
in place to ensure there is no selection
bias. Thus, the proposed rules require
that sponsors have plans and
procedures in place, maintain
documentation, and have the sampling
procedures agreed upon by an
independent auditing firm. In addition,
the proposed rules would require
ongoing disclosures about the
performance of the assets in the
representative sample in the same form,
level, and manner as is provided
concerning the securitized assets.
Although this will increase sponsors’
compliance costs, the Commission
believes that it will also further the
incentive-alignment benefits
contemplated in Section 15G of the
Exchange Act.
For some asset classes, such as
automobile loans, retaining a portion of
the loans that would ordinarily be
securitized has been used as a method
of risk retention. Therefore, permitting a
representative sample risk retention
option with the appropriate safeguards
will likely benefit sponsors of such asset
classes, whose compliance costs—other
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than reporting costs—will not increase
as a result of the proposed rules.
Furthermore, the borrowers whose loans
back such securitizations will also likely
experience no increase in their
borrowing costs.
Seller’s Interest Method
Securitizations of revolving lines of
credit, such as credit card accounts or
dealer floorplan loans, are typically
structured using a revolving master
trust, which issues more than one series
of ABS backed by a single pool of
revolving assets. The proposed rule
would allow a sponsor of a revolving
asset master trust that is collateralized
by revolving loans or other extensions of
revolving credit to meet its risk
retention requirement by retaining a
seller’s interest in an amount not less
than 5 percent of the unpaid principal
balance of the pool assets held by the
issuer. The definitions of a seller’s
interest and a revolving asset master
trust are intended to be consistent with
market practices and, with respect to
seller’s interest, designed to help ensure
that any seller’s interest retained by a
sponsor under the proposal would
expose the sponsor to the credit risk of
the underlying assets. This should
benefit all parties to the securitization
by balancing implementation costs for
sponsors utilizing the master trust
structure with incentive-alignment
benefits for investors.
3. Definition of Qualified Residential
Mortgages
Section 15G requires the Commission,
along with the other Agencies, to jointly
specify underwriting standards for
QRMs that take into consideration
underwriting and product features that
historical loan performance data
indicate result in lower risk of default.
Section 15G exempts ABS entirely
backed by QRMs from the risk retention
mandated by Section 15G. In defining
QRMs, the Agencies examined data on
mortgage performance supplied by
Lender Processing Services’ (‘‘LPS’’)
Applied Analytics division (formerly
McDash Analytics). To minimize
performance differences arising from
unobservable changes across products,
and to focus on loan performance
through stressful environments, the
analysis generally used prime fixed-rate
loans originated from 2005 to 2008.
Since the LPS data do not include
detailed borrower information, the
Agencies also analyzed data from the
triennial Survey of Consumer Finances
(‘‘SCF’’) for the 1992–2007 period. To
isolate the borrower characteristics
closest in time to the mortgage
origination, the analysis was limited to
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the approximately 1,500 families, who
purchased their homes in the year prior
to or of the survey. The Agencies also
examined a combined data set of loans
purchased or securitized by the
Enterprises from 1997 to 2009. This data
set consisted of more than 78 million
mortgages, and included data on loan
products and terms, borrower
characteristics (e.g., income and credit
score), and performance data through
the third quarter of 2010.
The analysis of the data described
above and the conclusions of numerous
academic studies support a definition of
QRM that takes into account the
following underwriting and product
features: the borrower’s ability to repay
the mortgage (as captured the borrower’s
debt-to-income ratio); the borrower’s
credit history; the borrower’s down
payment amount and sources; the loanto-value ratio for the loan; the form of
valuation used in underwriting the loan;
the type of mortgage involved; and the
owner-occupancy status of the property
securing the mortgage.236 The
Commission believes that selecting this
subset of features will be beneficial to
loan originators, because these are the
features typically considered in the
mortgage underwriting process.
Although there might be factors among
those listed above that loan originators
had not previously used in their lending
decisions, the Commission believes that
this is unlikely. Thus, the Commission
expects that loan originators would not
have to incur significant new or
additional costs to collect information
on these specific underwriting and
product features, which should have the
effect of not unnecessarily disrupting
existing lending practices. As a result,
236 See Demyanyk, Yuliya, and Otto Van Hemert,
‘‘Understanding the Subprime Crisis,’’ Working
paper. St. Louis, Missouri: Federal Reserve Bank of
St. Louis (2008); Quercia, Roberto, Michael
Stegman, and Walter R. Davis, ‘‘Residential
Mortgage Default: A Review of the Literature,’’
Journal of Housing Research 3(2): 341–379 (2005);
Ambrose, Brent W., Michael LaCour-Little, and
Zsuzsa Huszar, ‘‘A Note on Hybrid Mortgages,’’ Real
Estate Economics 33(4): 765–782 (2005); Anderson,
Dennis Capozza and Robert Van Order,
‘‘Deconstructing the Mortgage Meltdown: A
Methodology for Decomposing Underwriting
Quality,’’ Social Science Research Network.
https://ssrn.com/abstract=1411782 (2009); Gerardi,
Kristopher, Andreas Lehnert, Shane Sherlund, and
Paul Willen ‘‘Making Sense of the Subprime Crisis,’’
Brookings Papers on Economic Activity (Fall 2008),
59–145; Austin Kelly, ‘‘Skin in the Game: Zero
Down Payment Mortgage Default,’’ Federal Housing
Finance Agency, Journal of Housing Research, Vol.
19, No. 2 (2008); Neil Bhutta, Jane Dokko and Hui
Shan, ‘‘The Depth of Negative Equity and Mortgage
Default Decisions,’’ Finance and Economics
Discussion Series, Federal Reserve Board, 2010–35
(2010); Deng, Yongheng, John M. Quigley and
Robert van Order (2000), ‘‘Mortgage Terminations,
Heterogeneity and the Exercise of Mortgage
Options,’’ Econometrica, Vol. 68, No. 2 (2000), pp.
275–307.
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the Commission expects that mortgage
rates would not be adversely impacted
by the Agencies’ choice of the features
used to define QRMs and therefore this
choice would not have a negative effect
on efficiency and capital formation.
The Agencies also have sought to
make the standards applicable to QRMs
transparent to, and verifiable by,
originators, securitizers, investors and
supervisors. The Commission believes
that investors will also benefit from the
proposed approach to defining QRMs
using the above subset of mortgage
features, since these include the factors
most commonly considered by the
market as determinants of loan quality
and expected mortgage default.
Therefore, investors will likely be
familiar with them, which will have the
effect of facilitating investors’
interpretation and understanding of the
QRM standard as proposed.
When considering the underwriting
and product features to be used in the
QRM definition, the Agencies selected
features that are transparent or
verifiable. The Commission believes
that this will benefit all entities
involved in the securitization process.
Loan originators will be able to easily
discern whether a mortgage is a QRM
during the underwriting process.
Sponsors will be able to unambiguously
determine whether an ABS is backed by
QRMs alone and therefore qualifies for
the risk retention exemption. And
finally, investors will be able to assess
without difficulty whether they are
investing in a QRM ABS or not. Thus,
the Commission expects that as a result
of the transparency and verifiability of
the mortgage features used to define
QRMs, there will be no reduction in
efficiency or impediment to capital
formation.
Some of the QRM standards proposed
by the Agencies rely on definitions and
calculations which may be defined in
multiple ways. To provide clarity, the
Agencies are proposing the use of
definitions of key terms as established
in the U.S. Department of Housing and
Urban Development (HUD) Handbook
4155.1 (New Version), Mortgage Credit
Analysis for Mortgage Insurance, as in
effect on December 31, 2010. Since the
HUD definitions have been time-tested
and are well understood by the market,
the Commission believes this approach
will be efficient and beneficial to both
investors and sponsors. On the other
hand, loan originators and sponsors
who have been using alternative
definitions might incur adjustment
costs, if they have to modify their loan
origination systems and processes.
These new lending costs might be
passed onto borrowers in the form of
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higher mortgage rates or fees, thus
impeding capital formation.
The QRM standards that the Agencies
are proposing prescribe fixed thresholds
for several borrower and loan features.
For instance, a QRM cannot have a
front-end debt-to-income ratio higher
than 28 percent or a loan-to-value ratio
higher than 80 percent. The thresholds
chosen in the proposed rule reflect a
balance between setting standards that
are over- or under-conservative with
regard to mortgage default risk. If the
Agencies had been more conservative in
their choices of thresholds such that
fewer mortgages were QRMs, more
sponsors would have incurred
compliance costs for risk retention for
non-QRMs. These additional costs
would likely be passed on to borrowers
whose loans comprise the securitized
pool, which would have the effect of
increasing mortgage rates for a larger
proportion of home buyers. On the other
hand, QRM standards that are more
restrictive and that result in more nonQRMs would likely create a larger and
therefore more liquid secondary market
for non-QRMs, and thus reduce the
liquidity premium for non-QRM ABS.
The reduced liquidity premium, which
would decrease non-QRM rates, might
counteract the possible increase in nonQRM rates resulting from risk retention
compliance costs.
The opposite would also have been
true. If the Agencies had been less
conservative in their choices of
thresholds such that a larger fraction of
mortgages would have qualified as
QRMs, then non-QRMs might face
illiquidity in the secondary market.
However, fewer borrowers would have
had to face increased mortgage rates
resulting from compliance costs for risk
retention.
4. Risk Retention Allocation for NonQRMs and Non-QAs
Many securitization transactions are
brought to the market by aggregators
who purchase assets from one or many
originators, combine these assets in a
pool, and then issue securities backed
by the assets to investors. This
securitization chain allows for the
possibility of implementing risk
retention at either the originator or the
sponsor level. Risk retention imposed
directly on originators may be more
effective in improving underwriting
standards than if imposed on sponsors.
On the other hand, many of the risk
retention forms discussed earlier would
be unfeasible to implement due to the
complexity introduced by the two-stage
nature of a securitization by an
aggregator. Nonetheless, the Agencies
believe that the imposition of risk
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retention on sponsors should still have
the effect of improving underwriting
standards. Sponsors would have strong
incentives to monitor the lending
practices of originators and consider
these practices when acquiring pool
assets. This likely will align originators’
interests with those of sponsors, whose
interests would now be aligned with
those of investors through risk retention.
The proposed rules allow sponsors to
allocate some of their risk retention
responsibilities to originators, which
would provide additional flexibility in
complying with the requirements.
However, the proposed rules do not
allow the allocation of risk to an
originator contributing a small share of
assets to the securitized pool. Thus, the
proposed allocation of risk retention is
likely to benefit small loan originators
by not allowing sponsors to pass onto
them their own risk retention costs.
The Agencies are also proposing to
allow risk retention allocation to a thirdparty purchaser in the securitization of
commercial real estate loans. It has been
a common market practice for a thirdparty purchaser to retain the first-loss
position in commercial mortgage-backed
transactions. This third-party buyer,
also known as ‘‘B-piece buyer,’’ is
typically involved in the securitization
early on and thus can significantly affect
pool asset selection. The B-piece buyer
reviews the loans and corresponding
mortgage properties, and may ask for
loans to be removed from the pool if
underwriting issues are uncovered.
Thus, the Agencies’ decision to allow a
B-piece buyer to meet a sponsor’s risk
retention obligations under Section 15G
of the Exchange Act, will likely benefit
both sponsors and investors. It
accommodates existing market
practices, thus minimizing sponsors’
compliance costs while aligning the
interests of investors with those of
parties performing due diligence on the
pool assets. In this way, the proposal
should provide incentives for good
underwriting and origination practices.
Since a sponsor’s risk retention
obligation can be met by a B-piece buyer
only under certain conditions described
earlier, these conditions may increase Bpiece buyers’ cost of participating in
CMBS transactions. B-piece buyers may
be able to pass these costs to borrowers
with an adverse effect on capital
formation. However, the Commission
preliminary believes that the conditions
help ensure that the B-piece buyer’s risk
retention is consistent with the intent of
Section 15G and would benefit
investors, and ultimately facilitating
capital formation.
As noted earlier, the B-piece buyer in
CMBS transactions often acts in the
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capacity of a special servicer, which can
create conflicts of interest between the
B-piece buyer and senior tranche
holders. To mitigate these conflicts of
interest, the Agencies are proposing to
have an operating adviser oversee the
servicing activities of the B-piece buyer
when the B-piece buyer acts in a
capacity of a special servicer. While
such a requirement would increase
compliance costs, it should have the
benefit of minimizing B-piece buyers’
ability to manipulate cash flows through
special servicing and by limiting Bpiece buyers’ ability to offset the
consequences of poor underwriting
through special servicing. In addition, it
should incentivize B-piece buyers to
avoid adding into the pool poorly
underwritten or originated assets. This
would be consistent with the purpose of
Section 15G and would benefit
investors, thus facilitating capital
formation.
The Agencies are proposing yet
another option for risk retention
allocation, which is specifically
designed for asset-backed commercial
paper (‘‘ABCP’’) conduits. This option
takes into account the special structures
through which this type of ABS is
typically issued, as well as the manner
in which exposure to the credit risk of
the underlying assets is typically
retained.
Although the proposal would allow
the originator-sellers (rather than the
sponsor) to retain the required eligible
horizontal residual interest, the
proposal also imposes certain
obligations directly on the sponsor in
recognition of the key role the sponsor
plays in organizing and operating an
eligible ABCP conduit. Most
importantly, the proposal provides that
the sponsor of an eligible ABCP conduit
that issues ABCP in reliance on this
option would be the securitization party
ultimately responsible for compliance
with the risk retention requirements of
Section 15G of the Exchange Act. The
proposal allows for an ABCP sponsor to
be in compliance if each originatorseller retains a five-percent horizontal
residual interest in each intermediate
SPV established by or on behalf of that
originator-seller for purposes of issuing
interests to an eligible ABCP conduit.
Since eligible ABCP conduits also
provide full liquidity guarantees to
commercial-paper investors by
regulated liquidity providers, the
flexibility allowed by the proposed rule
benefits ABCP sponsors by allowing
them to avoid costly duplicative risk
retention and should have the effect of
promoting capital formation in this
important segment of the securitization
market.
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Further, the proposed rule avoids an
outcome in which one originator-seller
would have to be exposed to risks
underwritten by other originator-sellers.
Each originator-seller would be required
to retain credit exposure only to its own
receivables, thus properly aligning its
incentives with those of ABCP
investors.
5. Hedging Prohibitions
Hedging helps sponsors manage and
mitigate their exposure to unwanted
risks. For example, a securitizer may
want to mitigate the interest rate risk of
its ABS portfolio. Hedging is also a
beneficial activity from a systemic risk
perspective because it helps market
participants redistribute risk. Given the
benefits from hedging, the proposed rule
aims to implement the risk retention
mandate of Section 15G without unduly
limiting a sponsor’s risk management
activities. This is accomplished by
prohibiting hedging only to the extent
that hedging would result in a sponsor
no longer being exposed to the risk
required to be retained by Section 15G
of the Exchange Act.
The ability to hedge interest rate risk
and similar risks increases economic
efficiency and facilitates capital
formation, because it allows securitizers
to direct their capital and efforts
towards activities of comparative
advantage. For instance, a securitizer
might have a superior ability of
assessing the credit risk of residential
mortgages, but be less skilled in
forecasting interest-rate changes. Such a
securitizer might find it more efficient
to hedge the interest-rate risk of the
residential mortgages collateralizing an
RMBS rather than invest resources in
improving its ability to understand and
price this interest-rate risk.
Furthermore, since interest-rate
fluctuations are unrelated to
underwriting deficiencies in the loan
origination process, allowing a
securitizer to hedge interest-rate risk
will not compromise the incentive
alignment contemplated by the Act. The
ability to hedge also may help
competition, because by hedging less
diversified companies may be able to
compete with more diversified
companies that have weaker hedging
incentives. Therefore, the proposed
rules are designed to promote efficiency,
competition and capital formation.
6. Treatment of Government-Sponsored
Enterprises
The proposed rules, which allows the
guarantees of Fannie Mae and Freddie
Mac to satisfy the risk retention
requirements while they are operating
under the conservatorship or
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receivership of FHFA with capital
support from the United States, as well
as for any limited-life regulated entity
succeeding to the charter and also
operating with such capital support,
avoid unnecessary costs to be incurred
by sponsors until the statutory and
regulatory framework for the Enterprises
becomes clearer. The Commission
believes that the capital support
provided by the United States
government makes additional risk
retention unnecessary because as a
result of the support investors in GSE
ABS are not exposed to any credit
losses. Thus, there would be no
incremental benefit to be gained by
requiring GSEs to retain risk.
7. Resecuritization Transactions
The Agencies have identified certain
resecuritizations where duplicative risk
retention requirements would provide
no added benefit. Resecuritizations
collateralized only by existing 15Gcompliant ABS and financed through
the issuance of a single class of
securities so that all principal and
interest payments received are evenly
distributed to all security holders, are a
unique category of resecuritizations. For
them, the resecuritization process
would neither increase nor reallocate
the credit risk of the underlying ABS.
Therefore, there would be no cost to
investors from incentive misalignment
with the securitizing sponsor.
Furthermore, because this type of
resecuritization may be used to
aggregate 15G-compliant ABS backed by
small asset pools, the exemption for this
type of resecuritization could improve
access to credit at reasonable terms to
consumers and businesses by allowing
for the creation of an additional
investment vehicle for these smaller
asset pools. The exemption would allow
the creation of ABS that may be backed
by more geographically diverse pools
than those that can be achieved by the
pooling of individual assets as part of
the issuance of the underlying 15Gcompliant ABS. Again, this will likely
improve access to credit on reasonable
terms.
Under the proposed rule, sponsors of
resecuritizations that do not have the
structure described above would not be
exempted from risk retention.
Resecuritization transactions, which retranche the credit risk of the underlying
ABS, would be subject to risk retention
requirements in addition to the risk
retention requirement imposed on the
underlying ABS. In such transactions,
there is the possibility of incentive
misalignment between investors and
sponsors just as when structuring the
underlying ABS. For such
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resecuritizations, the proposed rule
seeks to ensure that this misalignment is
addressed by not granting these
resecuritizations with an exemption
from risk retention. However, the
proposed rules may have an adverse
impact on capital formation and
efficiency if they make some types of
resecuritization transactions costlier or
infeasible to conduct as a result of risk
retention costs.
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D. Executive Order 12866 Determination
The Office of Management and Budget
(OMB) reviewed this proposed rule as it
relates to programs and activities of the
Department of Housing and Urban
Development (HUD) under Executive
Order 12866 (entitled ‘‘Regulatory
Planning and Review’’), and determined
the rule as it relates to HUD to be an
economically significant regulatory
action, as provided in section 3(f)(1) of
the Order. The docket file is available
for public inspection in the Regulations
Division, Office of General Counsel,
Department of Housing and Urban
Development, 451 7th Street, SW.,
Room 10276 Washington, DC 20410–
0500. Due to security measures at the
HUD Headquarters building, please
schedule an appointment to review the
docket file by calling the Regulations
Division at 202–402–3055 (this is not a
toll-free number). Individuals with
speech or hearing impairments may
access this number via TTY by calling
the Federal Information Relay Service at
800–877–8339.
E. OCC Unfunded Mandates Reform Act
of 1995 Determination
Section 202 of the Unfunded
Mandates Reform Act of 1995, Public
Law 104–4 (Unfunded Mandates Act)
requires that an agency prepare a
budgetary impact statement before
promulgating a rule that includes a
Federal mandate that may result in
expenditure by State, local, and tribal
governments, in the aggregate, or by the
private sector, of $100 million (adjusted
for inflation) or more in any one year.
The current inflation-adjusted
expenditure threshold is $126.4 million.
If a budgetary impact statement is
required, section 205 of the UMRA also
requires an agency to identify and
consider a reasonable number of
regulatory alternatives before
promulgating a rule.
Based on current and historical
supervisory data on national bank
securitization activity, the OCC
estimates that, pursuant to the proposed
rule, national banks would be required
to retain approximately $2.8 billion of
credit risk, after taking into
consideration the proposed exemptions
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for qualified residential mortgages and
other qualified assets. The cost of
retaining this risk amount has two
components. The first is the loss of
origination and servicing fees on the
reduced amount of origination activity
necessitated by the need to hold the
$2.8 billion retention amount on the
bank’s balance sheet. Typical
origination fees are 1 percent and
typical servicing fees are another half of
a percentage point. To capture any
additional lost fees, the OCC
conservatively estimated that the total
cost of lost fees to be two percent of the
retained amount, or approximately $56
million. The second component of the
retention cost is the opportunity cost of
earning the return on these retained
assets versus the return that the bank
would earn if these funds were put to
other use. Because of the variety of
assets and returns on the securitized
assets, the OCC assumes that this
interest opportunity cost nets to zero. In
addition to the cost of retaining the
assets under the proposed rule, the
overall cost of the proposed rule
includes the administrative costs
associated with implementing the rule
and providing required disclosures. The
OCC estimates that implementation and
disclosure will require approximately
480 hours per institution, or at $100 per
hour, approximately $48,000 per
institution. The OCC estimates that the
rule will apply to approximately 25
national banking organizations. Thus,
the estimate of the total administrative
cost of the proposed rule is
approximately $1.2 million. Thus, the
estimated total cost of the proposed rule
applied to ABS is $57.2 million.
The OCC has determined that its
portion of the final rules will not result
in expenditures by State, local, and
tribal governments, or by the private
sector, of $126.4 million or more.
Accordingly, the OCC has not prepared
a budgetary impact statement or
specifically addressed the regulatory
alternatives considered.
F. Commission: Small Business
Regulatory Enforcement Fairness Act
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996, or ‘‘SBREFA,’’ 237 the Commission
solicits data to determine whether the
proposal constitutes a ‘‘major’’ rule.
Under SBREFA, a rule is considered
‘‘major’’ where, if adopted, it results or
is likely to result in:
• An annual effect on the economy of
$100 million or more (either in the form
of an increase or a decrease);
237 5
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• A major increase in costs or prices
for consumers or individual industries;
or
• Significant adverse effects on
competition, investment or innovation.
We request comment on the potential
impact of the proposal on the U.S.
economy on an annual basis, any
potential increase in costs or prices for
consumers or individual industries, and
any potential effect on competition,
investment or innovation. Commenters
are requested to provide empirical data
and other factual support for their views
if possible.
G. FHFA: Considerations of Differences
Between the Federal Home Loan Banks
and the Enterprises
Section 1313 of the Federal Housing
Enterprises Financial Safety and
Soundness Act of 1992 requires the
Director of FHFA, when promulgating
regulations relating to the Federal Home
Loan Banks (Banks), to consider the
following differences between the Banks
and the Enterprises (Fannie Mae and
Freddie Mac): cooperative ownership
structure; mission of providing liquidity
to members; affordable housing and
community development mission;
capital structure; and joint and several
liability.238 The Director also may
consider any other differences that are
deemed appropriate. In preparing the
portions of this proposed rule over
which FHFA has joint rulemaking
authority, the Director considered the
differences between the Banks and the
Enterprises as they relate to the above
factors. FHFA requests comments from
the public about whether differences
related to these factors should result in
any revisions to the proposal.
Text of the Proposed Common Rules
(All Agencies)
The text of the proposed common
rules appears below:
Part ll—Credit Risk Retention
Subpart A—Authority, Purpose, Scope and
Definitions
Sec.
ll.1 [Reserved]
ll.2 Definitions.
Subpart B—Credit Risk Retention
ll.3 Base risk retention requirement.
ll.4 Vertical risk retention.
ll.5 Horizontal risk retention.
ll.6 L-Shaped risk retention.
ll.7 Revolving asset master trusts.
ll.8 Representative sample.
ll.9 Eligible ABCP conduits.
ll.10 Commercial mortgage-backed
securities.
238 See
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ll.11 Federal National Mortgage
Association and Federal Home Loan
Mortgage Corporation ABS.
ll.12 Premium capture cash reserve
account.
Subpart C—Transfer of Risk Retention
ll.13 Allocation of risk retention to an
originator.
ll.14 Hedging, transfer and financing
prohibitions.
Subpart D—Exceptions and Exemptions
ll.15 Exemption for qualified residential
mortgages.
ll.16 Definitions applicable to qualifying
commercial loans, commercial
mortgages, and auto loans.
ll.17 Exceptions for qualifying
commercial loans, commercial
mortgages, and auto loans.
ll.18 Underwriting standards for
qualifying commercial loans.
ll.19 Underwriting standards for
qualifying CRE loans.
ll.20 Underwriting standards for
qualifying auto loans.
ll.21 General exemptions.
ll.22 Safe harbor for certain foreignrelated transactions.
ll.23 Additional exemptions.
Appendix A to Part ___— Additional QRM
Standards; Standards for Determining
Acceptable Sources of Borrower Funds,
Borrower’s Monthly Gross Income,
Monthly Housing Debt, and Total
Monthly Debt
Subpart A—Authority, Purpose, Scope
and Definitions
srobinson on DSKHWCL6B1PROD with PROPOSALS
§ ll.1
[Reserved]
§ ll.2 Definitions.
For purposes of this part, the
following definitions apply:
ABCP means asset-backed commercial
paper that has a maturity at the time of
issuance not exceeding nine months,
exclusive of days of grace, or any
renewal thereof the maturity of which is
likewise limited.
ABS interest:
(1) Includes any type of interest or
obligation issued by an issuing entity,
whether or not in certificated form,
including a security, obligation,
beneficial interest or residual interest,
payments on which are primarily
dependent on the cash flows of the
collateral owned or held by the issuing
entity; and
(2) Does not include common or
preferred stock, limited liability
interests, partnership interests, trust
certificates, or similar interests that:
(i) Are issued primarily to evidence
ownership of the issuing entity; and
(ii) The payments, if any, on which
are not primarily dependent on the cash
flows of the collateral held by the
issuing entity.
Affiliate. An affiliate of, or a person
affiliated with, a specified person means
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a person that directly, or indirectly
through one or more intermediaries,
controls, or is controlled by, or is under
common control with, the person
specified.
Appropriate Federal banking agency
has the same meaning as in section 3 of
the Federal Deposit Insurance Act (12
U.S.C. 1813).
Asset means a self-liquidating
financial asset (including but not
limited to a loan, lease, mortgage, or
receivable).
Asset-backed security has the same
meaning as in section 3(a)(77) of the
Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(77)).
Collateral with respect to any
issuance of ABS interests means the
assets or other property that provide the
cash flow (including cash flow from the
foreclosure or sale of the assets or
property) for the ABS interests
irrespective of the legal structure of
issuance, including security interests in
assets or other property of the issuing
entity, fractional undivided property
interests in the assets or other property
of the issuing entity, or any other
property interest in such assets or other
property.
Collateralize. Assets or other property
collateralize an issuance of ABS
interests if the assets or property serve
as collateral for such issuance.
Commercial real estate loan has the
same meaning as in § _.16 of this part.
Commission means the Securities and
Exchange Commission.
Consolidated affiliate means, with
respect to a sponsor, an entity (other
than the issuing entity) the financial
statements of which are consolidated
with those of:
(1) The sponsor under applicable
accounting standards; or
(2) Another entity the financial
statements of which are consolidated
with those of the sponsor under
applicable accounting standards.
Control including the terms
‘‘controlling,’’ ‘‘controlled by’’ and
‘‘under common control with’’
(1) Means the possession, direct or
indirect, of the power to direct or cause
the direction of the management and
policies of a person, whether through
the ownership of voting securities, by
contract, or otherwise.
(2) Without limiting the foregoing, a
person shall be considered to control a
company if the person:
(i) Owns, controls or holds with
power to vote 25 percent or more of any
class of voting securities of the
company; or
(ii) Controls in any manner the
election of a majority of the directors,
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trustees or persons performing similar
functions of the company.
Credit risk means:
(1) The risk of loss that could result
from the failure of the borrower in the
case of a securitized asset, or the issuing
entity in the case of an ABS interest in
the issuing entity, to make required
payments of principal or interest on the
asset or ABS interest on a timely basis;
(2) The risk of loss that could result
from bankruptcy, insolvency, or a
similar proceeding with respect to the
borrower or issuing entity, as
appropriate; or
(3) The effect that significant changes
in the underlying credit quality of the
asset or ABS interest may have on the
market value of the asset or ABS
interest.
Depositor means:
(1) The person that receives or
purchases and transfers or sells the
securitized assets to the issuing entity;
(2) The sponsor, in the case of a
securitization transaction where there is
not an intermediate transfer of the assets
from the sponsor to the issuing entity;
or
(3) The person that receives or
purchases and transfers or sells the
securitized assets to the issuing entity in
the case of a securitization transaction
where the person transferring or selling
the securitized assets directly to the
issuing entity is itself a trust.
Eligible ABCP conduit means an
issuing entity that issues ABCP
provided that:
(1) The issuing entity is bankruptcy
remote or otherwise isolated for
insolvency purposes from the sponsor of
the issuing entity and from any
intermediate SPV;
(2) The interests issued by an
intermediate SPV to the issuing entity
are collateralized solely by the assets
originated by a single originator-seller;
(3) All of the interests issued by an
intermediate SPV are transferred to one
or more ABCP conduits or retained by
the originator-seller; and
(4) A regulated liquidity provider has
entered into a legally binding
commitment to provide 100 percent
liquidity coverage (in the form of a
lending facility, an asset purchase
agreement, a repurchase agreement, or
other similar arrangement) to all the
ABCP issued by the issuing entity by
lending to, or purchasing assets from,
the issuing entity in the event that funds
are required to repay maturing ABCP
issued by the issuing entity.
Eligible horizontal residual interest
means, with respect to any
securitization transaction, an ABS
interest in the issuing entity that:
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(1) Is allocated all losses on the
securitized assets (other than losses that
are first absorbed through the release of
funds from a premium capture cash
reserve account, if such an account is
required to be established under § l.12
of this part) until the par value of such
ABS interest is reduced to zero;
(2) Has the most subordinated claim
to payments of both principal and
interest by the issuing entity; and
(3) Until all other ABS interests in the
issuing entity are paid in full, is not
entitled to receive any payments of
principal made on a securitized asset,
provided, however, an eligible
horizontal residual interest may receive
its current proportionate share of
scheduled payments of principal
received on the securitized assets in
accordance with the transaction
documents.
Federal banking agencies means the
Office of the Comptroller of the
Currency, the Board of Governors of the
Federal Reserve System, and the Federal
Deposit Insurance Corporation.
Intermediate SPV means, with respect
to an originator-seller, a special purpose
vehicle that:
(1) Is bankruptcy remote or otherwise
isolated for insolvency purposes from
the originator-seller;
(2) Purchases assets from the
originator-seller; and
(3) Issues interests collateralized by
such assets to one or more ABCP
conduits.
Issuing entity means, with respect to
a securitization transaction, the trust or
other entity:
(1) That is created at the direction of
the sponsor;
(2) That owns or holds the pool of
assets to be securitized; and
(3) In whose name the asset-backed
securities are issued.
Originator means a person who:
(1) Through an extension of credit or
otherwise, creates an asset that
collateralizes an asset-backed security;
and
(2) Sells the asset directly or
indirectly to a securitizer.
Originator-seller means an entity that
creates assets through one or more
extensions of credit and sells those
assets (and no other assets) to an
intermediate SPV, which in turn sells
interests collateralized by those assets to
one or more ABCP conduits.
Regulated liquidity provider means:
(1) A depository institution (as
defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813));
(2) A bank holding company (as
defined in 12 U.S.C. 1841), or a
subsidiary thereof;
(3) A savings and loan holding
company (as defined in 12 U.S.C.
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1467a), provided all or substantially all
of the holding company’s activities are
permissible for a financial holding
company under 12 U.S.C. 1843(k), or a
subsidiary thereof; or
(4) A foreign bank whose home
country supervisor (as defined in
§ 211.21 of the Federal Reserve Board’s
Regulation K (12 CFR 211.21)) has
adopted capital standards consistent
with the Capital Accord of the Basel
Committee on Banking Supervision, as
amended, and that is subject to such
standards, or a subsidiary thereof.
Retaining sponsor means, with
respect to a securitization transaction,
the sponsor that has retained or caused
to be retained an economic interest in
the credit risk of the securitized assets
pursuant to subpart B of this part.
Revolving asset master trust means an
issuing entity that is:
(1) A master trust; and
(2) Established to issue more than one
series of asset-backed securities all of
which are collateralized by a single pool
of revolving securitized assets that are
expected to change in composition over
time.
Securitization transaction means a
transaction involving the offer and sale
of asset-backed securities by an issuing
entity.
Securitized asset means an asset that:
(1) Is transferred, sold, or conveyed to
an issuing entity; and
(2) Collateralizes the ABS interests
issued by the issuing entity.
Securitizer with respect to a
securitization transaction shall mean
either:
(1) The depositor of the asset-backed
securities; or
(2) A sponsor of the asset-backed
securities.
Seller’s interest means an ABS
interest:
(1) In all of the assets that:
(i) Are owned or held by the issuing
entity; and
(ii) Do not collateralize any other ABS
interests issued by the issuing entity;
(2) That is pari passu with all other
ABS interests issued by the issuing
entity with respect to the allocation of
all payments and losses prior to an early
amortization event (as defined in the
transaction documents); and
(3) That adjusts for fluctuations in the
outstanding principal balances of the
securitized assets.
Servicer means any person
responsible for the management or
collection of the securitized assets or
making allocations or distributions to
holders of the ABS interests, but does
not include a trustee for the issuing
entity or the asset-backed securities that
makes allocations or distributions to
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holders of the ABS interests if the
trustee receives such allocations or
distributions from a servicer and the
trustee does not otherwise perform the
functions of a servicer.
Sponsor means a person who
organizes and initiates a securitization
transaction by selling or transferring
assets, either directly or indirectly,
including through an affiliate, to the
issuing entity.
U.S. person:
(1) Means—
(i) Any natural person resident in the
United States;
(ii) Any partnership, corporation,
limited liability company, or other
organization or entity organized or
incorporated under the laws of the
United States;
(iii) Any estate of which any executor
or administrator is a U.S. person;
(iv) Any trust of which any trustee is
a U.S. person;
(v) Any agency or branch of a foreign
entity located in the United States;
(vi) Any non-discretionary account or
similar account (other than an estate or
trust) held by a dealer or other fiduciary
for the benefit or account of a U.S.
person;
(vii) Any discretionary account or
similar account (other than an estate or
trust) held by a dealer or other fiduciary
organized, incorporated, or (if an
individual) resident in the United
States; and
(viii) Any partnership, corporation,
limited liability company, or other
organization or entity if:
(A) Organized or incorporated under
the laws of any foreign jurisdiction; and
(B) Formed by a U.S. person
principally for the purpose of investing
in securities not registered under the
Act.
(2) Does not include—
(i) Any discretionary account or
similar account (other than an estate or
trust) held for the benefit or account of
a non-U.S. person by a dealer or other
professional fiduciary organized,
incorporated, or (if an individual)
resident in the United States;
(ii) Any estate of which any
professional fiduciary acting as executor
or administrator is a U.S. person if:
(A) An executor or administrator of
the estate who is not a U.S. person has
sole or shared investment discretion
with respect to the assets of the estate;
and
(B) The estate is governed by foreign
law;
(iii) Any trust of which any
professional fiduciary acting as trustee
is a U.S. person, if a trustee who is not
a U.S. person has sole or shared
investment discretion with respect to
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the trust assets, and no beneficiary of
the trust (and no settlor if the trust is
revocable) is a U.S. person;
(iv) An employee benefit plan
established and administered in
accordance with the law of a country
other than the United States and
customary practices and documentation
of such country;
(v) Any agency or branch of a U.S.
person located outside the United States
if:
(A) The agency or branch operates for
valid business reasons; and
(B) The agency or branch is engaged
in the business of insurance or banking
and is subject to substantive insurance
or banking regulation, respectively, in
the jurisdiction where located;
(vi) The International Monetary Fund,
the International Bank for
Reconstruction and Development, the
Inter-American Development Bank, the
Asian Development Bank, the African
Development Bank, the United Nations,
and their agencies, affiliates and
pension plans, and any other similar
international organizations, their
agencies, affiliates and pension plans.
(3) For purposes of the definition of
a U.S. person, the term United States
means the United States of America, its
territories and possessions, any State of
the United States, and the District of
Columbia.
Subpart B—Credit Risk Retention
§ __.3
Base risk retention requirement.
(a) Base risk retention requirement.
Except as otherwise provided in this
part, the sponsor of a securitization
transaction shall retain an economic
interest in the credit risk of the
securitized assets in accordance with
any one of § __.4 through § __.11 of this
part.
(b) Multiple sponsors. If there is more
than one sponsor of a securitization
transaction, it shall be the responsibility
of each sponsor to ensure that at least
one of the sponsors of the securitization
transaction retains an economic interest
in the credit risk of the securitized
assets in accordance with any one of
§ __.4 through § __.11 of this part.
srobinson on DSKHWCL6B1PROD with PROPOSALS
§ __.4
Vertical risk retention.
(a) In general. At the closing of the
securitization transaction, the sponsor
retains not less than five percent of each
class of ABS interests in the issuing
entity issued as part of the securitization
transaction.
(b) Disclosures. A sponsor utilizing
this section shall provide, or cause to be
provided, to potential investors a
reasonable period of time prior to the
sale of the asset-backed securities in the
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securitization transaction and, upon
request, to the Commission and to its
appropriate Federal banking agency, if
any, the following disclosure in written
form under the caption ‘‘Credit Risk
Retention’’:
(1) The amount (expressed as a
percentage and dollar amount) of each
class of ABS interests in the issuing
entity that the sponsor will retain (or
did retain) at the closing of the
securitization transaction and the
amount (expressed as a percentage and
dollar amount) of each class of ABS
interests in the issuing entity that the
sponsor is required to retain under this
section; and
(2) The material assumptions and
methodology used in determining the
aggregate dollar amount of ABS interests
issued by the issuing entity in the
securitization transaction, including
those pertaining to any estimated cash
flows and the discount rate used.
§ __.5 Horizontal risk retention.
(a) General requirement. At the
closing of the securitization transaction,
the sponsor retains an eligible
horizontal residual interest in an
amount that is equal to at least five
percent of the par value of all ABS
interests in the issuing entity issued as
part of the securitization transaction.
(b) Option to hold base amount in
horizontal cash reserve account. In lieu
of retaining an eligible horizontal
residual interest in the amount required
by paragraph (a) of this section, the
sponsor may, at closing of the
securitization transaction, cause to be
established and funded, in cash, a
horizontal cash reserve account in the
amount specified in paragraph (a),
provided that the account meets all of
the following conditions:
(1) The account is held by the trustee
(or person performing similar functions)
in the name and for the benefit of the
issuing entity;
(2) Amounts in the account are
invested only in:
(i) United States Treasury securities
with maturities of 1 year or less; or
(ii) Deposits in one or more insured
depository institutions (as defined in
section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813)) that are
fully insured by federal deposit
insurance; and
(3) Until all ABS interests in the
issuing entity are paid in full or the
issuing entity is dissolved:
(i) Amounts in the account shall be
released to satisfy payments on ABS
interests in the issuing entity on any
payment date on which the issuing
entity has insufficient funds from any
source (including any premium capture
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cash reserve account established
pursuant to § __.12 of this part) to satisfy
an amount due on any ABS interest; and
(ii) No other amounts may be
withdrawn or distributed from the
account except that:
(A) Amounts in the account may be
released to the sponsor or any other
person due to the receipt by the issuing
entity of scheduled payments of
principal on the securitized assets,
provided that, the issuing entity
distributes such payments of principal
in accordance with the transaction
documents and the amount released
from the account on any date does not
exceed the product of:
(1) The amount of scheduled
payments of principal received by the
issuing entity and for which the release
is being made; and
(2) The ratio of the current balance in
the horizontal cash reserve account to
the aggregate remaining principal
balance of all ABS interests in the
issuing entity; and
(B) Interest on investments made in
accordance with paragraph (b)(2) may
be released once received by the
account.
(c) Disclosures. A sponsor utilizing
this section shall provide, or cause to be
provided, to potential investors a
reasonable period of time prior to the
sale of the asset-backed securities in the
securitization transaction and, upon
request, to the Commission and its
appropriate Federal banking agency, if
any, the following disclosure in written
form under the caption ‘‘Credit Risk
Retention’’:
(1) If the sponsor retains risk through
an eligible horizontal residual interest:
(i) The amount (expressed as a
percentage and dollar amount) of the
eligible horizontal residual interest the
sponsor will retain (or did retain) at the
closing of the securitization transaction,
and the amount (expressed as a
percentage and dollar amount) of the
eligible horizontal residual interest that
the sponsor is required to retain under
this section; and
(ii) A description of the material terms
of the eligible horizontal residual
interest to be retained by the sponsor;
(2) If the sponsor retains risk through
the funding of a horizontal cash reserve
account:
(i) The dollar amount to be placed (or
placed) by the sponsor in the horizontal
cash reserve account and the dollar
amount the sponsor is required to place
in such an account pursuant to this
section; and
(ii) A description of the material terms
of the horizontal cash reserve account;
and
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(3) The material assumptions and
methodology used in determining the
aggregate dollar amount of ABS interests
issued by the issuing entity in the
securitization transaction, including
those pertaining to any estimated cash
flows and the discount rate used.
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§ __.6 L-Shaped risk retention.
(a) General requirement. At the
closing of the securitization transaction,
the sponsor:
(1) Retains not less than 2.5 percent
of each class of ABS interests in the
issuing entity issued as part of the
securitization transaction; and
(2) Retains an eligible horizontal
residual interest in the issuing entity, or
establishes and funds in cash a
horizontal cash reserve account that
meets all of the requirements of § __.5(b)
of this part, in an amount that in either
case is equal to at least 2.564 percent of
the par value of all ABS interests in the
issuing entity issued as part of the
securitization transaction other than any
portion of such ABS interests that the
sponsor is required to retain pursuant to
paragraph (a)(1) of this section.
(b) Disclosure requirements. A
sponsor utilizing this section shall
comply with all of the disclosure
requirements set forth in § __.4(b) and
§ __.5(c) of this part.
§ __.7 Revolving asset master trusts.
(a) General requirement. At the
closing of the securitization transaction
and until all ABS interests in the issuing
entity are paid in full, the sponsor
retains a seller’s interest of not less than
five percent of the unpaid principal
balance of all the assets owned or held
by the issuing entity provided that:
(1) The issuing entity is a revolving
asset master trust; and
(2) All of the securitized assets are
loans or other extensions of credit that
arise under revolving accounts.
(b) Disclosures. A sponsor utilizing
this section shall provide, or cause to be
provided, to potential investors a
reasonable period of time prior to the
sale of the asset-backed securities in the
securitization transaction and, upon
request, to the Commission and its
appropriate Federal banking agency, if
any, the following disclosure in written
form under the caption ‘‘Credit Risk
Retention’’:
(1) The amount (expressed as a
percentage and dollar amount) of the
seller’s interest that the sponsor will
retain (or did retain) at the closing of the
securitization transaction and the
amount (expressed as a percentage and
dollar amount) that the sponsor is
required to retain pursuant to this
section;
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(2) A description of the material terms
of the seller’s interest; and
(3) The material assumptions and
methodology used in determining the
aggregate dollar amount of ABS interests
issued by the issuing entity in the
securitization transaction, including
those pertaining to any estimated cash
flows and the discount rate used.
§ __.8 Representative sample.
(a) In general. At the closing of the
securitization transaction, the sponsor
retains ownership of a representative
sample of the pool of assets that are
designated for securitization in the
securitization transaction and draws
from such pool all of the securitized
assets for the securitization transaction,
provided that:
(1) At the time of issuance of assetbacked securities by the issuing entity,
the unpaid principal balance of the
assets comprising the representative
sample retained by the sponsor is equal
to at least 5.264 percent of the unpaid
principal balance of all the securitized
assets in the securitization transaction;
and
(2) The sponsor complies with
paragraphs (b) through (g) of this
section.
(b) Construction of representative
sample—(1) Designated pool. Prior to
the sale of the asset-backed securities as
part of the securitization transaction, the
sponsor identifies a designated pool (the
‘‘designated pool’’) of assets:
(i) That consists of a minimum of
1000 separate assets;
(ii) From which the securitized assets
and the assets comprising the
representative sample are exclusively
drawn; and
(iii) That contains no assets other than
those described in paragraph (b)(1)(ii) of
this section.
(2) Random selection from designated
pool. (i) Prior to the sale of the assetbacked securities as part of the
securitization transaction, the sponsor
selects from the assets that comprise the
designated pool a sample of such assets
using a random selection process that
does not take account of any
characteristic of the assets other than
the unpaid principal balance of the
assets.
(ii) The unpaid principal balance of
the assets selected through the random
selection process described in paragraph
(b)(2)(i) of this section must represent at
least 5 percent of the aggregate unpaid
principal balance of all the assets that
comprise the designated pool.
(3) Equivalent risk determination.
Prior to the sale of the asset-backed
securities as part of the securitization
transaction, the sponsor determines,
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using a statistically valid methodology,
that for each material characteristic of
the assets in the designated pool,
including the average unpaid principal
balance of all the assets, that the mean
of any quantitative characteristic, and
the proportion of any characteristic that
is categorical in nature, of the sample of
assets randomly selected from the
designated pool pursuant to paragraph
(b)(2) of this section is within a 95
percent two-tailed confidence interval
of the mean or proportion, respectively,
of the same characteristic of the assets
in the designated pool.
(c) Sponsor policies, procedures and
documentation. (1) The sponsor has in
place, and adheres to, policies and
procedures for:
(i) Identifying and documenting the
material characteristics of assets
included in the designated pool;
(ii) Selecting assets randomly in
accordance with paragraph (b)(2) of this
section;
(iii) Testing the randomly-selected
sample of assets for compliance with
paragraph (b)(3) of this section;
(iv) Maintaining, until all ABS
interests are paid in full, documentation
that clearly identifies the assets
included in the representative sample
established under paragraphs (b)(2) and
(3) of this section; and
(v) Prohibiting, until all ABS interests
are paid in full, assets in the
representative sample from being
included in the designated pool of any
other securitization transaction.
(2) The sponsor maintains
documentation that clearly identifies
the assets in the representative sample
established under paragraphs (b)(2) and
(3) of this section.
(d) Agreed upon procedures report.
(1) Prior to the sale of the asset-backed
securities as part of the securitization
transaction, the sponsor has obtained an
agreed upon procedures report that
satisfies the requirements of paragraph
(d)(2) of this section from an
independent public accounting firm.
(2) The independent public
accounting firm providing the agreed
upon procedures report required by
paragraph (d)(1) of this section must at
a minimum report on whether the
sponsor has:
(i) Policies and procedures that
require the sponsor to identify and
document the material characteristics of
assets included in a designated pool of
assets that meets the requirements of
paragraph (b)(1) of this section;
(ii) Policies and procedures that
require the sponsor to select assets
randomly in accordance with paragraph
(b)(2) of this section;
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(iii) Policies and procedures that
require the sponsor to test the
randomly-selected sample of assets in
accordance with paragraph (b)(3) of this
section;
(iv) Policies and procedures that
require the sponsor to maintain, until all
ABS interests are paid in full,
documentation that identifies the assets
in the representative sample established
under paragraphs (b)(2) and (3) of this
section; and
(v) Policies and procedures that
require the sponsor to prohibit, until all
ABS interests are paid in full, assets in
the representative sample from being
included in the designated pool of any
other securitization transaction.
(e) Servicing. Until such time as all
ABS interests in the issuing entity have
been fully paid or the issuing entity has
been dissolved:
(1) Servicing of the assets included in
the representative sample must be
conducted by the same entity and under
the same contractual standards as the
servicing of the securitized assets; and
(2) The individuals responsible for
servicing the assets included in the
representative sample or the securitized
assets must not be able to determine
whether an asset is owned or held by
the sponsor or owned or held by the
issuing entity.
(f) Sale, hedging or pledging
prohibited. Until such time as all ABS
interests in the issuing entity have been
fully paid or the issuing entity has been
dissolved, the sponsor:
(1) Shall comply with the restrictions
in § __.14 of this part with respect to the
assets in the representative sample;
(2) Shall not remove any assets from
the representative sample; and
(3) Shall not cause or permit any
assets in the representative sample to be
included in any designated pool or
representative sample established in
connection with any other issuance of
asset-backed securities.
(g) Disclosures—(1) Disclosure prior to
sale. A sponsor utilizing this section
shall provide, or cause to be provided,
to potential investors a reasonable
period of time prior to the sale of the
asset-backed securities as part of the
securitization transaction and, upon
request, to the Commission and its
appropriate Federal banking agency, if
any, the following disclosure with
respect to the securitization transaction
in written form under the caption
‘‘Credit Risk Retention’’:
(i) The amount (expressed as a
percentage of the designated pool and
dollar amount) of assets included in the
representative sample and to be retained
(or retained) by the sponsor, and the
amount (expressed as a percentage of
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the designated pool and dollar amount)
of assets required to be included in the
representative sample and retained by
the sponsor pursuant to this section;
(ii) A description of the material
characteristics of the designated pool,
including, but not limited to, the
average unpaid principal balance of all
the assets, the means of the quantitative
characteristics and the proportions of
categorical characteristics of the assets,
appropriate introductory and
explanatory information to introduce
the characteristics, the methodology
used in determining or calculating the
characteristics, and any terms or
abbreviations used;
(iii) A description of the policies and
procedures that the sponsor used for
ensuring that the process for identifying
the representative sample complies with
paragraph (b)(2) of this section and that
the representative sample has
equivalent material characteristics as
required by paragraph (b)(3) of this
section;
(iv) Confirmation that an agreed upon
procedures report was obtained
pursuant to paragraph (d) of this
section; and
(v) The material assumptions and
methodology used in determining the
aggregate dollar amount of ABS interests
issued by the issuing entity in the
securitization transaction, including
those pertaining to any estimated cash
flows and the discount rate used.
(2) Disclosure after sale. A sponsor
utilizing this section shall provide, or
cause to be provided, to the holders of
the asset-backed securities issued as
part of the securitization transaction
and, upon request, provide, or cause to
be provided, to the Commission and its
appropriate Federal banking agency, if
any, at the end of each distribution
period, as specified in the governing
documents for such asset-backed
securities, a comparison of the
performance of the pool of securitized
assets included in the securitization
transaction for the related distribution
period with the performance of the
assets in the representative sample for
the related distribution period.
(3) Conforming disclosure of
representative sample. A sponsor
utilizing this section shall provide, or
cause to be provided, to holders of the
asset-backed securities issued as part of
the securitization transaction and, upon
request, provide to the Commission and
its appropriate Federal banking agency,
if any, disclosure concerning the assets
in the representative sample in the same
form, level, and manner as it provides,
pursuant to rule or otherwise,
concerning the securitized assets.
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§ __.9
Eligible ABCP conduits.
(a) In general. A sponsor satisfies the
risk retention requirement of § __.3 of
this part with respect to the issuance of
ABCP by an eligible ABCP conduit in a
securitization transaction if:
(1) Each originator-seller of the ABCP
conduit:
(i) Retains an eligible horizontal
residual interest in each intermediate
SPV established by or on behalf of that
originator-seller for purposes of issuing
interests collateralized by assets of such
intermediate SPV to the eligible ABCP
conduit in the same form, amount, and
manner as would be required under
§ __.5(a) of this part if the originatorseller was the only sponsor of the
intermediate SPV; and
(ii) Complies with the provisions of
§ __.14 of this part with respect to the
eligible horizontal residual interest
retained pursuant to paragraph (a)(1)(i)
of this section as if it were a retaining
sponsor with respect to such interest;
(2) The sponsor:
(i) Establishes the eligible ABCP
conduit;
(ii) Approves each originator-seller
permitted to sell or transfer assets,
indirectly through an intermediate SPV,
to the eligible ABCP conduit;
(iii) Establishes criteria governing the
assets that the originator-sellers referred
to in paragraph (a)(2)(ii) of this section
are permitted to sell or transfer to an
intermediate SPV;
(iv) Approves all interests in an
intermediate SPV to be purchased by
the eligible ABCP conduit;
(v) Administers the eligible ABCP
conduit by monitoring the interests in
any intermediate SPV acquired by the
conduit and the assets collateralizing
those interests, arranging for debt
placement, compiling monthly reports,
and ensuring compliance with the
conduit documents and with the
conduit’s credit and investment policy;
and
(vi) Maintains and adheres to policies
and procedures for ensuring that the
conditions in this paragraph (a) have
been met.
(b) Disclosures. A sponsor utilizing
this section shall provide, or cause to be
provided, to potential investors a
reasonable period of time prior to the
sale of any ABCP by the eligible ABCP
conduit as part of the securitization
transaction and, upon request, to the
Commission and its appropriate Federal
banking agency, if any, in written form
under the caption ‘‘Credit Risk
Retention’’, the name and form of
organization of:
(1) Each originator-seller that will
retain (or has retained) an eligible
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horizontal residual interest in the
securitization transaction pursuant to
this section, including a description of
the form, amount (expressed as a
percentage and as a dollar amount), and
nature of such interest; and
(2) Each regulated liquidity provider
that provides liquidity support to the
eligible ABCP conduit, including a
description of the form, amount, and
nature of such liquidity coverage.
(c) Duty to comply.
(1) The retaining sponsor shall be
responsible for compliance with this
section.
(2) A retaining sponsor relying on this
section:
(i) Shall maintain and adhere to
policies and procedures that are
reasonably designed to monitor
compliance by each originator-seller of
the eligible ABCP conduit with the
requirements of paragraph (a)(1) of this
section; and
(ii) In the event that the sponsor
determines that an originator-seller no
longer complies with the requirements
of paragraph (a)(1) of this section, shall
promptly notify the holders of the ABS
interests issued in the securitization
transaction of such noncompliance by
such originator-seller.
§ __.10 Commercial mortgage-backed
securities.
(a) Third-Party Purchaser. A sponsor
satisfies the risk retention requirements
of § __.3 of this part with respect to a
securitization transaction if a third party
purchases an eligible horizontal residual
interest in the issuing entity in the same
form, amount, and manner as would be
required of the sponsor under § __.5(a)
of this part and all of the following
conditions are met:
(1) Composition of collateral. At the
closing of the securitization transaction,
at least 95 percent of the total unpaid
principal balance of the securitized
assets in the securitization transaction
are commercial real estate loans.
(2) Source of funds. The third-party
purchaser:
(i) Pays for the eligible horizontal
residual interest in cash at the closing
of the securitization transaction; and
(ii) Does not obtain financing, directly
or indirectly, for the purchase of such
interest from any other person that is a
party to the securitization transaction
(including, but not limited to, the
sponsor, depositor, or an unaffiliated
servicer), other than a person that is a
party to the transaction solely by reason
of being an investor.
(3) Third-party review. The thirdparty purchaser conducts a review of
the credit risk of each securitized asset
prior to the sale of the asset-backed
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securities in the securitization
transaction that includes, at a minimum,
a review of the underwriting standards,
collateral, and expected cash flows of
each commercial real estate loan that is
collateral for the asset-backed securities.
(4) Affiliation and control rights. (i)
Except as provided in paragraphs
(a)(4)(ii) or (iii) of this section:
(A) The third-party purchaser is not
affiliated with any party to the
securitization transaction (including,
but not limited to, the sponsor,
depositor, or servicer) other than
investors in the securitization
transaction; and
(B) The third-party purchaser or an
affiliate of such third-party purchaser
does not have control rights in
connection with the securitization
transaction (including, but not limited
to, acting as a servicer for the
securitized assets) that are not
collectively shared with all other
investors in the securitization.
(ii) Notwithstanding paragraph
(a)(4)(i)(A) of this section, the thirdparty purchaser may be affiliated with
one or more originators of the
securitized assets so long as the assets
originated by the affiliated originator or
originators collectively comprise less
than 10 percent of the unpaid principal
balance of the securitized assets
included in the securitization
transaction at closing of the
securitization transaction.
(iii) Paragraph (a)(4)(i) of this section
shall not prevent the third-party
purchaser from acting as, or being an
affiliate of, a servicer for any of the
securitized assets, and having such
controls rights that are related to such
servicing, if the underlying
securitization transaction documents
provide for the following:
(A) The appointment of an operating
advisor (the ‘‘Operating Advisor’’) that:
(1) Is not affiliated with other parties
to the securitization transaction;
(2) Does not directly or indirectly
have any financial interest in the
securitization transaction other than in
fees from its role as Operating Advisor;
and
(3) Is required to act in the best
interest of, and for the benefit of,
investors as a collective whole.
(B) Any servicer for the securitized
assets that is, or is affiliated with, the
third-party purchaser must consult with
the Operating Advisor in connection
with, and prior to, any major decision
in connection with the servicing of the
securitized assets, including, without
limitation:
(1) Any material modification of, or
waiver with respect to, any provision of
a loan agreement (including a mortgage,
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deed of trust, or other security
agreement);
(2) Foreclosure upon or comparable
conversion of the ownership of a
property; or
(3) Any acquisition of a property.
(C) The Operating Advisor shall be
responsible for reviewing the actions of
any servicer that is, or is affiliated with,
the third-party purchaser and for issuing
a report to investors and the issuing
entity on a periodic basis concerning:
(1) Whether the Operating Advisor
believes, in its sole discretion exercised
in good faith, that such servicer is
operating in compliance with any
standard required of the servicer as
provided in the applicable transaction
documents; and
(2) What, if any, standard(s) the
Operating Advisor believes, in its sole
discretion exercised in good faith, with
which such servicer has failed to
comply;
(D) The Operating Advisor shall have
the authority to recommend that a
servicer that is, or is affiliated with, a
third-party purchaser be replaced by a
successor servicer if the Operating
Advisor determines, in its sole
discretion exercised in good faith, that:
(1) The servicer that is, or is affiliated
with, the third-party purchaser has
failed to comply with a standard
required of the servicer as provided in
the transaction documents; and
(2) Such replacement would be in the
best interest of the investors as a
collective whole; and
(E) If a recommendation described in
paragraph (a)(4)(iii)(D) of this section is
made, the servicer that is, or is affiliated
with, the third-party purchaser must be
replaced unless a majority of each class
of ABS interests in the issuing entity
eligible to vote on the matter votes to
retain the servicer.
(5) Disclosures. The sponsor provides,
or causes to be provided, to potential
investors a reasonable period of time
prior to the sale of the asset-backed
securities as part of the securitization
transaction and, upon request, to the
Commission and its appropriate Federal
banking agency, if any, the following
disclosure in written form, and, with
respect to paragraphs (a)(5)(i) through
(vii) of this section, under the caption
‘‘Credit Risk Retention’’:
(i) The name and form of organization
of the third-party purchaser;
(ii) A description of the third-party
purchaser’s experience in investing in
commercial mortgage-backed securities;
(iii) Any other information regarding
the third-party purchaser or the thirdparty purchaser’s retention of the
eligible horizontal residual interest that
is material to investors in light of the
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circumstances of the particular
securitization transaction;
(iv) A description of the amount
(expressed as a percentage and dollar
amount) of the eligible horizontal
residual interest that will be retained (or
was retained) by the third-party
purchaser, as well as the amount of the
purchase price paid by the third-party
purchaser for such interest;
(v) The amount (expressed as a
percentage and dollar amount) of the
eligible horizontal residual interest in
the securitization transaction that the
sponsor would have been required to
retain pursuant to § __.5(a) of this part
if the sponsor had relied on such section
to meet the requirements of § __.3 of this
part with respect to the transaction;
(vi) A description of the material
terms of the eligible residual horizontal
interest retained by the third-party
purchaser;
(vii) The material assumptions and
methodology used in determining the
aggregate amount of ABS interests
issued by the issuing entity in the
securitization transaction, including
those pertaining to any estimated cash
flows and the discount rate used; and
(viii) The representations and
warranties concerning the securitized
assets, a schedule of any securitized
assets that are determined do not
comply with such representations and
warranties, and what factors were used
to make the determination that such
securitized assets should be included in
the pool notwithstanding that the
securitized assets did not comply with
such representations and warranties,
such as compensating factors or a
determination that the exceptions were
not material.
(6) Hedging, transfer and pledging.
The third-party purchaser complies
with the hedging and other restrictions
in § __.14 of this part as if it were the
retaining sponsor with respect to the
securitization transaction and had
acquired the eligible horizontal residual
interest pursuant to § __.5 of this part.
(b) Duty to comply. (1) The retaining
sponsor shall be responsible for
compliance with this section.
(2) A retaining sponsor relying on this
section:
(i) Shall maintain and adhere to
policies and procedures to monitor the
third-party purchaser’s compliance with
the requirements in paragraph (a) of this
section (other than paragraphs (a)(1) and
(a)(5)); and
(ii) In the event that the sponsor
determines that the third-party
purchaser no longer complies with any
of the requirements of paragraph (a) of
this section (other than paragraphs (a)(1)
and (a)(5)), shall promptly notify, or
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cause to be notified, the holders of the
ABS interests issued in the
securitization transaction of such
noncompliance by the third-party
purchaser.
§ __.11 Federal National Mortgage
Association and Federal Home Loan
Mortgage Corporation ABS.
(a) In general. The sponsor fully
guarantees the timely payment of
principal and interest on all ABS
interests issued by the issuing entity in
the securitization transaction and is:
(1) The Federal National Mortgage
Association or the Federal Home Loan
Mortgage Corporation operating under
the conservatorship or receivership of
the Federal Housing Finance Agency
pursuant to section 1367 of the Federal
Housing Enterprises Financial Safety
and Soundness Act of 1992 (12 U.S.C.
4617) with capital support from the
United States; or
(2) Any limited-life regulated entity
succeeding to the charter of either the
Federal National Mortgage Association
or the Federal Home Loan Mortgage
Corporation pursuant to section 1367(i)
of the Federal Housing Enterprises
Financial Safety and Soundness Act of
1992 (12 U.S.C. 4617(i)), provided that
the entity is operating with capital
support from the United States.
(b) Certain provisions not applicable.
The provisions of § __.12 and § __.14(b),
(c), and (d) of this part shall not apply
to a sponsor described in paragraph
(a)(1) or (2) of this section, its affiliates,
or the issuing entity with respect to a
securitization transaction for which the
sponsor has retained credit risk in
accordance with the requirements of
this section.
(c) Disclosure. A sponsor utilizing this
section shall provide to investors, in
written form under the caption ‘‘Credit
Risk Retention’’ and, upon request, to
the Federal Housing Finance Agency
and the Commission, a description of
the manner in which it has met the
credit risk retention requirements of this
part.
§ __.12 Premium capture cash reserve
account.
(a) When creation of a premium
capture cash reserve account is required
and calculation of amount. In addition
to the economic interest in the credit
risk that a retaining sponsor is required
to retain, or cause to be retained under
§ __.3 of this part, the retaining sponsor
shall, at closing of the securitization
transaction, cause to be established and
funded, in cash, a premium capture
cash reserve account (as defined in
paragraph (b) of this section) in an
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amount equal to the difference, if a
positive amount, between:
(1) The gross proceeds, net of closing
costs paid by the sponsor(s) or issuing
entity to unaffiliated parties, received by
the issuing entity from the sale of ABS
interests in the issuing entity to persons
other than the retaining sponsor; and
(2)(i) If the retaining sponsor has
relied on § __.4, § __.5, § __.6, or § __.7
of this part with respect to the
securitization transaction, 95 percent of
the par value of all ABS interests in the
issuing entity issued as part of the
securitization transaction; or
(ii) If the retaining sponsor has relied
on § __.8, § __.9, or § __.10 of this part
with respect to the securitization
transaction, 100 percent of the par value
of all ABS interests in the issuing entity
issued as part of the securitization
transaction.
(b) Operation of premium capture
cash reserve account. For purposes of
this section, a premium capture cash
reserve account means an account that
meets all of the following conditions:
(1) The account is held by the trustee
(or person performing similar functions)
in the name and for the benefit of the
issuing entity;
(2) Amounts in the account may be
invested only in:
(i) United States Treasury securities
with maturities of 1 year or less; and
(ii) Deposits in one or more insured
depository institutions (as defined in
section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813)) that are
fully insured by federal deposit
insurance; and
(3) Until all ABS interests in the
issuing entity are paid in full or the
issuing entity is dissolved, no funds
may be withdrawn or distributed from
the account except as follows:
(i) Amounts in the account shall be
released to satisfy payments on ABS
interests in the issuing entity on any
payment date on which the issuing
entity has insufficient funds to satisfy
an amount due on an ABS interest prior
to the allocation of any losses to:
(A) An eligible horizontal residual
interest held pursuant to § __.5, § __.6,
§ __.9, § __.10, or § __.13 of this part, if
any; or
(B) If an eligible horizontal residual
interest in the issuing entity is not held
pursuant to § __.5, § __.6, § __.9, § __.10,
or § __.13 of this part, the class of ABS
interests in the issuing entity that:
(1) Is allocated losses before other
classes; or
(2) If the contractual terms of the
securitization transaction do not
provide for the allocation of losses by
class, the class of ABS interests that has
the most subordinate claim to payment
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of principal or interest by the issuing
entity; and
(ii) Interest on investments made in
accordance with paragraph (b)(2) of this
section may be released to any person
once received by the account.
(c) Calculation of gross proceeds
received by issuing entity—(1) Antievasion provision for certain resales and
senior excess spread tranches. For
purposes of paragraph (a)(1) of this
section, the gross proceeds received by
the issuing entity from the sale of ABS
interests to persons other than the
retaining sponsor shall include the par
value, or if an ABS interest does not
have a par value, the fair value, of any
ABS interest in the issuing entity that is
directly or indirectly transferred to the
retaining sponsor in connection with
the closing of the securitization
transaction and that:
(i) The retaining sponsor does not
intend to hold to maturity; or
(ii) Represents a contractual right to
receive some or all of the interest and
no more than a minimal amount of
principal payments received by the
issuing entity and that has priority of
payment of interest (or principal, if any)
senior to the most subordinated class of
ABS interests in the issuing entity,
provided, however, this paragraph
(c)(1)(ii) shall not apply to any ABS
interest that:
(A) Does not have a par value;
(B) Is held by a sponsor that is relying
on § __.4 or § __.6 of this part with
respect to the securitization transaction;
and
(C) The sponsor is required to retain
pursuant to § __.4 or § __.6(a)(1) of this
part.
(d) Disclosures. A sponsor that is
required to establish and fund a
premium capture cash reserve account
pursuant to this section shall provide, or
cause to be provided, to potential
investors a reasonable period of time
prior to the sale of the asset-backed
securities as part of the securitization
transaction and, upon request, to the
Commission and its appropriate Federal
banking agency, if any, the following
disclosure in written form under the
caption ‘‘Credit Risk Retention’’:
(1) The dollar amount required to be
placed in the account pursuant to this
section and any other amounts the
sponsor will place (or has placed) in the
account in connection with the
securitization transaction; and
(2) The material assumptions and
methodology used in determining the
fair value of any ABS interest in the
issuing entity that does not have a par
value and that was used in calculating
the amount required for the premium
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capture cash reserve account pursuant
to paragraph (c) of this section.
Subpart C—Transfer of Risk Retention
§ __.13 Allocation of risk retention to
an originator
(a) In general. A sponsor choosing to
retain a portion of each class of ABS
interests in the issuing entity under the
vertical risk retention option in § __.4 of
this part or an eligible horizontal
residual interest pursuant to § __.5(a) of
this part with respect to a securitization
transaction may offset the amount of its
risk retention requirements under § __.4
or § __.5(a) of this part, as applicable, by
the amount of the ABS interests or
eligible horizontal residual interest,
respectively, acquired by an originator
of one or more of the securitized assets
if:
(1) Amount of retention. At the
closing of the securitization transaction:
(i) The originator acquires and retains
the ABS interests or eligible horizontal
residual interest from the sponsor in the
same manner as would have been
retained by the sponsor under § __.4 or
§ __.5(a) of this part, as applicable;
(ii) The ratio of the dollar amount of
ABS interests or eligible horizontal
residual interest acquired and retained
by the originator to the total dollar
amount of ABS interests or eligible
horizontal residual interest otherwise
required to be retained by the sponsor
pursuant to § __.4 or § __.5(a) of this
part, as applicable, does not exceed the
ratio of:
(A) The unpaid principal balance of
all the securitized assets originated by
the originator; to
(B) The unpaid principal balance of
all the securitized assets in the
securitization transaction;
(iii) The originator acquires and
retains at least 20 percent of the
aggregate risk retention amount
otherwise required to be retained by the
sponsor pursuant to § __.4 or § __.5(a) of
this part, as applicable; and
(iv) The originator purchases the ABS
interests or eligible horizontal residual
interest from the sponsor at a price that
is equal, on a dollar-for-dollar basis, to
the amount by which the sponsor’s
required risk retention is reduced in
accordance with this section, by
payment to the sponsor in the form of:
(A) Cash; or
(B) A reduction in the price received
by the originator from the sponsor or
depositor for the assets sold by the
originator to the sponsor or depositor for
inclusion in the pool of securitized
assets.
(2) Disclosures. In addition to the
disclosures required pursuant to
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§ __.4(b) or § __.5(c) of this part, the
sponsor provides, or causes to be
provided, to potential investors a
reasonable period of time prior to the
sale of the asset-backed securities as
part of the securitization transaction
and, upon request, to the Commission
and its appropriate Federal banking
agency, if any, in written form under the
caption ‘‘Credit Risk Retention’’, the
name and form of organization of any
originator that will acquire and retain
(or has acquired and retained) an
interest in the transaction pursuant to
this section, including a description of
the form, amount (expressed as a
percentage and dollar amount), and
nature of the interest, as well as the
method of payment for such interest
under paragraph (a)(1)(iv).
(3) Hedging, transferring and
pledging. The originator complies with
the hedging and other restrictions in
§ __.14 of this part with respect to the
interests retained by the originator
pursuant to this section as if it were the
retaining sponsor and was required to
retain the interest under subpart B of
this part.
(b) Duty to comply. (1) The retaining
sponsor shall be responsible for
compliance with this section.
(2) A retaining sponsor relying on this
section:
(i) Shall maintain and adhere to
policies and procedures that are
reasonably designed to monitor the
compliance by each originator that is
allocated a portion of the sponsor’s risk
retention obligations with the
requirements in paragraphs (a)(1) and
(a)(3) of this section; and
(ii) In the event the sponsor
determines that any such originator no
longer complies with any of the
requirements in paragraphs (a)(1) and
(a)(3) of this section, shall promptly
notify, or cause to be notified, the
holders of the ABS interests issued in
the securitization transaction of such
noncompliance by such originator.
§ __.14. Hedging, transfer and
financing prohibitions.
(a) Transfer. A retaining sponsor may
not sell or otherwise transfer any
interest or assets that the sponsor is
required to retain pursuant to subpart B
of this part to any person other than an
entity that is and remains a consolidated
affiliate.
(b) Prohibited hedging by sponsor and
affiliates. A retaining sponsor and its
consolidated affiliates may not purchase
or sell a security, or other financial
instrument, or enter into an agreement,
derivative or other position, with any
other person if:
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(1) Payments on the security or other
financial instrument or under the
agreement, derivative, or position are
materially related to the credit risk of
one or more particular ABS interests,
assets, or securitized assets that the
retaining sponsor is required to retain
with respect to a securitization
transaction pursuant to subpart B of this
part or one or more of the particular
securitized assets that collateralize the
asset-backed securities issued in the
securitization transaction; and
(2) The security, instrument,
agreement, derivative, or position in any
way reduces or limits the financial
exposure of the sponsor to the credit
risk of one or more of the particular ABS
interests, assets, or securitized assets
that the retaining sponsor is required to
retain with respect to a securitization
transaction pursuant to subpart B of this
part or one or more of the particular
securitized assets that collateralize the
asset-backed securities issued in the
securitization transaction.
(c) Prohibited hedging by issuing
entity. The issuing entity in a
securitization transaction may not
purchase or sell a security or other
financial instrument, or enter into an
agreement, derivative or position, with
any other person if:
(1) Payments on the security or other
financial instrument or under the
agreement, derivative or position are
materially related to the credit risk of
one or more particular interests, assets,
or securitized assets that the retaining
sponsor for the transaction is required to
retain with respect to the securitization
transaction pursuant to subpart B of this
part; and
(2) The security, instrument,
agreement, derivative, or position in any
way reduces or limits the financial
exposure of the retaining sponsor to the
credit risk of one or more of the
particular interests or assets that the
sponsor is required to retain pursuant to
subpart B of this part.
(d) Permitted hedging activities. The
following activities shall not be
considered prohibited hedging activities
by a retaining sponsor, a consolidated
affiliate or an issuing entity under
paragraph (b) or (c) of this section:
(1) Hedging the interest rate risk
(which does not include the specific
interest rate risk, known as spread risk,
associated with the ABS interest that is
otherwise considered part of the credit
risk) or foreign exchange risk arising
from one or more of the particular ABS
interests, assets, or securitized assets
required to be retained by the sponsor
under subpart B of this part or one or
more of the particular securitized assets
that underlie the asset-backed securities
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issued in the securitization transaction;
or
(2) Purchasing or selling a security or
other financial instrument or entering
into an agreement, derivative, or other
position with any third party where
payments on the security or other
financial instrument or under the
agreement, derivative, or position are
based, directly or indirectly, on an
index of instruments that includes assetbacked securities if:
(i) Any class of ABS interests in the
issuing entity that were issued in
connection with the securitization
transaction and that are included in the
index represents no more than 10
percent of the dollar-weighted average
of all instruments included in the index;
and
(ii) All classes of ABS interests in all
issuing entities that were issued in
connection with any securitization
transaction in which the sponsor was
required to retain an interest pursuant to
subpart B of this part and that are
included in the index represent, in the
aggregate, no more than 20 percent of
the dollar-weighted average of all
instruments included in the index.
(e) Prohibited non-recourse financing.
Neither a retaining sponsor nor any of
its consolidated affiliates may pledge as
collateral for any obligation (including a
loan, repurchase agreement, or other
financing transaction) any interest or
asset that the sponsor is required to
retain with respect to a securitization
transaction pursuant to subpart B of this
part unless such obligation is with full
recourse to the sponsor or consolidated
affiliate, respectively.
Subpart D—Exceptions and Exemptions
§ ___.15 Exemption for qualified
residential mortgages.
(a) Definitions. For purposes of this
section, the following definitions shall
apply:
Borrower includes any co-borrower,
unless the context otherwise requires.
Borrower funds means funds:
(1) Derived from one or more sources
identified as acceptable sources of funds
in the Additional QRM Standards
Appendix to this part; and
(2) That are verified in accordance
with the requirements set forth in the
Additional QRM Standards Appendix to
this part.
Cash-out refinancing means a
refinancing transaction in a principal
amount that exceeds the sum of the
amount used to:
(1) Fully repay the balance
outstanding on the borrower’s existing
first-lien mortgage that is secured by the
one-to-four family property being
refinanced;
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(2) Fully repay the balance
outstanding as of the date of the
mortgage transaction on any
subordinate-lien mortgage that was used
in its entirety to purchase such one-tofour family property;
(3) Pay closing or settlement charges
required to be included on the related
HUD–1 or HUD–1A Settlement
Statement or a successor form in
accordance with 24 CFR Part 3500 or a
successor regulation; and
(4) Disburse up to $500 of cash to the
borrower or any other payee.
Closed-end credit means any
consumer credit extended by a creditor
other than open-end credit.
Combined loan-to-value ratio means,
with respect to a first-lien refinancing
transaction on a one-to-four family
property, the ratio (expressed as a
percentage) of:
(1) The sum of:
(i) The principal amount of the firstlien mortgage transaction at the closing
of the transaction;
(ii) The unpaid principal amount of
any other closed-end credit transaction
that to the creditor’s knowledge would
exist at the closing of the refinancing
transaction and that is or would be
secured by the same one-to-four family
property; and
(iii) The face amount (as if fully
drawn) of any open-end credit
transaction that to the creditor’s
knowledge would exist at the closing of
the refinancing transaction and that is or
would be secured by the same one-tofour family property; to
(2) The estimated market value of the
one-to-four family property as
determined by a qualifying appraisal.
Consumer credit means credit offered
or extended to a borrower primarily for
personal, family, or household
purposes.
Consumer reporting agency that
compiles and maintains files on
consumers on a nationwide basis has
the same meaning as in 15 U.S.C.
1681a(p).
Creditor has the same meaning as in
15 U.S.C. 1602(f).
Currently performing means the
borrower in the mortgage transaction is
not currently thirty (30) days past due,
in whole or in part, on the mortgage
transaction.
Loan-to-value ratio means, with
respect to a mortgage transaction to
purchase a one-to-four family property,
the ratio (expressed as a percentage) of:
(1) The principal amount of the firstlien mortgage transaction at the closing
of the mortgage transaction; to
(2) The lesser of:
(i) The estimated market value of the
one-to-four family property as
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determined by a qualifying appraisal;
and
(ii) The purchase price of the one-tofour family property to be paid in
connection with the mortgage
transaction.
Mortgage originator has the same
meaning as in 15 U.S.C. 1602(cc)(2) and
the regulations issued thereunder.
Mortgage transaction means a closedend credit transaction to purchase or
refinance a one-to-four family property
at least one unit of which is the
borrower’s principal dwelling.
One-to-four family property means
real property that is held in fee simple,
on leasehold under a lease for not less
than 99 years which is renewable, or
under a lease having a period of not less
than 10 years to run beyond the
maturity date of the mortgage and that
is improved by a residential structure
that contains one to four units,
including but not limited to:
(1) An individual condominium;
(2) An individual cooperative unit; or
(3) An individual manufactured home
that is constructed in conformance with
the National Manufactured Home
Construction and Safety Standards, as
evidenced by a certification label affixed
to the exterior of the home, and that is
erected on or that otherwise is affixed to
a foundation in accordance with
requirements established by the Federal
Housing Administration.
Open-end credit means any consumer
credit extended by a creditor under a
plan in which:
(1) The creditor reasonably
contemplates repeated consumer credit
transactions;
(2) The creditor may impose a finance
charge from time to time on an
outstanding unpaid balance; and
(3) The amount of credit that may be
extended to the borrower during the
term of the plan (up to any limit set by
the creditor) is generally made available
to the extent that any outstanding
balance is repaid.
Points and fees means:
(1) All items considered to be a
finance charge under 12 CFR 226.4(a)
and 226.4(b), except:
(i) Interest or the time-price
differential; and
(ii) Items excluded from the finance
charge under 12 CFR 226.4(c), 226.4(d)
and 226.4(e), unless included in
paragraphs (2) through (5) of this
definition;
(2) All compensation paid directly or
indirectly by the borrower or creditor to
a mortgage originator, including a
mortgage originator that is also the
creditor in a table-funded transaction;
(3) All items (other than amounts held
for future payment of taxes) listed in 12
CFR 226.4(c)(7) unless:
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(i) The charge is bona fide and
reasonable;
(ii) The creditor and mortgage
originator receive no direct or indirect
compensation in connection with the
charge; and
(iii) The charge is not paid to an
affiliate of the creditor or mortgage
originator;
(4) Premiums or other charges payable
at or before closing for any credit life,
credit disability, credit unemployment,
or credit property insurance, or any
other accident, loss-of-income, life or
health insurance, or any payments
directly or indirectly for any debt
cancellation or suspension agreement or
contract; and
(5) If the mortgage transaction
refinances a previous loan made or
currently held by the same creditor or
an affiliate of the same creditor, all
prepayment fees or penalties that are
incurred by the consumer in connection
with the payment of the previous loan.
Prepayment penalty means a penalty
imposed solely because the mortgage
obligation is prepaid in full or in part.
For purposes of this definition, a
prepayment penalty does not include,
for example, fees imposed for preparing
and providing documents in connection
with prepayment, such as a loan payoff
statement, a reconveyance, or other
document releasing the creditor’s
security interest in the one-to-four
family property securing the loan.
Principal dwelling means a one-tofour family property, or unit thereof,
that is occupied or will be occupied by
at least one borrower as a principal
residence. For purposes of this
definition, a borrower can only have one
principal dwelling at a time; however, if
a borrower buys a new dwelling that
will become the borrower’s principal
dwelling within a year or upon the
completion of construction, the new
dwelling is considered the principal
dwelling for purposes of applying this
definition to a credit transaction to
purchase the new dwelling.
Qualifying appraisal means an
appraisal that meets the requirements of
§ __.15(d)(11) of this part.
Rate and term refinancing means a
refinancing transaction that is not a
cash-out refinancing.
Refinancing transaction means:
(1) A closed-end credit transaction
secured by a one-to-four family property
that is entered into by the borrower that
satisfies and replaces an existing credit
transaction that was entered into by the
same borrower and that is secured by
the same one-to-four family property; or
(2) A closed-end credit transaction
secured by the borrower’s principal
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dwelling on which there are no existing
liens.
Reverse mortgage means a
nonrecourse consumer credit
transaction in which:
(1) A mortgage, deed of trust, or
equivalent consensual security interest
securing one or more advances is
created in the borrower’s principal
dwelling; and
(2) Any principal, interest, or shared
appreciation or equity is due and
payable (other than in the case of
default) only after:
(i) The borrower dies;
(ii) The dwelling is transferred; or
(iii) The borrower ceases to occupy
the one-to-four family property as a
principal dwelling.
Total loan amount means the amount
financed, as determined according to 12
CFR 226.18(b), less any cost listed in
paragraphs (3), (4) and (5) of the
definition of ‘‘points of fees’’ that is both
included in the definition of points and
fees and financed by the creditor.
(b) Exemption. A sponsor shall be
exempt from the risk retention
requirements in subpart B of this part
with respect to any securitization
transaction, if:
(1) All of the securitized assets that
collateralize the asset-backed securities
are qualified residential mortgages;
(2) None of the securitized assets that
collateralize the asset-backed securities
are other asset-backed securities;
(3) At the closing of the securitization
transaction, each qualified residential
mortgage collateralizing the assetbacked securities is currently
performing; and
(4)(i) The depositor of the assetbacked security certifies that it has
evaluated the effectiveness of its
internal supervisory controls with
respect to the process for ensuring that
all assets that collateralize the assetbacked security are qualified residential
mortgages and has concluded that its
internal supervisory controls are
effective;
(ii) The evaluation of the effectiveness
of the depositor’s internal supervisory
controls referenced in paragraph (b)(4)(i)
of this section shall be performed, for
each issuance of an asset-backed
security in reliance on this section, as of
a date within 60 days of the cut-off date
or similar date for establishing the
composition of the asset pool
collateralizing such asset-backed
security; and
(iii) The sponsor provides, or causes
to be provided, a copy of the
certification described in paragraph
(b)(4)(i) of this section to potential
investors a reasonable period of time
prior to the sale of asset-backed
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securities in the issuing entity, and,
upon request, to the Commission and its
appropriate Federal banking agency, if
any.
(c) Qualified residential mortgage.
The term ‘‘qualified residential
mortgage’’ means a closed-end credit
transaction to purchase or refinance a
one-to-four family property at least one
unit of which is the principal dwelling
of a borrower that:
(1) Meets all of the criteria in
paragraph (d) of this section; and
(2) Is not:
(i) Made to finance the initial
construction of a dwelling;
(ii) A reverse mortgage;
(iii) A temporary or ‘‘bridge’’ loan with
a term of twelve months or less, such as
a loan to purchase a new dwelling
where the borrower plans to sell a
current dwelling within twelve months;
or
(iv) A timeshare plan described in 11
U.S.C. 101(53D).
(d) Eligibility criteria—(1) First-lien
required. The mortgage transaction is
secured by a first lien:
(i) On the one-to-four family property
to be purchased or refinanced; and
(ii) That is perfected in accordance
with applicable law.
(2) Subordinate liens. If the mortgage
transaction is to purchase a one-to-four
family property, no other recorded or
perfected liens on the one-to-four family
property would exist, to the creditor’s
knowledge at the time of the closing of
the mortgage transaction, upon the
closing of that transaction.
(3) Original maturity. At the closing of
the mortgage transaction, the maturity
date of the mortgage transaction does
not exceed 30 years.
(4) Written Application. The borrower
completed and submitted to the creditor
a written application for the mortgage
transaction that, as supplemented or
amended prior to closing, includes an
acknowledgement by the borrower that
the information provided in the
application is true and correct as of the
date executed by the borrower and that
any intentional or negligent
misrepresentation of the information
provided in the application may result
in civil liability and/or criminal
penalties under 18 U.S.C. 1001.
(5) Credit history—(i) In general. The
creditor has verified and documented
that within ninety (90) days prior to the
closing of the mortgage transaction:
(A) The borrower is not currently 30
days or more past due, in whole or in
part, on any debt obligation;
(B) Within the previous twenty-four
(24) months, the borrower has not been
60 days or more past due, in whole or
in part, on any debt obligation; and
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(C) Within the previous thirty-six (36)
months:
(1) The borrower has not been a
debtor in a case commenced under
Chapter 7, Chapter 12, or Chapter 13 of
Title 11, United States Code, or been the
subject of any Federal or State judicial
judgment for the collection of any
unpaid debt;
(2) The borrower has not had any
personal property repossessed; and
(3) No one-to-four family property
owned by the borrower has been the
subject of any foreclosure, deed-in-lieu
of foreclosure, or short sale.
(ii) Safe harbor. A creditor will be
deemed to have met the requirements of
paragraph (d)(5)(i) of this section if:
(A) The creditor, no more than 90
days before the closing of the mortgage
transaction, obtains a credit report
regarding the borrower from at least two
consumer reporting agencies that
compile and maintain files on
consumers on a nationwide basis;
(B) Based on the information in such
credit reports, the borrower meets all of
the requirements of paragraph (d)(5)(i)
of this section, and no information in a
credit report subsequently obtained by
the creditor before the closing of the
mortgage transaction contains contrary
information; and
(C) The creditor maintains copies of
such credit reports in the loan file for
the mortgage transaction.
(6) Payment terms. Based on the terms
of the mortgage transaction at the
closing of the transaction:
(i) The regularly scheduled principal
and interest payments on the mortgage
transaction:
(A) Would not result in an increase of
the principal balance of the mortgage
transaction; and
(B) Do not allow the borrower to defer
payment of interest or repayment of
principal;
(ii) No scheduled payment of
principal and interest would be more
than twice as large as any earlier
scheduled payment of principal and
interest;
(iii) If the rate of interest applicable to
the mortgage transaction may increase
after the closing of the mortgage
transaction, any such increase may not
exceed:
(A) 2 percent (200 basis points) in any
twelve month period; and
(B) 6 percent (600 basis points) over
the life of the mortgage transaction; and
(iv) The mortgage transaction does not
include or provide for any prepayment
penalty.
(7) Points and fees. The total points
and fees payable by the borrower in
connection with the mortgage
transaction shall not exceed three
percent of the total loan amount.
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(8) Debt-to-income ratios—(i) In
general. The creditor has determined
that, as of a date that is no more than
60 days prior to the closing of the
mortgage transaction, the ratio of:
(A) The borrower’s monthly housing
debt to the borrower’s monthly gross
income does not exceed 28 percent; and
(B) The borrower’s total monthly debt
to the borrower’s monthly gross income
does not exceed 36 percent.
(ii) Applicable standards. For
purposes of determining the borrower’s
compliance with the ratios set forth in
paragraph (d)(8)(i) of this section, the
creditor shall:
(A) Verify, document, and determine
the borrower’s monthly gross income in
accordance with the effective income
standards established in the Additional
QRM Standards Appendix to this part;
and
(B) Except as provided in paragraph
(d)(8)(iii) of this section, verify,
document, and determine the
borrower’s monthly housing debt and
total monthly debt in accordance with
the standards established in the
Additional QRM Standards Appendix to
this part.
(iii) Housing debt. Notwithstanding
paragraph (d)(8)(ii)(B) of this section, for
purposes of determining the borrower’s
compliance with the ratios set forth in
paragraph (d)(8)(i) of this section, the
creditor shall:
(A) Determine the borrower’s monthly
periodic payment for principal and
interest on the mortgage transaction
and, if the mortgage transaction is a
refinancing transaction, any other credit
transaction (including any open-end
credit transaction as if fully drawn) that
to the creditor’s knowledge would exist
at the closing of the refinancing
transaction and that would be secured
by the one-to-four family property being
refinanced, based on:
(1) The maximum interest rate that is
permitted or required under any feature
(including any conversion or other
feature that allows a variable interest
rate to convert to a fixed interest rate)
of the relevant credit transaction
documents during the first five years
after the date on which the first regular
periodic payment will be due; and
(2) A payment schedule that fully
amortizes the mortgage transaction over
the term of the mortgage transaction;
and
(B) Include in the borrower’s monthly
housing debt and total monthly debt the
monthly pro rata amount of the
following, as applicable, with respect to
the one-to-four family property being
purchased or refinanced:
(1) Real estate taxes;
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(2) Hazard insurance, flood insurance,
mortgage guarantee insurance, and any
other required insurance;
(3) Homeowners’ and condominium
association dues;
(4) Ground rent or leasehold
payments; and
(5) Special assessments.
(9) Loan-to-value ratio—(i) Purchase
mortgages. If the mortgage transaction is
to purchase a one-to-four family
property, at the closing of the mortgage
transaction, the loan-to-value ratio of
the mortgage transaction does not
exceed 80 percent.
(ii) Rate and term refinancings. If the
mortgage transaction is a rate and term
refinancing, at the closing of the
mortgage transaction, the combined
loan-to-value ratio of the mortgage
transaction does not exceed 75 percent.
(iii) Cash-out refinancings. If the
mortgage transaction is a cash-out
refinancing, at the closing of the
mortgage transaction, the combined
loan-to-value ratio of the mortgage
transaction does not exceed 70 percent.
(10) Down payment. If the mortgage
transaction is for the purchase of a oneto-four family property:
(i) The borrower provides, at closing,
a cash down payment in an amount
equal to at least the sum of:
(A) The closing costs payable by the
borrower in connection with the
mortgage transaction;
(B) 20 percent of the lesser of:
(1) The estimated market value of the
one-to-four family property as
determined by a qualifying appraisal;
and
(2) The purchase price of the one-tofour family property to be paid in
connection with the mortgage
transaction; and
(C) The difference, if a positive
amount, between:
(1) The purchase price of the one-tofour family property to be paid in
connection with the mortgage
transaction; and
(2) The estimated market value of the
one-to-four family property as
determined by a qualifying appraisal;
(ii) The funds used by the borrower to
satisfy the down payment required by
paragraph (d)(10)(i) of this section:
(A) Must come solely from borrower
funds;
(B) May not be subject to any
contractual obligation by the borrower
to repay; and
(C) May not have been obtained by the
borrower from a person or entity with
an interest in the sale of the property
(other than the borrower); and
(iii) The creditor shall verify and
document the borrower’s compliance
with the conditions set forth in
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paragraphs (d)(10)(i) and (d)(10)(ii) of
this section.
(11) Appraisal. The creditor obtained
a written appraisal of the property
securing the mortgage that was
performed not more than 90 days prior
to the closing of the mortgage
transaction by an appropriately statecertified or state-licensed appraiser that
conforms to generally accepted
appraisal standards as evidenced by the
Uniform Standards of Professional
Appraisal Practice (USPAP)
promulgated by the Appraisal Standards
Board (ASB) of the Appraisal
Foundation, the appraisal requirements
of the Federal banking agencies, and
applicable laws.
(12) Assumability. The mortgage
transaction is not assumable by any
person that was not a borrower under
the mortgage transaction at closing.
(13) Default mitigation. The mortgage
originator—
(i) Includes terms in the mortgage
transaction documents under which the
creditor commits to have servicing
policies and procedures under which
the creditor shall—
(A) Mitigate risk of default on the
mortgage loan by taking loss mitigation
actions, such as loan modification or
other loss mitigation alternative, in the
event the estimated resulting net present
value of such action exceeds the
estimated net present value of recovery
through foreclosure, without regard to
whether the particular action benefits
the interests of a particular class of
investors in a securitization;
(B) Take into account the borrower’s
ability to repay and other appropriate
underwriting criteria in such loss
mitigation actions;
(C) Initiate loss mitigation activities
within 90 days after the mortgage loan
becomes delinquent (if the delinquency
has not been cured);
(D) Implement or maintain servicing
compensation arrangements consistent
with the obligations under paragraphs
(d)(13)(i)(A), (B), and (C) of this section;
(E) Implement procedures for
addressing any whole loan owned by
the creditor (or any of its affiliates) and
secured by a subordinate lien on the
same property that secures the first
mortgage loan if the borrower becomes
more than 90 days past due on the first
mortgage loan;
(F) If the first mortgage loan will
collateralize any asset-backed securities,
disclose or require to be disclosed to
potential investors within a reasonable
period of time prior to the sale of the
asset-backed securities a description of
the procedures to be implemented
pursuant to paragraph (d)(13)(i)(E) of
this section; and
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(G) Not sell, transfer or assign
servicing rights for the mortgage loan
unless the agreement requires the
purchaser, transferee or assignee
servicer to abide by the default
mitigation commitments of the creditor
under this paragraph (d)(13)(i) as if the
purchaser, transferee or assignee were
the creditor under this section.
(ii) Provides disclosure of the
foregoing default mitigation
commitments to the borrower at or prior
to the closing of the mortgage
transaction.
(e) Repurchase of loans subsequently
determined to be non-qualified after
closing. A sponsor that has relied on the
exemption provided in paragraph (b) of
this section with respect to a
securitization transaction shall not lose
such exemption with respect to such
transaction if, after closing of the
securitization transaction, it is
determined that one or more of the
residential mortgage loans
collateralizing the asset-backed
securities does not meet all of the
criteria to be a qualified residential
mortgage provided that:
(1) The depositor complied with the
certification requirement set forth in
paragraph (b)(4) of this section;
(2) The sponsor repurchases the
loan(s) from the issuing entity at a price
at least equal to the remaining aggregate
unpaid principal balance and accrued
interest on the loan(s) no later than 90
days after the determination that the
loans do not satisfy the requirements to
be a qualified residential mortgage; and
(3) The sponsor promptly notifies, or
causes to be notified, the holders of the
asset-backed securities issued in the
securitization transaction of any loan(s)
included in such securitization
transaction that is (or are) required to be
repurchased by the sponsor pursuant to
paragraph (e)(2) of this section,
including the amount of such
repurchased loan(s) and the cause for
such repurchase.
§ __.16 Definitions applicable to
qualifying commercial mortgages,
commercial loans, and auto loans.
The following definitions apply for
purposes of §§ __.17 through __.20 of
this part:
Appraisal Standards Board means the
board of the Appraisal Foundation that
establishes generally accepted standards
for the appraisal profession.
Automobile loan:
(1) Means any loan to an individual
to finance the purchase of, and is
secured by a first lien on, a passenger
car or other passenger vehicle, such as
a minivan, van, sport-utility vehicle,
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pickup truck, or similar light truck for
personal, family, or household use; and
(2) Does not include any:
(i) Loan to finance fleet sales;
(ii) Personal cash loan secured by a
previously purchased automobile;
(iii) Loan to finance the purchase of
a commercial vehicle or farm equipment
that is not used for personal, family, or
household purposes;
(iv) Lease financing; or
(v) Loan to finance the purchase of a
vehicle with a salvage title.
Combined loan-to-value (CLTV) ratio
means, at the time of origination, the
sum of the principal balance of a firstlien mortgage loan on the property, plus
the principal balance of any junior-lien
mortgage loan that, to the creditor’s
knowledge, would exist at the closing of
the transaction and that is secured by
the same property, divided by:
(1) For acquisition funding, the lesser
of the purchase price or the estimated
market value of the real property based
on an appraisal that meets the
requirements set forth in § __.19(b)(2)(ii)
of this part; or
(2) For refinancing, the estimated
market value of the real property based
on an appraisal that meets the
requirements set forth in § __.19(b)(2)(ii)
of this part.
Commercial loan means a secured or
unsecured loan to a company or an
individual for business purposes, other
than any:
(1) Loan to purchase or refinance a
one-to-four family residential property;
(2) Loan for the purpose of financing
agricultural production; or
(3) Loan for which the primary source
(fifty (50) percent or more) of repayment
is expected to be derived from rents
collected from persons or firms that are
not affiliates of the borrower.
Commercial real estate (CRE) loan:
(1) Means a loan secured by a
property with five or more single family
units, or by nonfarm nonresidential real
property, the primary source (fifty (50)
percent or more) of repayment for which
is expected to be derived from:
(i) The proceeds of the sale,
refinancing, or permanent financing of
the property; or
(ii) Rental income associated with the
property other than rental income
derived from any affiliate of the
borrower; and
(2) Does not include:
(i) A land development and
construction loan (including 1- to
4-family residential or commercial
construction loans);
(ii) Any other land loan;
(iii) A loan to a real estate investment
trusts (REITs); or
(iv) An unsecured loan to a developer.
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Debt service coverage (DSC) ratio
means:
(1) For qualifying leased CRE loans,
qualifying multi-family loans, and other
CRE loans, the ratio of:
(i) The annual NOI less the annual
replacement reserve of the CRE property
at the time of origination of the CRE
loans; to
(ii) The sum of the borrower’s annual
payments for principal and interest on
any debt obligation.
(2) For commercial loans, the ratio of:
(i) The borrower’s EBITDA as of the
most recently completed fiscal year; to
(ii) The sum of the borrower’s annual
payments for principal and interest on
any debt obligation.
Debt to income (DTI) ratio means the
ratio of:
(1) The borrower’s total debt (for
automobile loans), including the
monthly amount due on the automobile
loan; to
(2) The borrower’s monthly income.
Earnings before interest, taxes,
depreciation, and amortization
(EBITDA) means the annual income of
a business before expenses for interest,
taxes, depreciation and amortization, as
determined in accordance with U.S.
Generally Accepted Accounting
Principles (GAAP).
Environmental risk assessment means
a process for determining whether a
property is contaminated or exposed to
any condition or substance that could
result in contamination that has an
adverse effect on the market value of the
property or the realization of the
collateral value.
First lien means a lien or
encumbrance on property that has
priority over all other liens or
encumbrances on the property.
Junior lien means a lien or
encumbrance on property that is lower
in priority relative to other liens or
encumbrances on the property.
Leverage ratio means the ratio of:
(1) The borrower’s total debt (for
commercial loans); to
(2) The borrower’s EBITDA.
Machinery and equipment (M&E)
collateral means collateral for a
commercial loan that consists of
machinery and equipment that is
identifiable by make, model, and serial
number.
Model year means the year
determined by the manufacturer and
reflected on the vehicle’s Motor Vehicle
Title as part of the vehicle description.
Net operating income (NOI) refers to
the income a CRE property generates
after all expenses have been deducted
for federal income tax purposes, except
for depreciation, debt service expenses,
and federal and state income taxes, and
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excluding any unusual and
nonrecurring items of income.
New vehicle means any vehicle that:
(1) Is not a used vehicle; and
(2) Has not been previously sold to an
end user.
Payment-in-kind (PIK) means
payments of principal or accrued
interest that are not paid in cash when
due, and instead are paid by increasing
the principal or by providing shares or
stock in the borrowing company. A PIK
loan is a type of loan that typically does
not provide for any cash payments of
principal or interest from the borrower
to the lender between the drawdown
date and the maturity or refinancing
date.
Purchase price means:
(1) For a new vehicle, the amount
paid by the borrower for the new
vehicle net of any incentive payments or
manufacturer cash rebates; and
(2) For a vehicle other than a new
vehicle, the lesser of:
(i) The purchase price as would be
determined for a new vehicle; or
(ii) The retail value of the used
vehicle, as determined by a nationally
recognized automobile pricing agency
and based on the manufacturer, year,
model, features, and condition of the
vehicle.
Qualified tenant means
(1) A tenant with a triple net lease
who has satisfied all obligations with
respect to the property in a timely
manner; or
(2) A tenant who originally had a
triple net lease that subsequently
expired and currently is leasing the
property on a month-to-month basis, has
occupied the property for at least three
years prior to the date of origination,
and has satisfied all obligations with
respect to the property in a timely
manner.
Qualifying leased CRE loan means a
CRE loan secured by commercial
nonfarm real property, other than a
multi-family property or a hotel, inn, or
similar property:
(1) That is occupied by one or more
qualified tenants pursuant to a lease
agreement with a term of no less than
one (1) month; and
(2) Where no more than 20 percent of
the aggregate gross revenue of the
property is payable from one or more
tenants who:
(i) Are subject to a lease that will
terminate within six months following
the date of origination; or
(ii) Are not qualified tenants.
Qualifying multi-family loan:
(1) Means a CRE loan secured by any
residential property (other than a hotel,
motel, inn, hospital, nursing home, or
other similar facility where dwellings
are not leased to residents):
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(i) That consists of five or more
dwelling units (including apartment
buildings, condominiums, cooperatives
and other similar structures) primarily
for residential use; and
(ii) Where at least seventy-five (75)
percent of the NOI is derived from
residential rents and tenant amenities
(including income from parking garages,
health or swim clubs, and dry cleaning),
and not from other commercial uses.
Replacement reserve means the
monthly capital replacement or
maintenance amount based on the
property type, age, construction and
condition of the property that is
adequate to maintain the physical
condition and NOI of the property.
Salvage title means a form of vehicle
title branding, which notes that the
vehicle has been severely damaged and/
or deemed a total loss and
uneconomical to repair by an insurance
company that paid a claim on the
vehicle.
Total debt, with respect to a borrower,
means:
(1) In the case of an automobile loan,
the sum of:
(i) All monthly housing payments
(rent- or mortgage-related, including
property taxes, insurance and home
owners association fees); and
(ii) Any of the following that are
dependent upon the borrower’s income
for payment:
(A) Monthly payments on other debt
and lease obligations, such as credit
card loans or installment loans,
including the monthly amount due on
the automobile loan;
(B) Estimated monthly amortizing
payments for any term debt, debts with
other than monthly payments and debts
not in repayment (such as deferred
student loans, interest-only loans); and
(C) Any required monthly alimony,
child support or court-ordered
payments; and
(2) In the case of a commercial loan,
the outstanding balance of all long-term
debt (obligations that have a remaining
maturity of more than one year) and the
current portion of all debt that matures
in one year or less.
Total liabilities ratio means the ratio
of:
(1) The borrower’s total liabilities,
determined in accordance with U.S.
GAAP; to
(2) The sum of the borrower’s total
liabilities and equity, less the borrower’s
intangible assets, with each component
determined in accordance with U.S.
GAAP.
Trade-in allowance means the amount
a vehicle purchaser is given as a credit
at the purchase of a vehicle for the fair
exchange of the borrower’s existing
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vehicle to compensate the dealer for
some portion of the vehicle purchase
price, except that such amount shall not
exceed the trade-in value of the used
vehicle, as determined by a nationally
recognized automobile pricing agency
and based on the manufacturer, year,
model, features, and condition of the
vehicle.
Triple net lease means a lease
pursuant to which the lessee is required
to pay rent as well as all taxes,
insurance, and maintenance expenses
associated with the property.
Uniform Standards of Professional
Appraisal Practice (USPAP) means the
standards issued by the Appraisal
Standards Board for the performance of
an appraisal, an appraisal review, or an
appraisal consulting assignment.
Used vehicle:
(1) Means any vehicle driven more
than the limited use necessary in
transporting or road testing the vehicle
prior to the initial sale of the vehicle;
and
(2) Does not include any vehicle sold
only for scrap or parts (title documents
surrendered to the State and a salvage
certificate issued).
§ __.17 Exceptions for qualifying
commercial loans, commercial
mortgages, and auto loans.
The risk retention requirements in
subpart B of this part shall not apply to
securitization transactions that satisfy
the standards provided in §§ __.18,
__.19, or __.20 of this part.
§ __.18 Underwriting standards for
qualifying commercial loans.
(a) General. The securitization
transaction––
(1) Is collateralized solely (excluding
cash and cash equivalents) by one or
more commercial loans, each of which
meets all of the requirements of
paragraph (b) of this section; and
(2) Does not permit reinvestment
periods.
(b) Underwriting, product and other
standards. (1) Prior to origination of the
commercial loan, the originator:
(i) Verified and documented the
financial condition of the borrower:
(A) As of the end of the borrower’s
two most recently completed fiscal
years; and
(B) During the period, if any, since the
end of its most recently completed fiscal
year;
(ii) Conducted an analysis of the
borrower’s ability to service its overall
debt obligations during the next two
years, based on reasonable projections;
(iii) Determined that, based on the
previous two years’ actual performance,
the borrower had:
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(A) A total liabilities ratio of 50
percent or less;
(B) A leverage ratio of 3.0 or less; and
(C) A DSC ratio of 1.5 or greater;
(iv) Determined that, based on the two
years of projections, which include the
new debt obligation, following the
closing date of the loan, the borrower
will have:
(A) A total liabilities ratio of 50
percent or less;
(B) A leverage ratio of 3.0 or less;
(C) A DSC ratio of 1.5 or greater; and
(v) If the loan is originated on a
secured basis, obtained a first-lien
security interest on all of the property
pledged to collateralize the loan.
(2) The loan documentation for the
commercial loan includes covenants
that:
(i) Require the borrower to provide to
the originator or subsequent holder, and
the servicer, of the commercial loan the
borrower’s financial statements and
supporting schedules on an ongoing
basis, but not less frequently than
quarterly;
(ii) Prohibit the borrower from
retaining or entering into a debt
arrangement that permits payments-inkind;
(iii) Impose limits on:
(A) The creation or existence of any
other security interest with respect to
any of the borrower’s property;
(B) The transfer of any of the
borrower’s assets; and
(C) Any change to the name, location
or organizational structure of the
borrower, or any other party that
pledges collateral for the loan;
(iv) Require the borrower and any
other party that pledges collateral for
the loan to:
(A) Maintain insurance that protects
against loss on any collateral for the
commercial loan at least up to the
amount of the loan, and that names the
originator or any subsequent holder of
the loan as an additional insured or loss
payee;
(B) Pay taxes, charges, fees, and
claims, where non-payment might give
rise to a lien on any collateral;
(C) Take any action required to perfect
or protect the security interest of the
originator or any subsequent holder of
the loan in the collateral for the
commercial loan or the priority thereof,
and to defend the collateral against
claims adverse to the lender’s interest;
(D) Permit the originator or any
subsequent holder of the loan, and the
servicer of the loan, to inspect the
collateral for the commercial loan and
the books and records of the borrower;
and
(E) Maintain the physical condition of
any collateral for the commercial loan.
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(3) Loan payments required under the
loan agreement are:
(i) Based on straight-line amortization
of principal and interest that fully
amortize the debt over a term that does
not exceed five years from the date of
origination; and
(ii) To be made no less frequently
than quarterly over a term that does not
exceed five years.
(4) The primary source of repayment
for the loan is revenue from the business
operations of the borrower.
(5) The loan was funded within the
six (6) months prior to the closing of the
securitization transaction.
(6) At the closing of the securitization
transaction, all payments due on the
loan are contractually current.
(7) (i) The depositor of the assetbacked security certifies that it has
evaluated the effectiveness of its
internal supervisory controls with
respect to the process for ensuring that
all assets that collateralize the assetbacked security meet all of the
requirements set forth in paragraphs
(b)(1) through (b)(6) of this section and
has concluded that its internal
supervisory controls are effective;
(ii) The evaluation of the effectiveness
of the depositor’s internal supervisory
controls referenced in paragraph (b)(7)(i)
of this section shall be performed, for
each issuance of an asset-backed
security, as of a date within 60 days of
the cut-off date or similar date for
establishing the composition of the asset
pool collateralizing such asset-backed
security; and
(iii) The sponsor provides, or causes
to be provided, a copy of the
certification described in paragraph
(b)(7)(i) of this section to potential
investors a reasonable period of time
prior to the sale of asset-backed
securities in the issuing entity, and,
upon request, to its appropriate Federal
banking agency, if any.
(c) Buy-back requirement. A sponsor
that has relied on the exception
provided in paragraph (a) of this section
with respect to a securitization
transaction shall not lose such
exception with respect to such
transaction if, after the closing of the
securitization transaction, it is
determined that one or more of the
loans collateralizing the asset-backed
securities did not meet all of the
requirements set forth in paragraphs
(b)(1) through (b)(6) of this section
provided that:
(1) The depositor complied with the
certification requirement set forth in
paragraph (b)(7) of this section;
(2) The sponsor repurchases the
loan(s) from the issuing entity at a price
at least equal to the remaining principal
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balance and accrued interest on the
loan(s) no later than ninety (90) days
after the determination that the loans do
not satisfy all of the requirements of
paragraphs (b)(1) through (b)(6) of this
section; and
(3) The sponsor promptly notifies, or
causes to be notified, the holders of the
asset-backed securities issued in the
securitization transaction of any loan(s)
included in such securitization
transaction that is required to be
repurchased by the sponsor pursuant to
paragraph (c)(2) of this section,
including the principal amount of such
repurchased loan(s) and the cause for
such repurchase.
§ __.19 Underwriting standards for
qualifying CRE loans.
(a) General. The securitization
transaction is collateralized solely
(excluding cash and cash equivalents)
by one or more CRE loans, each of
which meets all of the requirements of
paragraph (b) of this section.
(b) Underwriting, product and other
standards.(1) The CRE loan must be
secured by a first lien on the
commercial real estate.
(2) Prior to origination of the CRE
loan, the originator:
(i) Verified and documented the
current financial condition of the
borrower;
(ii) Obtained a written appraisal of the
real property securing the loan that:
(A) Was performed not more than six
months from the origination date of the
loan by an appropriately state-certified
or state-licensed appraiser;
(B) Conforms to generally accepted
appraisal standards as evidenced by the
Uniform Standards of Professional
Appraisal Practice (USPAP)
promulgated by the Appraisal Standards
Board and the appraisal requirements of
the Federal banking agencies (OCC: 12
CFR part 34, subpart C; FRB: 12 CFR
part 208, subpart E, and 12 CFR part
225, subpart G; and FDIC: 12 CFR part
323); and
(C) Provides an ‘‘as is’’ opinion of the
market value of the real property, which
includes an income valuation approach
that uses a discounted cash flow
analysis;
(iii) Qualified the borrower for the
CRE loan based on a monthly payment
amount derived from a straight-line
amortization of principal and interest
over the term of the loan (but not
exceeding 20 years);
(iv) Conducted an environmental risk
assessment to gain environmental
information about the property securing
the loan and took appropriate steps to
mitigate any environmental liability
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determined to exist based on this
assessment;
(v) Conducted an analysis of the
borrower’s ability to service its overall
debt obligations during the next two
years, based on reasonable projections;
(vi) Determined that, based on the
previous two years’ actual performance,
the borrower had:
(A) A DSC ratio of 1.5 or greater, if the
loan is a qualifying leased CRE loan, net
of any income derived from a tenant(s)
who is not a qualified tenant(s);
(B) A DSC ratio of 1.5 or greater, if the
loan is a qualifying multi-family
property loan; or
(C) A DSC ratio of 1.7 or greater, if the
loan is any other type of CRE loan;
(vii) Determined that, based on two
years of projections, which include the
new debt obligation, following the
origination date of the loan, the
borrower will have:
(A) A DSC ratio of 1.5 or greater, if the
loan is a qualifying leased CRE loan, net
of any income derived from a tenant(s)
who is not a qualified tenant(s);
(B) A DSC ratio of 1.5 or greater, if the
loan is a qualifying multi-family
property loan; or
(C) A DSC ratio of 1.7 or greater, if the
loan is any other type of CRE loan.
(3) The loan documentation for the
CRE loan includes covenants that:
(i) Require the borrower to provide to
the originator and any subsequent
holder of the commercial loan, and the
servicer, the borrower’s financial
statements and supporting schedules on
an ongoing basis, but not less frequently
than quarterly, including information on
existing, maturing and new leasing or
rent-roll activity for the property
securing the loan, as appropriate; and
(ii) Impose prohibitions on:
(A) The creation or existence of any
other security interest with respect to
any collateral for the CRE loan;
(B) The transfer of any collateral
pledged to support the CRE loan; and
(C) Any change to the name, location
or organizational structure of the
borrower, or any other party that
pledges collateral for the loan;
(iii) Require the borrower and any
other party that pledges collateral for
the loan to:
(A) Maintain insurance that protects
against loss on any collateral for the
CRE loan, at least up to the amount of
the loan, and names the originator or
any subsequent holder of the loan as an
additional insured or loss payee;
(B) Pay taxes, charges, fees, and
claims, where non-payment might give
rise to a lien on any collateral for the
CRE loan;
(C) Take any action required to perfect
or protect the security interest of the
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originator or any subsequent holder of
the loan in the collateral for the CRE
loan or the priority thereof, and to
defend such collateral against claims
adverse to the originator’s or subsequent
holder’s interest;
(D) Permit the originator or any
subsequent holder of the loan, and the
servicer, to inspect the collateral for the
CRE loan and the books and records of
the borrower or other party relating to
the collateral for the CRE loan;
(E) Maintain the physical condition of
the collateral for the CRE loan;
(F) Comply with all environmental,
zoning, building code, licensing and
other laws, regulations, agreements,
covenants, use restrictions, and proffers
applicable to the collateral;
(G) Comply with leases, franchise
agreements, condominium declarations,
and other documents and agreements
relating to the operation of the
collateral, and to not modify any
material terms and conditions of such
agreements over the term of the loan
without the consent of the originator or
any subsequent holder of the loan, or
the servicer; and
(H) Not materially alter the collateral
for the CRE loan without the consent of
the originator or any subsequent holder
of the loan, or the servicer.
(4) The loan documentation for the
CRE loan prohibits the borrower from
obtaining a loan secured by a junior lien
on any property that serves as collateral
for the CRE loan, unless such loan
finances the purchase of machinery and
equipment and the borrower pledges
such machinery and equipment as
additional collateral for the CRE loan.
(5) The CLTV ratio for the loan is:
(i) Less than or equal to 65 percent;
or
(ii) Less than or equal to 60 percent,
if the capitalization rate used in an
appraisal that meets the requirements
set forth in paragraph (b)(2)(ii) of this
section is less than or equal to the sum
of:
(A) The 10-year swap rate, as reported
in the Federal Reserve Board H.15
Report as of the date concurrent with
the effective date of an appraisal that
meets the requirements set forth in
paragraph (b)(2)(ii) of this section; and
(B) 300 basis points.
(6) All loan payments required to be
made under the loan agreement are:
(i) Based on straight-line amortization
of principal and interest over a term that
does not exceed 20 years; and
(ii) To be made no less frequently
than monthly over a term of at least ten
years.
(7) Under the terms of the loan
agreement:
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(i) Any maturity of the note occurs no
earlier than ten years following the date
of origination;
(ii) The borrower is not permitted to
defer repayment of principal or payment
of interest; and
(iii) The interest rate on the loan is:
(A) A fixed interest rate; or
(B) An adjustable interest rate and the
borrower, prior to or concurrently with
origination of the CRE loan, obtained a
derivative that effectively results in a
fixed interest rate.
(8) The originator does not establish
an interest reserve at origination to fund
all or part of a payment on the loan.
(9) At the closing of the securitization
transaction, all payments due on the
loan are contractually current.
(10) (i) The depositor of the assetbacked security certifies that it has
evaluated the effectiveness of its
internal supervisory controls with
respect to the process for ensuring that
all assets that collateralize the assetbacked security meet all of the
requirements set forth in paragraphs
(b)(1) through (9) of this section and has
concluded that its internal supervisory
controls are effective;
(ii) The evaluation of the effectiveness
of the depositor’s internal supervisory
controls referenced in paragraph
(b)(10)(i) of this section shall be
performed, for each issuance of an assetbacked security, as of a date within 60
days of the cut-off date or similar date
for establishing the composition of the
asset pool collateralizing such assetbacked security; and
(iii) The sponsor provides, or causes
to be provided, a copy of the
certification described in paragraph
(b)(10)(i) of this section to potential
investors a reasonable period of time
prior to the sale of asset-backed
securities in the issuing entity, and,
upon request, to its appropriate Federal
banking agency, if any.
(c) Buy-back requirement. A sponsor
that has relied on the exception
provided in paragraph (a) of this section
with respect to a securitization
transaction shall not lose such
exception with respect to such
transaction if, after the closing of the
securitization transaction, it is
determined that one or more of the CRE
loans collateralizing the asset-backed
securities did not meet all of the
requirements set forth in paragraphs
(b)(1) through (b)(9) of this section
provided that:
(1) The depositor has complied with
the certification requirement set forth in
paragraph (b)(10) of this section;
(2) The sponsor repurchases the
loan(s) from the issuing entity at a price
at least equal to the remaining principal
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balance and accrued interest on the
loan(s) no later than ninety (90) days
after the determination that the loans do
not satisfy all of the requirements of
paragraphs (b)(1) through (b)(9) of this
section; and
(3) The sponsor promptly notifies, or
causes to be notified, the holders of the
asset-backed securities issued in the
securitization transaction of any loan(s)
included in such securitization
transaction that is required to be
repurchased by the sponsor pursuant to
paragraph (c)(2) of this section,
including the principal amount of such
repurchased loan(s) and the cause for
such repurchase.
§ __.20 Underwriting standards for
qualifying auto loans.
(a) General. The securitization
transaction is collateralized solely
(excluding cash and cash equivalents)
by one or more automobile loans, each
of which meets all of the requirements
of paragraph (b) of this section.
(b) Underwriting, product and other
standards. (1) Prior to origination of the
automobile loan, the originator:
(i) Verified and documented that
within 30 days of the date of
origination:
(A) The borrower was not currently 30
days or more past due, in whole or in
part, on any debt obligation;
(B) Within the previous twenty-four
(24) months, the borrower has not been
60 days or more past due, in whole or
in part, on any debt obligation;
(C) Within the previous thirty-six (36)
months, the borrower has not:
(1) Been a debtor in a proceeding
commenced under Chapter 7
(Liquidation), Chapter 11
(Reorganization), Chapter 12 (Family
Farmer or Family Fisherman plan), or
Chapter 13 (Individual Debt
Adjustment) of the U.S. Bankruptcy
Code; or
(2) Been the subject of any Federal or
State judicial judgment for the
collection of any unpaid debt;
(D) Within the previous thirty-six (36)
months, no one-to-four family property
owned by the borrower has been the
subject of any foreclosure, deed in lieu
of foreclosure, or short sale; or
(E) Within the previous thirty-six (36)
months, the borrower has not had any
personal property repossessed;
(ii) Determined and documented that,
upon the origination of the loan, the
borrower’s DTI ratio is less than or equal
to thirty-six (36) percent. For the
purpose of making the determination
under paragraph (b)(1)(ii) of this section,
the originator must:
(A) Verify and document all income
of the borrower that the originator
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includes in the borrower’s effective
monthly income (using payroll stubs,
tax returns, profit and loss statements,
or other similar documentation); and
(B) On or after the date of the
borrower’s written application and prior
to origination, obtain a credit report
regarding the borrower from a consumer
reporting agency that compiles and
maintain files on consumers on a
nationwide basis (within the meaning of
15 U.S.C. 1681a(p)) and verify that all
outstanding debts reported in the
borrower’s credit report are
incorporated into the calculation of the
borrower’s DTI ratio under paragraph
(b)(1)(ii) of this section;
(2) An originator will be deemed to
have met the requirements of paragraph
(b)(1)(i) of this section if:
(i) The originator, no more than 90
days before the closing of the loan,
obtains a credit report regarding the
borrower from at least two consumer
reporting agencies that compile and
maintain files on consumers on a
nationwide basis (within the meaning of
15 U.S.C. 1681a(p));
(ii) Based on the information in such
credit reports, the borrower meets all of
the requirements of paragraph (b)(1)(i)
of this section, and no information in a
credit report subsequently obtained by
the originator before the closing of the
mortgage transaction contains contrary
information; and
(iii) The originator obtains electronic
or hard copies of such credit reports.
(3) At closing of the automobile loan,
the borrower makes a down payment
from the borrower’s personal funds and
trade-in allowance, if any, that is at least
equal to the sum of:
(i) The full cost of the vehicle title,
tax, and registration fees;
(ii) Any dealer-imposed fees; and
(iii) 20 percent of the vehicle
purchase price.
(4) The transaction documents require
the originator, subsequent holder of the
loan, or an agent of the originator or
subsequent holder of the loan to
maintain physical possession of the title
for the vehicle until the loan is repaid
in full and the borrower has otherwise
satisfied all obligations under the terms
of the loan agreement.
(5) If the loan is for a new vehicle, the
terms of the loan agreement provide a
maturity date for the loan that does not
exceed 5 years from the date of
origination.
(6) If the loan is for a vehicle other
than a new vehicle, the term of the loan
(as set forth in the loan agreement) plus
the difference between the current
model year and the vehicle’s model year
does not exceed 5 years.
(7) The terms of the loan agreement:
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(i) Specify a fixed rate of interest for
the life of the loan;
(ii) Provide for a monthly payment
amount that:
(A) Is based on straight-line
amortization of principal and interest
over the term of the loan; and
(B) Do not permit the borrower to
defer repayment of principal or payment
of interest; and
(C) Require the borrower to make the
first payment on the automobile loan
within 45 days of the date of
origination.
(8) At the closing of the securitization
transaction, all payments due on the
loan are contractually current; and
(9) (i) The depositor of the assetbacked security certifies that it has
evaluated the effectiveness of its
internal supervisory controls with
respect to the process for ensuring that
all assets that collateralize the assetbacked security meet all of the
requirements set forth in paragraphs
(b)(1) through (b)(8) of this section and
has concluded that its internal
supervisory controls are effective;
(ii) The evaluation of the effectiveness
of the depositor’s internal supervisory
controls referenced in paragraph (b)(9)(i)
of this section shall be performed, for
each issuance of an asset-backed
security, as of a date within 60 days of
the cut-off date or similar date for
establishing the composition of the asset
pool collateralizing such asset-backed
security; and
(iii) The sponsor provides, or causes
to be provided, a copy of the
certification described in paragraph
(b)(9)(i) of this section to potential
investors a reasonable period of time
prior to the sale of asset-backed
securities in the issuing entity, and,
upon request, to its appropriate Federal
banking agency, if any.
(c) Buy-back requirement. A sponsor
that has relied on the exception
provided in this paragraph (a) of this
section with respect to a securitization
transaction shall not lose such
exception with respect to such
transaction if, after the closing of the
securitization transaction, it is
determined that one or more of the
automobile loans collateralizing the
asset-backed securities did not meet all
of the requirements set forth in
paragraphs (b)(1) through (b)(8) of this
section provided that:
(1) The depositor has complied with
the certification requirement set forth in
paragraph (b)(9) of this section;
(2) The sponsor repurchases the
loan(s) from the issuing entity at a price
at least equal to the remaining principal
balance and accrued interest on the
loan(s) no later than 90 days after the
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determination that the loans do not
satisfy all of the requirements of
paragraphs (b)(1) through (b)(8) of this
section; and
(3) The sponsor promptly notifies, or
causes to be notified, the holders of the
asset-backed securities issued in the
securitization transaction of any loan(s)
included in such securitization
transaction that is required to be
repurchased by the sponsor pursuant to
paragraph (c)(2) of this section,
including the principal amount of such
repurchased loan(s) and the cause for
such repurchase.
§ l.21
General exemptions.
(a) This part shall not apply to:
(1) Any securitization transaction
that:
(i) Is collateralized solely (excluding
cash and cash equivalents) by
residential, multifamily, or health care
facility mortgage loan assets that are
insured or guaranteed as to the payment
of principal and interest by the United
States or an agency of the United States;
or
(ii) Involves the issuance of assetbacked securities that:
(A) Are insured or guaranteed as to
the payment of principal and interest by
the United States or an agency of the
United States; and
(B) Are collateralized solely
(excluding cash and cash equivalents)
by residential, multifamily, or health
care facility mortgage loan assets or
interests in such assets.
(2) Any securitization transaction that
is collateralized solely (excluding cash
and cash equivalents) by loans or other
assets made, insured, guaranteed, or
purchased by any institution that is
subject to the supervision of the Farm
Credit Administration, including the
Federal Agricultural Mortgage
Corporation;
(3) Any asset-backed security that is a
security issued or guaranteed by any
State of the United States, or by any
political subdivision of a State or
territory, or by any public
instrumentality of a State or territory
that is exempt from the registration
requirements of the Securities Act of
1933 by reason of section 3(a)(2) of that
Act (15 U.S.C. 77c(a)(2)); and
(4) Any asset-backed security that
meets the definition of a qualified
scholarship funding bond, as set forth in
section 150(d)(2) of the Internal
Revenue Code of 1986 (26 U.S.C.
150(d)(2)).
(5) Any securitization transaction
that:
(i) Is collateralized solely (other than
cash and cash equivalents) by existing
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asset-backed securities issued in a
securitization transaction:
(A) For which credit risk was retained
as required under subpart B of this part;
or
(B) That was exempted from the credit
risk retention requirements of this part
pursuant to subpart D of this part;
(ii) Is structured so that it involves the
issuance of only a single class of ABS
interests; and
(iii) Provides for the pass-through of
all principal and interest payments
received on the underlying ABS (net of
expenses of the issuing entity) to the
holders of such class.
(b) This part shall not apply to any
securitization transaction if the assetbacked securities issued in the
transaction are:
(1) Collateralized solely (excluding
cash and cash equivalents) by
obligations issued by the United States
or an agency of the United States;
(2) Collateralized solely (excluding
cash and cash equivalents) by assets that
are fully insured or guaranteed as to the
payment of principal and interest by the
United States or an agency of the United
States (other than those referred to in
paragraph (a)(1)(i) of this section); or
(3) Fully guaranteed as to the timely
payment of principal and interest by the
United States or any agency of the
United States;
(c) Rule of construction.
Securitization transactions involving the
issuance of asset-backed securities that
are either issued, insured, or guaranteed
by, or are collateralized by obligations
issued by, or loans that are issued,
insured, or guaranteed by, the Federal
National Mortgage Association, the
Federal Home Loan Mortgage
Corporation, or a Federal home loan
bank shall not on that basis qualify for
exemption under this section.
§ l.22 Safe harbor for certain foreignrelated transactions.
(a) In general. This part shall not
apply to a securitization transaction if
all the following conditions are met:
(1) The securitization transaction is
not required to be and is not registered
under the Securities Act of 1933 (15
U.S.C. 77a et seq.);
(2) No more than 10 percent of the
dollar value by proceeds (or equivalent
if sold in a foreign currency) of all
classes of ABS interests sold in the
securitization transaction are sold to
U.S. persons or for the account or
benefit of U.S. persons;
(3) Neither the sponsor of the
securitization transaction nor the
issuing entity is:
(i) Chartered, incorporated, or
organized under the laws of the United
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States, any State of the United States,
the District of Columbia, Puerto Rico,
the Virgin Islands, or any other
possession of the United States (each of
the foregoing, a ‘‘U.S. jurisdiction’’);
(ii) An unincorporated branch or
office (wherever located) of an entity
chartered, incorporated, or organized
under the laws of a U.S. jurisdiction; or
(iii) An unincorporated branch or
office located in a U.S. jurisdiction of an
entity that is chartered, incorporated, or
organized under the laws of a
jurisdiction other than a U.S.
jurisdiction; and
(4) If the sponsor or issuing entity is
chartered, incorporated, or organized
under the laws of a jurisdiction other
than a U.S. jurisdiction, no more than
25 percent (as determined based on
unpaid principal balance) of the assets
that collateralize the ABS interests sold
in the securitization transaction were
acquired by the sponsor or issuing
entity, directly or indirectly, from:
(i) A consolidated affiliate of the
sponsor or issuing entity that is
chartered, incorporated, or organized
under the laws of a U.S. jurisdiction; or
(ii) An unincorporated branch or
office of the sponsor or issuing entity
that is located in a U.S. jurisdiction.
(b) Evasions prohibited. In view of the
objective of these rules and the policies
underlying Section 15G of the Exchange
Act, the safe harbor described in
paragraph (a) of this section is not
available with respect to any transaction
or series of transactions that, although
in technical compliance with such
paragraph (a), is part of a plan or
scheme to evade the requirements of
section 15G and this Regulation. In such
cases, compliance with section 15G and
this part is required.
§ l.23 Additional exemptions.
(a) Securitization transactions. The
federal agencies with rulewriting
authority under section 15G(b) of the
Exchange Act (15 U.S.C. 78o–11(b))
with respect to the type of assets
involved may jointly provide a total or
partial exemption of any securitization
transaction as such agencies determine
may be appropriate in the public
interest and for the protection of
investors.
(b) Exceptions, exemptions, and
adjustments. The Federal banking
agencies and the Commission, in
consultation with the Federal Housing
Finance Agency and the Department of
Housing and Urban Development, may
jointly adopt or issue exemptions,
exceptions or adjustments to the
requirements of this part, including
exemptions, exceptions or adjustments
for classes of institutions or assets in
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accordance with section 15G(e) of the
Exchange Act (15 U.S.C. 78o–11(e)).
Appendix A to Part ll—Additional
QRM Standards; Standards for
Determining Acceptable Sources of
Borrower Funds, Borrower’s Monthly
Gross Income, Monthly Housing Debt,
and Total Monthly Debt
I. Borrower Funds to Close
A. Cash and Savings/Checking
Accounts as Acceptable Sources of
Funds
1. Earnest Money Deposit
a. The lender must verify with
documentation, the deposit amount and
source of funds, if the amount of the
earnest money deposit:
i. Exceeds 2 percent of the sales price,
or
ii. Appears excessive based on the
borrower’s history of accumulating
savings. Satisfactory documentation
includes:
iii. A copy of the borrower’s cancelled
check
iv. Certification from the depositholder acknowledging receipt of funds,
or
v. Separate evidence of the source of
funds.
b. Separate evidence includes a
verification of deposit (VOD) or bank
statement showing that the average
balance was sufficient to cover the
amount of the earnest money deposit, at
the time of the deposit.
2. Savings and Checking Accounts
a. A VOD, along with the most recent
bank statement, may be used to verify
savings and checking accounts.
b. If there is a large increase in an
account, or the account was recently
opened, the lender must obtain from the
borrower a credible explanation of the
source of the funds.
3. Cash Saved at Home
a. Borrowers who have saved cash at
home and are able to adequately
demonstrate the ability to do so, are
permitted to have this money included
as an acceptable source of funds to close
the mortgage.
b. To include cash saved at home
when assessing the borrower’s cash
assets, the:
i. Money must be verified, whether
deposited in a financial institution, or
held by the escrow/title company, and
ii. Borrower must provide satisfactory
evidence of the ability to accumulate
such savings.
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4. Verifying Cash Saved at Home
Verifying the cash saved at home
assets requires the borrower to explain
in writing:
a. How the funds were accumulated,
and
b. The amount of time it took to
accumulate the funds.
The lender must determine the
reasonableness of the accumulation,
based on the:
c. Borrower’s income stream
d. Time period during which the
funds were saved
e. Borrower’s spending habits, and
f. Documented expenses and the
borrower’s history of using financial
institutions.
Note: Borrowers with checking and/or
savings accounts are less likely to save
money at home, than individuals with no
history of such accounts.
6. Requirements for Private Savings
Clubs
B. Investments as an Acceptable Source
of Funds
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Note: The actual receipt of funds must be
verified and documented.
3. Savings Bonds
C. Gifts as an Acceptable Source of
Funds
1. Description of Gift Funds
In order for funds to be considered a
gift there must be no expected or
implied repayment of the funds to the
donor by the borrower.
Note: The portion of the gift not used to
meet closing requirements may be counted as
reserves.
2. Who can provide a gift?
a. While private savings clubs are not
supervised banking institutions, the
clubs must, at a minimum, have:
i. Account ledgers
ii. Receipts from the club
iii. Verification from the club
treasurer, and
iv. Identification of the club.
b. The lender must reverify the
information, and the underwriter must
be able to determine that:
i. It was reasonable for the borrower
to have saved the money claimed, and
ii. There is no evidence that the funds
were borrowed with an expectation of
repayment.
1. IRAs, Thrift Savings Plans, and
401(k)s and Keogh Accounts
Up to 60 percent of the value of assets
such as IRAs, thrift savings plans, 401(k)
and Keogh accounts may be included in
the underwriting analysis, unless the
borrower provides conclusive evidence
that a higher percentage may be
withdrawn, after subtracting any:
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The monthly or quarterly statement
provided by the stockbroker or financial
institution managing the portfolio may
be used to verify the value of stocks and
bonds.
Note: The actual receipt of funds at
redemption must be verified.
a. Some borrowers may choose to use
non-traditional methods to save money
by making deposits into private savings
clubs. Often, these private savings clubs
pool resources for use among the
membership.
b. If a borrower claims that the cash
to close mortgage is from savings held
with a private savings club, he/she must
be able to adequately document the
accumulation of the funds with the
club.
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2. Stocks and Bonds
Government issued bonds are counted
at the original purchase price, unless
eligibility for redemption and the
redemption value are confirmed.
5. Cash Accumulated With Private
Savings Clubs
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a. Federal income tax, and
b. Withdrawal penalties.
Notes:
i. Redemption evidence is required.
ii. The portion of the assets not used
to meet closing requirements, after
adjusting for taxes and penalties may be
counted as reserves.
An outright gift of the cash
investment is acceptable if the donor is:
a. The borrower’s relative
b. The borrower’s employer or labor
union
c. A charitable organization
d. A governmental agency or public
entity that has a program providing
home ownership assistance to
i. Low- and moderate-income families
ii. First-time homebuyers, or
e. A close friend with a clearly
defined and documented interest in the
borrower.
3. Who cannot provide a gift?
a. The gift donor may not be a person
or entity with an interest in the sale of
the property, such as:
i. The seller
ii. The real estate agent or broker
iii. The builder, or
iv. An associated entity.
b. Gifts from these sources are
considered inducements to purchase,
and must be subtracted from the sales
price.
Note: This applies to properties where the
seller is a government agency selling
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foreclosed properties, such as the US
Department of Veterans Affairs (VA) or Rural
Housing Services.
4. Lender Responsibility for Verifying
the Acceptability of Gift Fund Sources
a. Regardless of when gift funds are
made available to a borrower, the lender
must be able to determine that the gift
funds were not provided by an
unacceptable source, and were the
donor’s own funds.
b. When the transfer occurs at closing,
the lender is responsible for verifying
that the closing agent received the funds
from the donor for the amount of the
gift, and that the funds were from an
acceptable source.
5. Requirements Regarding Donor
Source of Funds
a. As a general rule, how a donor
obtains gift funds is not of concern,
provided that the funds are not derived
in any manner from a party to the sales
transaction.
b. Donors may borrow gift funds from
any other acceptable source, provided
the mortgage borrowers are not obligors
to any note to secure money borrowed
to give the gift.
6. Equity Credit
Only family members may provide
equity credit as a gift on property being
sold to other family members.
7. Payment of Consumer Debt Must
Result in Sales Price Reduction
a. The payment of consumer debt by
third parties is considered to be an
inducement to purchase.
b. While sellers and other parties may
make contributions subject to any
percentage limitation of the sales price
of a property toward a buyer’s actual
closing costs and financing concessions,
this applies exclusively to the mortgage
financing provision.
c. When someone other than a family
member has paid off debts or other
expenses on behalf of the borrower:
i. The funds must be treated as an
inducement to purchase, and
ii. There must be a dollar for dollar
reduction to the sales price when
calculating the maximum insurable
mortgage.
Note: The dollar for dollar reduction to the
sales price also applies to gift funds not
meeting the requirement that:
i. The gift be for down payment assistance,
and
ii. That it be provided by an acceptable
source.
8. Using Downpayment Assistance
Programs
a. Downpayment assistance programs
providing gifts administered by
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charitable organizations, such as
nonprofits should be carefully
monitored. Nonprofit entities should
not provide gifts to pay off:
i. Installment loans
ii. Credit cards
iii. Collections
iv. Judgments, and
v. Similar debts.
b. Lenders must ensure that a gift
provided by a charitable organization
meets these requirements and that the
transfer of funds is properly
documented.
9. Gifts From Charitable Organizations
That Lose or Give Up Their Federal TaxExempt Status
If a charitable organization makes a
gift that is to be used for all, or part, of
a borrower’s down payment, and the
organization providing the gift loses or
gives up its Federal tax exempt status,
the gift will be recognized as an
acceptable source of the down payment
provided that:
a. The gift is made to the borrower
b. The gift is properly documented,
and
c. The borrower has entered into a
contract of sale (including any
amendments to purchase price) on, or
before, the date the IRS officially
announces that the charitable
organization’s tax exempt status is
terminated.
10. Lender Responsibility for Ensuring
That an Entity Is a Charitable
Organization
a. The lender is responsible for
ensuring that an entity is a charitable
organization as defined by Section
501(a) of the Internal Revenue Code
(IRC) of 1986 (26 U.S.C. 150(d)(2))
pursuant to Section 501(c)(3) of the IRC.
b. One resource available to lenders
for obtaining this information is the
Internal Revenue Service (IRS)
Publication 78, Cumulative List of
Organizations described in Section
170(c) of the Internal Revenue Code of
1986, which contains a list of
organizations eligible to receive taxdeductible charitable contributions.
c. The IRS has an online version of
this list that can help lenders and others
conduct a search of these organizations.
The online version can be found at
https://apps.irs.gov/app/pub78 using the
following instructions to obtain the
latest update:
i. Enter search data and click ‘‘Search’’
ii. Click ‘‘Search for Charities’’ under
the ‘‘Charities & Non-Profits Topics’’
heading on the left-hand side of the
page
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iii. Click ‘‘Recent Revocations and
Deletions from Cumulative List’’ under
the ‘‘Additional Information’’ heading in
the middle of the page, and
iv. Click the name of the organization
if the name appears on the list
displayed.
D. Gift Fund Required Documentation
1. Gift Letter Requirement
A lender must document any
borrower gift funds through a gift letter,
signed by the donor and borrower. The
gift letter must show the donor’s name,
address, telephone number, specify the
dollar amount of the gift, and state the
nature of the donor’s relationship to the
borrower and that no repayment is
required. If sufficient funds required for
closing are not already verified in the
borrower’s accounts, document the
transfer of the gift funds to the
borrower’s accounts, in accordance with
the instructions described in section
(I)(D)(2).
2. Documenting the Transfer of Gift
Funds
The lender must document the
transfer of the gift funds from the donor
to the borrower. The table below
describes the requirements for the
transfer of gift funds.
If the gift funds . . .
Then . . .
• Are in the borrower’s account ...............................................................
Obtain
• A copy of the withdrawal document showing that the withdrawal is
from the donor’s account, and
• The borrower’s deposit slip and bank statement showing the deposit.
Obtain a
• Bank statement showing the withdrawal from the donor’s account,
and
• Copy of the certified check.
Have the donor provide a withdrawal document or cancelled check for
the amount of the gift, showing that the funds came from the donor’s
personal account.
Have the donor provide documentation of the wire transfer.
Note: The lender must obtain and keep the documentation of the wire
transfer in its mortgage loan application binder. While the document
does not need to be provided in the insurance binder, it must be
available for inspection.
Have the donor provide written evidence that the funds were borrowed
from an acceptable source, not from a party to the transaction, including the lender.
IMPORTANT: Cash on hand is not an acceptable source of donor gift
funds.
• Are to be provided at closing, and
• Are in the form of a certified check from the donor’s account
• Are to be provided at closing, and
• Are in the form of a cashier’s check, money order, official check, or
other type of bank check
• Are to be provided at closing, and
• Are in the form of an electronic wire transfer to the closing agent
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• Are being borrowed by the donor, and
• Documentation from the bank or other savings account is not available
E. Property Related Acceptable Sources
of Funds
b. Recreational vehicles
c. Stamps
d. Coins, and
e. Baseball card collections.
1. Type of Personal Property
In order to obtain cash for closing, a
borrower may sell various personal
property items. The types of personal
property items that a borrower can sell
include
a. Cars
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2. Sale of Personal Property
Documentation Requirement
a. If a borrower plans to sell personal
property items to obtain funds for
closing, he/she must provide
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i. Satisfactory estimate of the worth of
the personal property items, and
ii. Evidence that the items were sold.
b. The estimated worth of the items
being sold may be in the form of
i. Published value estimates issued by
organizations, such as automobile
dealers, or philatelic or numismatic
associations, or
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b. A family member entitled to the
commission may also provide gift funds
to the borrower.
ii. A separate written appraisal by a
qualified appraiser with no financial
interest in the loan transaction.
c. Only the lesser of the estimated
value or actual sales prices are
considered as assets to close.
3. Net Sales Proceeds From a Property
a. The net proceeds from an armslength sale of a currently owned
property may be used for the cash
investment on a new house. The
borrower must provide satisfactory
evidence of the accrued cash sales
proceeds.
b. If the property has not sold by the
time of underwriting, condition loan
approval by verifying the actual
proceeds received by the borrower. The
lender must document the
i. Actual sale, and
ii. Sufficiency of the net proceeds
required for settlement.
Note: If the property has not sold by the
time of the subject settlement, the existing
mortgage must be included as a liability for
qualifying purposes.
4. Commission From the Sale of the
Property
a. If the borrower is a licensed real
estate agent entitled to a real estate
commission from the sale of the
property being purchased, then he/she
may use that amount for the cash
investment, with no adjustment to the
maximum mortgage required.
5. Trade Equity
a. The borrower may agree to trade
his/her real property to the seller as part
of the cash investment. The amount of
the borrower’s equity contribution is
determined by
i. Using the lesser of the property’s
appraised value or sales price, and
ii. Subtracting all liens against the
property being traded, along with any
real estate commission.
b. In order to establish the property
value, the borrower must provide
i. A residential appraisal no more
than six months old to determine the
property’s value, and
ii. Evidence of ownership.
Note: If the property being traded has an
FHA-insured mortgage, assumption
processing requirements and restrictions
apply.
6. Rent Credit
a. The cumulative amount of rental
payments that exceed the appraiser’s
estimate of fair market rent may be
considered accumulation of the
borrower’s cash investment.
b. The following must be included in
the endorsement package:
i. Rent with option to purchase
agreement, and
ii. Appraiser’s estimate of market rent.
c. Conversely, treat the rent as an
inducement to purchase with an
appropriate reduction to the mortgage, if
the sales agreement reveals that the
borrower
i. Has been living in the property rentfree, or
ii. Has an agreement to occupy the
property as a rental considerably below
fair market value in anticipation of
eventual purchase.
d. Exception: An exception may be
granted when a builder
i. Fails to deliver a property at an
agreed to time, and
ii. Permits the borrower to occupy an
existing or other unit for less than
market rent until construction is
complete.
7. Sweat Equity Considered a Cash
Equivalent
Labor performed, or materials
furnished by the borrower before closing
on the property being purchased
(known as ‘‘sweat equity’’), may be
considered the equivalent of a cash
investment, to the amount of the
estimated cost of the work or materials.
Note: Sweat equity may also be ‘‘gifted,’’
subject to
i. The additional requirements in section
(I)(E)(8), and
ii. The gift fund requirements described in
section (I)(D).
8. Additional Sweat Equity
Requirements
The table below describes additional
requirements for applying sweat equity
as a cash equivalent and as an
acceptable source of borrower funds.
Sweat Equity Category
Requirement
Existing Construction ................................................................................
Only repairs or improvements listed on the appraisal are eligible for
sweat equity.
Any work completed or materials provided before the appraisal are not
eligible.
The sales contract must indicate the tasks to be performed by the borrower during construction.
The borrower must demonstrate his/her ability to complete the work in
a satisfactory manner.
The lender must document the contributory value of the labor either
through
• The appraiser’s estimate, or
• A cost-estimating service.
The following cannot be included as sweat equity:
• Delayed work (on-site escrow)
• Clean up
• Debris removal, and
• Other general maintenance.
Cash back to the borrower in sweat equity transactions is not permitted.
Sweat equity is not acceptable on property other than the property
being purchased.
Compensation for work performed on other properties must be
• In cash, and
• Properly documented.
Evidence of the following must be provided if the borrower furnishes
funds and materials:
• Source of the funds, and
• Market value of the materials.
Proposed Construction .............................................................................
Borrower’s Labor ......................................................................................
Delayed Work ...........................................................................................
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Cash Back ................................................................................................
Sweat Equity on Property Not Being Purchased .....................................
Source of Funds Evidence .......................................................................
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9. Trade-In Manufactured Home
An acceptable source of borrower
cash investment commonly associated
with manufactured homes is the sale or
trade-in of another manufactured home
that is not considered real estate. Tradeins for cash funds are considered a
seller inducement and are not
permitted.
II. Borrower Eligibility
A. Stability of Income
1. Effective Income
Income may not be used in
calculating the borrower’s income ratios
if it comes from any source that cannot
be verified, is not stable, or will not
continue.
2. Verifying Employment History
a. The lender must verify the
borrower’s employment for the most
recent two full years, and the borrower
must
i. Explain any gaps in employment
that span one or more months, and
ii. Indicate if he/she was in school or
the military for the recent two full years,
providing Evidence supporting this
claim, such as college transcripts, or
discharge papers.
b. Allowances can be made for
seasonal employment, typical for the
building trades and agriculture, if
documented by the lender.
Note: A borrower with a 25 percent or
greater ownership interest in a business is
considered self employed and will be
evaluated as a self employed borrower for
underwriting purposes.
srobinson on DSKHWCL6B1PROD with PROPOSALS
3. Analyzing a Borrower’s Employment
Record
a. When analyzing the probability of
continued employment, lenders must
examine:
i. The borrower’s past employment
record
ii. Qualifications for the position
iii. Previous training and education,
and
iv. The employer’s confirmation of
continued employment.
b. Favorably consider a borrower for
a mortgage if he/she changes jobs
frequently within the same line of work,
but continues to advance in income or
benefits. In this analysis, income
stability takes precedence over job
stability.
4. Borrowers Returning to Work After an
Extended Absence
A borrower’s income may be
considered effective and stable when
recently returning to work after an
extended absence if he/she:
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a. Is employed in the current job for
six months or longer, and
b. Can document a two year work
history prior to an absence from
employment using
i. Traditional employment
verifications, and/or
ii. Copies of W–2 forms or pay stubs.
Note: An acceptable employment situation
includes individuals who took several years
off from employment to raise children, then
returned to the workforce.
c. Important: Situations not meeting
the criteria listed above may only be
considered as compensating factors.
Extended absence is defined as six
months.
B. Salary, Wage and Other Forms of
Income
1. General Policy on Borrower Income
Analysis
a. The income of each borrower who
will be obligated for the mortgage debt
must be analyzed to determine whether
his/her income level can be reasonably
expected to continue through at least
the first three years of the mortgage
loan.
b. In most cases, a borrower’s income
is limited to salaries or wages. Income
from other sources can be considered as
effective, when properly verified and
documented by the lender.
Notes:
i. Effective income for borrowers planning
to retire during the first three-year period
must include the amount of:
a. Documented retirement benefits
b. Social Security payments, or
c. Other payments expected to be received
in retirement.
ii. Lenders must not ask the borrower about
possible, future maternity leave.
2. Overtime and Bonus Income
a. Overtime and bonus income can be
used to qualify the borrower if he/she
has received this income for the past
two years, and it will likely continue. If
the employment verification states that
the overtime and bonus income is
unlikely to continue, it may not be used
in qualifying.
b. The lender must develop an
average of bonus or overtime income for
the past two years. Periods of overtime
and bonus income less than two years
may be acceptable, provided the lender
can justify and document in writing the
reason for using the income for
qualifying purposes.
3. Establishing an Overtime and Bonus
Income Earning Trend
a. The lender must establish and
document an earnings trend for
overtime and bonus income. If either
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type of income shows a continual
decline, the lender must document in
writing a sound rationalization for
including the income when qualifying
the borrower.
b. A period of more than two years
must be used in calculating the average
overtime and bonus income if the
income varies significantly from year to
year.
4. Qualifying Part-Time Income
a. Part-time and seasonal income can
be used to qualify the borrower if the
lender documents that the borrower has
worked the part-time job uninterrupted
for the past two years, and plans to
continue. Many low and moderate
income families rely on part-time and
seasonal income for day to day needs,
and lenders should not restrict
consideration of such income when
qualifying these borrowers.
b. Part-time income received for less
than two years may be included as
effective income, provided that the
lender justifies and documents that the
income is likely to continue.
c. Part-time income not meeting the
qualifying requirements may be
considered as a compensating factor
only.
Note: For qualifying purposes, ‘‘part-time’’
income refers to employment taken to
supplement the borrower’s income from
regular employment; part-time employment
is not a primary job and it is worked less than
40 hours.
5. Income from Seasonal Employment
a. Seasonal income is considered
uninterrupted, and may be used to
qualify the borrower, if the lender
documents that the borrower:
i. Has worked the same job for the
past two years, and
ii. Expects to be rehired the next
season.
b. Seasonal employment includes:
i. Umpiring baseball games in the
summer, or
ii. Working at a department store
during the holiday shopping season.
6. Primary Employment Less Than 40
Hour Work Week
a. When a borrower’s primary
employment is less than a typical
40-hour work week, the lender should
evaluate the stability of that income as
regular, on-going primary employment.
b. Example: A registered nurse may
have worked 24 hours per week for the
last year. Although this job is less than
the 40-hour work week, it is the
borrower’s primary employment, and
should be considered effective income.
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7. Commission Income
a. Commission income must be
averaged over the previous two years.
To qualify commission income, the
borrower must provide:
i. Copies of signed tax returns for the
last two years, and
ii. The most recent pay stub.
b. Commission income showing a
decrease from one year to the next
requires significant compensating
factors before a borrower can be
approved for the loan.
c. Borrowers whose commission
income was received for more than one
year, but less than two years may be
considered favorably if the underwriter
can:
i. Document the likelihood that the
income will continue, and
ii. Soundly rationalize accepting the
commission income.
Notes:
i. Unreimbursed business expenses must
be subtracted from gross income.
ii. A commissioned borrower is one who
receives more than 25 percent of his/her
annual income from commissions.
iii. A tax transcript obtained directly from
the IRS may be used in lieu of signed tax
returns, and the cost of the transcript may be
charged to the borrower.
8. Qualifying Commission Income
Earned for Less Than One Year
a. Commission income earned for less
than one year is not considered effective
income. Exceptions may be made for
situations in which the borrower’s
compensation was changed from salary
to commission within a similar position
with the same employer.
b. A borrower may also qualify when
the portion of earnings not attributed to
commissions would be sufficient to
qualify the borrower for the mortgage.
9. Employer Differential Payments
If the employer subsidizes a
borrower’s mortgage payment through
direct payments, the amount of the
payments:
a. Is considered gross income, and
b. Cannot be used to offset the
mortgage payment directly, even if the
employer pays the servicing lender
directly.
10. Retirement Income
Retirement income must be verified
from the former employer, or from
Federal tax returns. If any retirement
income, such as employer pensions or
401(k)s, will cease within the first full
three years of the mortgage loan, the
income may only be considered as a
compensating factor.
i. The borrower’s monthly car
payment, and
ii. Any loss resulting from the
calculation of the difference between
the actual expenditures and the expense
account allowance.
C. Borrowers Employed by a Family
Owned Business
11. Social Security Income
Social Security income must be
verified by the Social Security
Administration or on Federal tax
returns. If any benefits expire within the
first full three years of the loan, the
income source may be considered only
as a compensating factor.
1. Income Documentation Requirement
In addition to normal employment
verification, a borrower employed by a
family owned businesses are required to
provide evidence that he/she is not an
owner of the business, which may
include:
a. Copies of signed personal tax
returns, or
b. A signed copy of the corporate tax
return showing ownership percentage.
Notes:
i. The lender must obtain a complete copy
of the current awards letter.
ii. Not all Social Security income is for
retirement-aged recipients; therefore,
documented continuation is required.
iii. Some portion of Social Security income
may be ‘‘grossed up’’ if deemed nontaxable by
the IRS.
Note: A tax transcript obtained directly
from the IRS may be used in lieu of signed
tax returns, and the cost of the transcript may
be charged to the borrower.
12. Automobile Allowances and
Expense Account Payments
A borrower with a 25 percent or
greater ownership interest in a business
is considered self employed.
a. Only the amount by which the
borrower’s automobile allowance or
expense account payments exceed
actual expenditures may be considered
income.
b. To establish the amount to add to
gross income, the borrower must
provide the following:
i. IRS Form 2106, Employee Business
Expenses, for the previous two years,
and
ii. Employer verification that the
payments will continue.
c. If the borrower uses the standard
per-mile rate in calculating automobile
expenses, as opposed to the actual cost
method, the portion that the IRS
considers depreciation may be added
back to income.
d. Expenses that must be treated as
recurring debt include:
D. General Information on Self
Employed Borrowers and Income
Analysis
1. Definition: Self Employed Borrower
2. Types of Business Structures
There are four basic types of business
structures. They include:
a. Sole proprietorships
b. Corporations
c. Limited liability or ‘‘S’’
corporations, and
d. Partnerships.
3. Minimum Length of Self Employment
a. Income from self employment is
considered stable, and effective, if the
borrower has been self employed for
two or more years.
b. Due to the high probability of
failure during the first few years of a
business, the requirements described in
the table below are necessary for
borrowers who have been self employed
for less than two years.
Then . . .
Between one and two years ....................
srobinson on DSKHWCL6B1PROD with PROPOSALS
If the period of self employment is . . .
To be eligible for a mortgage loan, the individual must have at least two years of documented previous successful employment in the line of work in which the individual is self employed, or in a related occupation.
Note: A combination of one year of employment and formal education or training in the line of work
in which the individual is self employed or in a related occupation is also acceptable.
The income from the borrower may not be considered effective income.
Less than one year ..................................
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4. General Documentation Requirements
for Self Employed Borrowers
Self employed borrowers must
provide the following documentation:
a. Signed, dated individual tax
returns, with all applicable tax
schedules for the most recent two years
b. For a corporation, ‘‘S’’ corporation,
or partnership, signed copies of Federal
business income tax returns for the last
two years, with all applicable tax
schedules
c. Year to date profit and loss (P&L)
statement and balance sheet, and
d. Business credit report for
corporations and ‘‘S’’ corporations.
5. Establishing a Borrower’s Earnings
Trend
a. When qualifying a borrower for a
mortgage loan, the lender must establish
the borrower’s earnings trend from the
previous two years using the borrower’s
tax returns.
b. If a borrower:
i. Provides quarterly tax returns, the
income analysis may include income
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through the period covered by the tax
filings, or
ii. Is not subject to quarterly tax
returns, or does not file them, then the
income shown on the P&L statement
may be included in the analysis,
provided the income stream based on
the P&L is consistent with the previous
years’ earnings.
c. If the P&L statements submitted for
the current year show an income stream
considerably greater than what is
supported by the previous year’s tax
returns, the lender must base the
income analysis solely on the income
verified through the tax returns.
d. If the borrower’s earnings trend for
the previous two years is downward and
the most recent tax return or P&L is less
than the prior year’s tax return, the
borrower’s most recent year’s tax return
or P&L must be used to calculate his/her
income.
for the borrower’s needs, the lender
must carefully analyze the business’s
financial strength, including the:
i. Source of the business’s income
ii. General economic outlook for
similar businesses in the area.
b. Annual earnings that are stable or
increasing are acceptable, while
businesses that show a significant
decline in income over the analysis
period are not acceptable.
6. Analyzing the Business’s Financial
Strength
a. To determine if the business is
expected to generate sufficient income
2. Guidelines for Analyzing IRS Form
1040
E. Income Analysis: Individual Tax
Returns (IRS Form 1040)
1. General Policy on Adjusting Income
Based on a Review of IRS Form 1040
The amount shown on a borrower’s
IRS Form 1040 as adjusted gross income
must either be increased or decreased
based on the lender’s analysis of the
individual tax return and any related tax
schedules.
The table below contains guidelines
for analyzing IRS Form 1040:
IRS Form 1040 heading
Description
Wages, Salaries and Tips .......................
An amount shown under this heading may indicate that the individual
• Is a salaried employee of a corporation, or
• Has other sources of income.
This section may also indicate that the spouse is employed, in which case the spouse’s income must
be subtracted from the borrower’s adjusted gross income.
Sole proprietorship income calculated on Schedule C is business income.
Business Income and Loss (from Schedule C).
Rents, Royalties, Partnerships (from
Schedule E).
Capital Gain and Losses (from Schedule
D).
Interest and Dividend Income (from
Schedule B).
srobinson on DSKHWCL6B1PROD with PROPOSALS
Farm Income or Loss (from Schedule F)
IRA Distributions, Pensions, Annuities,
and Social Security Benefits.
Adjustments to Income ............................
Employee Business Expenses ................
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Depreciation or depletion may be added back to the adjusted gross income.
Any income received from rental properties or royalties may be used as income, after adding back
any depreciation shown on Schedule E. xxx
Capital gains or losses generally occur only one time, and should not be considered when determining effective income.
However, if the individual has a constant turnover of assets resulting in gains or losses, the capital
gain or loss must be considered when determining the income. Three years’ tax returns are required to evaluate an earning trend. If the trend
• Results in a gain, it may be added as effective income, or
• Consistently shows a loss, it must be deducted from the total income.
Lender must document anticipated continuation of income through verified assets.
Example: A lender can consider the capital gains for an individual who purchases old houses, remodels them, and sells them for profit.
This taxable/tax-exempt income may be added back to the adjusted gross income only if it
• Has been received for the past two years, and
• Is expected to continue.
If the interest-bearing asset will be liquidated as a source of the cash investment, the lender must appropriately adjust the amount.
Any depreciation shown on Schedule F may be added back to the adjusted gross income.
The non-taxable portion of these items may be added back to the adjusted gross income, if the income is expected to continue for the first three years of the mortgage.
Adjustments to income may be added back to the adjusted gross income if they are
• IRA and Keogh retirement deductions
• Penalties on early withdrawal of savings
• Health insurance deductions, and
• Alimony payments.
Employee business expenses are actual cash expenses that must be deducted from the adjusted
gross income.
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F. Income Analysis: Corporate Tax
Returns (IRS Form 1120)
1. Description: Corporation
A Corporation is a state-chartered
business owned by its stockholders.
2. Need To Obtain Borrower Percentage
of Ownership Information
a. Corporate compensation to the
officers, generally in proportion to the
percentage of ownership, is shown on
the
i. Corporate tax return IRS Form 1120,
and
ii. Individual tax returns.
b. When a borrower’s percentage of
ownership does not appear on the tax
returns, the lender must obtain the
information from the corporation’s
accountant, along with evidence that the
borrower has the right to any
compensation.
3. Analyzing Corporate Tax Returns
a. In order to determine a borrower’s
self employed income from a
corporation the adjusted business
income must
i. Be determined, and
ii. Multiplied by the borrower’s
percentage of ownership in the
business.
b. The table below describes the items
found on IRS Form 1120 for which an
adjustment must be made in order to
determine adjusted business income.
Adjustment item
Description of adjustment
Depreciation and Depletion .....................
Taxable Income .......................................
Add the corporation’s depreciation and depletion back to the after-tax income.
Taxable income is the corporation’s net income before Federal taxes. Reduce taxable income by the
tax liability.
If the corporation operates on a fiscal year that is different from the calendar year, an adjustment
must be made to relate corporate income to the individual tax return.
The borrower’s withdrawal of cash from the corporation may have a severe negative impact on the
corporation’s ability to continue operating.
Fiscal Year vs. Calendar Year ................
Cash Withdrawals ....................................
b. Each partner pays taxes on his/her
proportionate share of the partnership’s
net income.
G. Income Analysis: ‘‘S’’ Corporation
Tax Returns (IRS Form 1120S)
1. Description: ‘‘S’’ Corporation
a. An ‘‘S’’ Corporation is generally a
small, start-up business, with gains and
losses passed to stockholders in
proportion to each stockholder’s
percentage of business ownership.
b. Income for owners of ‘‘S’’
corporations comes from W–2 wages,
and is taxed at the individual rate. The
IRS Form 1120S, Compensation of
Officers line item is transferred to the
borrower’s individual IRS Form 1040.
srobinson on DSKHWCL6B1PROD with PROPOSALS
2. Analyzing ‘‘S’’ Corporation Tax
Returns
a. ‘‘S’’ corporation depreciation and
depletion may be added back to income
in proportion to the borrower’s share of
the corporation’s income.
b. In addition, the income must also
be reduced proportionately by the total
obligations payable by the corporation
in less than one year.
c. IMPORTANT: The borrower’s
withdrawal of cash from the corporation
may have a severe negative impact on
the corporation’s ability to continue
operating, and must be considered in
the income analysis.
H. Income Analysis: Partnership Tax
Returns (IRS Form 1065)
1. Description: Partnership
a. A Partnership is formed when two
or more individuals form a business,
and share in profits, losses, and
responsibility for running the company.
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2. Analyzing Partnership Tax Returns
a. Both general and limited
partnerships report income on IRS Form
1065, and the partners’ share of income
is carried over to Schedule E of IRS
Form 1040.
b. The lender must review IRS Form
1065 to assess the viability of the
business. Both depreciation and
depletion may be added back to the
income in proportion to the borrower’s
share of income.
c. Income must also be reduced
proportionately by the total obligations
payable by the partnership in less than
one year.
d. IMPORTANT: Cash withdrawals
from the partnership may have a severe
negative impact on the partnership’s
ability to continue operating, and must
be considered in the income analysis.
III. Non-Employment Related Borrower
Income
A. Alimony, Child Support, and
Maintenance Income Criteria
Alimony, child support, or
maintenance income may be considered
effective, if:
1. Payments are likely to be received
consistently for the first three years of
the mortgage
2. The borrower provides the required
documentation, which includes a copy
of the
1. Final divorce decree
ii. Legal separation agreement,
iii. Court order, or
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iv. Voluntary payment agreement, and
3. The borrower can provide
acceptable evidence that payments have
been received during the last 12 months,
such as
i. Cancelled checks
ii. Deposit slips
iii. Tax returns, or
iv. Court records.
Notes:
i. Periods less than 12 months may be
acceptable, provided the lender can
adequately document the payer’s ability
and willingness to make timely
payments.
ii. Child support may be ‘‘grossed up’’
under the same provisions as nontaxable income sources.
B. Investment and Trust Income
1. Analyzing Interest and Dividends
a. Interest and dividend income may
be used as long as tax returns or account
statements support a two-year receipt
history. This income must be averaged
over the two years.
b. Subtract any funds that are derived
from these sources, and are required for
the cash investment, before calculating
the projected interest or dividend
income.
2. Trust Income
a. Income from trusts may be used if
guaranteed, constant payments will
continue for at least the first three years
of the mortgage term.
b. Required trust income
documentation includes a copy of the
Trust Agreement or other trustee
statement, confirming the
i. Amount of the trust
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ii. Frequency of distribution, and
iii. Duration of payments.
c. Trust account funds may be used
for the required cash investment if the
borrower provides adequate
documentation that the withdrawal of
funds will not negatively affect income.
The borrower may use funds from the
trust account for the required cash
investment, but the trust income used to
determine repayment ability cannot be
affected negatively by its use.
3. Notes Receivable Income
a. In order to include notes receivable
income to qualify a borrower, he/she
must provide
i. A copy of the note to establish the
amount and length of payment, and
ii. Evidence that these payments have
been consistently received for the last
12 months through deposit slips,
cancelled checks, or tax returns.
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b. If the borrower is not the original
payee on the note, the lender must
establish that the borrower is now a
holder in due course, and able to
enforce the note.
4. Eligible Investment Properties
Follow the steps in the table below to
calculate an investment property’s
income or loss if the property to be
subject to a mortgage is an eligible
investment property.
Step
Action
1 ..............................
Subtract the monthly payment (PITI) from the monthly net rental income of the subject property.
Note: Calculate the monthly net rental by taking the gross rents, and subtracting the 25 percent reduction for vacancies
and repairs.
Does the calculation in Step 1 yield a positive number?
• If yes, add the number to the borrower’s monthly gross income.
• If no, and the calculation yields a negative number, consider it a recurring monthly obligation.
2 ..............................
C. Military, Government Agency, and
Assistance Program Income
1. Military Income
a. Military personnel not only receive
base pay, but often times are entitled to
additional forms of pay, such as
i. Income from variable housing
allowances
ii. Clothing allowances
iii. Flight or hazard pay
iv. Rations, and
v. Proficiency pay.
b. These types of additional pay are
acceptable when analyzing a borrower’s
income as long as the probability of
such pay to continue is verified in
writing.
Note: The tax-exempt nature of some of the
above payments should also be considered.
2. VA Benefits
a. Direct compensation for servicerelated disabilities from the Department
of Veterans Affairs (VA) is acceptable,
provided the lender receives
documentation from the VA.
b. Education benefits used to offset
education expenses are not acceptable.
srobinson on DSKHWCL6B1PROD with PROPOSALS
3. Government Assistance Programs
a. Income received from government
assistance programs is acceptable as
long as the paying agency provides
documentation indicating that the
income is expected to continue for at
least three years.
b. If the income from government
assistance programs will not be received
for at least three years, it may be
considered as a compensating factor.
c. Unemployment income must be
documented for two years, and there
must be reasonable assurance that this
income will continue. This requirement
may apply to seasonal employment.
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4. Mortgage Credit Certificates
a. If a government entity subsidizes
the mortgage payments either through
direct payments or tax rebates, these
payments may be considered as
acceptable income.
b. Either type of subsidy may be
added to gross income, or used directly
to offset the mortgage payment, before
calculating the qualifying ratios.
5. Homeownership Subsidies
a. A monthly subsidy may be treated
as income, if a borrower is receiving
subsidies under the housing choice
voucher home ownership option from a
public housing agency (PHA). Although
continuation of the homeownership
voucher subsidy beyond the first year is
subject to Congressional appropriation,
for the purposes of underwriting, the
subsidy will be assumed to continue for
at least three years.
b. If the borrower is receiving the
subsidy directly, the amount received is
treated as income. The amount received
may also be treated as non taxable
income and be ‘‘grossed up’’ by 25
percent, which means that the amount
of the subsidy, plus 25 percent of that
subsidy may be added to the borrower’s
income from employment and/or other
sources.
c. Lenders may treat this subsidy as
an ‘‘offset’’ to the monthly mortgage
payment (that is, reduce the monthly
mortgage payment by the amount of the
home ownership assistance payment
before dividing by the monthly income
to determine the payment-to-income
and debt-to-income ratios). The subsidy
payment must not pass through the
borrower’s hands.
d. The assistance payment must be:
i. Paid directly to the servicing lender,
or
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ii. Placed in an account that only the
servicing lender may access.
Note: Assistance payments made directly
to the borrower must be treated as income.
D. Rental Income
1. Analyzing the Stability of Rental
Income
a. Rent received for properties owned
by the borrower is acceptable as long as
the lender can document the stability of
the rental income through
i. A current lease
ii. An agreement to lease, or
iii. A rental history over the previous
24 months that is free of unexplained
gaps greater than three months (such
gaps could be explained by student,
seasonal, or military renters, or property
rehabilitation).
b. A separate schedule of real estate
is not required for rental properties as
long as all properties are documented
on the URLA.
Note: The underwriting analysis may not
consider rental income from any property
being vacated by the borrower, except under
the circumstances described below.
2. Rental Income From Borrower
Occupied Property
a. The rent for multiple unit property
where the borrower resides in one or
more units and charges rent to tenants
of other units may be used for qualifying
purposes.
b. Projected rent for the tenantoccupied units only may:
i. Be considered gross income, only
after deducting vacancy and
maintenance factors, and
ii. Not be used as a direct offset to the
mortgage payment.
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3. Income from Roommates in a Single
Family Property
a. Income from roommates in a single
family property occupied as the
borrower’s primary residence is not
acceptable. Rental income from boarders
however, is acceptable, if the boarders
are related by blood, marriage, or law.
b. The rental income may be
considered effective, if shown on the
borrower’s tax return. If not on the tax
return, rental income paid by the
boarder
i. May be considered a compensating
factor, and
ii. Must be adequately documented by
the lender.
4. Documentation Required To Verify
Rental Income
Analysis of the following required
documentation is necessary to verify all
borrower rental income:
a. IRS Form 1040 Schedule E; and
b. Current leases/rental agreements.
5. Analyzing IRS Form 1040 Schedule E
a. The IRS Form 1040 Schedule E is
required to verify all rental income.
Depreciation shown on Schedule E may
be added back to the net income or loss.
b. Positive rental income is
considered gross income for qualifying
purposes, while negative income must
be treated as a recurring liability.
c. The lender must confirm that the
borrower still owns each property listed,
by comparing Schedule E with the real
estate owned section of the URLA. If the
borrower owns six or more units in the
same general area, a map must be
provided disclosing the locations of the
units, as evidence of compliance with
FHA’s seven-unit limitation.
6. Using Current Leases To Analyze
Rental Income
a. The borrower can provide a current
signed lease or other rental agreement
for a property that was acquired since
the last income tax filing, and is not
shown on Schedule E.
b. In order to calculate the rental
income:
i. Reduce the gross rental amount by
25 percent for vacancies and
maintenance
ii. Subtract PITI and any homeowners’
association dues, and
iii. Apply the resulting amount to
income, if positive, or recurring debts, if
negative.
7. Exclusion of Rental Income From
Property Being Vacated by the Borrower
Underwriters may not consider any
rental income from a borrower’s
principal residence that is being vacated
in favor of another principal residence,
except under the conditions described
below:
Notes: i. This policy assures that a
borrower either has sufficient income to
make both mortgage payments without any
rental income, or has an equity position not
likely to result in defaulting on the mortgage
on the property being vacated.
ii. This applies solely to a principal
residence being vacated in favor of another
principal residence. It does not apply to
existing rental properties disclosed on the
loan application and confirmed by tax
returns (Schedule E of form IRS 1040).
8. Policy Exceptions Regarding the
Exclusion of Rental Income From a
Principal Residence Being Vacated by a
Borrower
When a borrower vacates a principal
residence in favor of another principal
residence, the rental income, reduced by
the appropriate vacancy factor, may be
considered in the underwriting analysis
under the circumstances listed in the
table below.
Exception
Description
Relocations ..............................................
The borrower is relocating with a new employer, or being transferred by the current employer to an
area not within reasonable and locally-recognized commuting distance.
A properly executed lease agreement (that is, a lease signed by the borrower and the lessee) of at
least one year’s duration after the loan is closed is required.
Note: Underwriters should also obtain evidence of the security deposit and/or evidence the first
month’s rent was paid to the homeowner.
The borrower has a loan-to-value ratio of 75 percent or less, as determined either by
• A current (no more than six months old) residential appraisal, or
• Comparing the unpaid principal balance to the original sales price of the property.
Note: The appraisal, in addition to using forms Fannie Mae1004/Freddie Mac 70, may be an exterioronly appraisal using form Fannie Mae/Freddie Mac 2055, and for condominium units, form Fannie
Mae 1075/Freddie Mac 466.
Sufficient Equity in Vacated Property ......
E. Non Taxable and Projected Income
srobinson on DSKHWCL6B1PROD with PROPOSALS
1. Types of Non Taxable Income
Certain types of regular income may
not be subject to Federal tax. Such types
of non taxable income include
a. Some portion of Social Security,
some Federal government employee
retirement income, Railroad Retirement
Benefits, and some state government
retirement income
b. Certain types of disability and
public assistance payments
c. Child support
d. Military allowances, and
e. Other income that is documented as
being exempt from Federal income
taxes.
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2. Adding Non Taxable Income to a
Borrower’s Gross Income
a. The amount of continuing tax
savings attributed to regular income not
subject to Federal taxes may be added
to the borrower’s gross income.
b. The percentage of non-taxable
income that may be added cannot
exceed the appropriate tax rate for the
income amount. Additional allowances
for dependents are not acceptable.
c. The lender:
i. Must document and support the
amount of income grossed up for any
non-taxable income source, and
ii. Should use the tax rate used to
calculate the borrower’s last year’s
income tax.
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Note: If the borrower is not required to file
a Federal tax return, the tax rate to use is 25
percent.
3. Analyzing Projected Income
a. Projected or hypothetical income is
not acceptable for qualifying purposes.
However, exceptions are permitted for
income from the following sources:
i. Cost-of-living adjustments
ii. Performance raises, and
iii. Bonuses.
b. For the above exceptions to apply,
the income must be
i. Verified in writing by the employer,
and
ii. Scheduled to begin within 60 days
of loan closing.
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4. Project Income for New Job
a. Projected income is acceptable for
qualifying purposes for a borrower
scheduled to start a new job within 60
days of loan closing if there is a
guaranteed, non-revocable contract for
employment.
b. The lender must verify that the
borrower will have sufficient income or
cash reserves to support the mortgage
payment and any other obligations
between loan closing and the start of
employment. Examples of this type of
scenario are teachers whose contracts
begin with the new school year, or
physicians beginning a residency after
the loan closes fall under this category.
c. The loan is not eligible for
endorsement if the loan closes more
than 60 days before the borrower starts
the new job. To be eligible for
endorsement, the lender must obtain
from the borrower a pay stub or other
acceptable evidence indicating that
he/she has started the new job.
IV. Borrower Liabilities: Recurring
Obligations
1. Types of Recurring Obligations
Recurring obligations include:
a. All installment loans
b. Revolving charge accounts
c. Real estate loans
d. Alimony
e. Child support, and
f. Other continuing obligations.
srobinson on DSKHWCL6B1PROD with PROPOSALS
Note: Monthly payments on revolving or
open-ended accounts, regardless of the
balance, are counted as a liability for
qualifying purposes even if the account
appears likely to be paid off within 10
months or less.
3. Revolving Account Monthly Payment
Calculation
If the credit report shows any
revolving accounts with an outstanding
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Note: If the actual monthly payment is
documented from the creditor or the lender
obtains a copy of the current statement
reflecting the monthly payment, that amount
may be used for qualifying purposes.
4. Reduction of Alimony Payment for
Qualifying Ratio Calculation
Since there are tax consequences of
alimony payments, the lender may
choose to treat the monthly alimony
obligation as a reduction from the
borrower’s gross income when
calculating qualifying ratios, rather than
treating it as a monthly obligation.
V. Borrower Liabilities: Contingent
Liability
1. Definition: Contingent Liability
A contingent liability exists when an
individual is held responsible for
payment of a debt if another party,
jointly or severally obligated, defaults
on the payment.
2. Application of Contingent Liability
Policies
2. Debt to Income Ratio Computation for
Recurring Obligations
a. The lender must include the
following when computing the debt to
income ratios for recurring obligations:
i. Monthly housing expense, and
ii. Additional recurring charges
extending ten months or more, such as
a. Payments on installment accounts
b. Child support or separate
maintenance payments
c. Revolving accounts, and
d. Alimony.
b. Debts lasting less than ten months
must be included if the amount of the
debt affects the borrower’s ability to pay
the mortgage during the months
immediately after loan closing,
especially if the borrower will have
limited or no cash assets after loan
closing.
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balance but no specific minimum
monthly payment, the payment must be
calculated as the greater of
a. 5 percent of the balance, or
b. $10.
The contingent liability policies
described in this topic apply unless the
borrower can provide conclusive
evidence from the debt holder that there
is no possibility that the debt holder
will pursue debt collection against him/
her should the other party default.
3. Contingent Liability on Mortgage
Assumptions
Contingent liability must be
considered when the borrower remains
obligated on an outstanding FHAinsured, VA-guaranteed, or
conventional mortgage secured by
property that:
a. Has been sold or traded within the
last 12 months without a release of
liability, or
b. Is to be sold on assumption without
a release of liability being obtained.
4. Exemption From Contingent Liability
Policy on Mortgage Assumptions
When a mortgage is assumed,
contingent liabilities need not be
considered if the
a. Originating lender of the mortgage
being underwritten obtains, from the
servicer of the assumed loan, a payment
history showing that the mortgage has
been current during the previous 12
months, or
b. Value of the property, as
established by an appraisal or the sales
price on the HUD–1 Settlement
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24183
Statement from the sale of the property,
results in a loan-to-value (LTV) ratio of
75 percent or less.
5. Contingent Liability on Cosigned
Obligations
a. Contingent liability applies, and the
debt must be included in the
underwriting analysis, if an individual
applying for a mortgage is a cosigner/coobligor on:
i. A car loan
ii. A student loan
iii. A mortgage, or
iv. Any other obligation.
b. If the lender obtains documented
proof that the primary obligor has been
making regular payments during the
previous 12 months, and does not have
a history of delinquent payments on the
loan during that time, the payment does
not have to be included in the
borrower’s monthly obligations.
VI. Borrower Liabilities: Projected
Obligations and Obligations Not
Considered Debt
1. Projected Obligations
a. Debt payments, such as a student
loan or balloon note scheduled to begin
or come due within 12 months of the
mortgage loan closing, must be included
by the lender as anticipated monthly
obligations during the underwriting
analysis.
b. Debt payments do not have to be
classified as projected obligations if the
borrower provides written evidence that
the debt will be deferred to a period
outside the 12-month timeframe.
c. Balloon notes that come due within
one year of loan closing must be
considered in the underwriting analysis.
2. Obligations Not Considered Debt
Obligations not considered debt, and
therefore not subtracted from gross
income, include
a. Federal, state, and local taxes
b. Federal Insurance Contributions
Act (FICA) or other retirement
contributions, such as 401(k) accounts
(including repayment of debt secured by
these funds)
c. Commuting costs
d. Union dues
e. Open accounts with zero balances
f. Automatic deductions to savings
accounts
g. Child care, and
h.Voluntary deductions.
END OF COMMON RULE
Adoption of the Common Rule Text
The proposed adoption of the
common rules by the agencies, as
modified by agency-specific text, is set
forth below:
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(2) With respect to any other
securitization transaction, two years
after the date on which final rules under
section 15G(b) of the Exchange Act (15
U.S.C. 78o–11(b)) are published in the
Federal Register.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Chapter I
List of Subjects in 12 CFR Part 43
Banks and banking, Credit risk,
National banks, Reporting and
recordkeeping requirements, Risk
retention, Securitization, Mortgages,
Commercial loans, Commercial real
estate, Auto loans.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
12 CFR Chapter II
List of Subjects in 12 CFR Part 244
Authority and Issuance
For the reasons stated in the Common
Preamble, the Office of the Comptroller
of the Currency proposes to amend
chapter I of Title 12, Code of Federal
Regulations as follows:
PART 43—CREDIT RISK RETENTION
1. The authority citation for part 43 is
added to read as follows:
Authority: 12 U.S.C. 1 et seq., 93a, 161,
1818, and 15 U.S.C. 78o–11.
2. Part 43 is added as set forth at the
end of the Common Preamble.
3. Section 43.1 is added to read as
follows:
srobinson on DSKHWCL6B1PROD with PROPOSALS
§ 43.1 Authority, purpose, scope, and
reservation of authority.
(a) Authority. This part is issued
under the authority of 12 U.S.C. 1 et
seq., 93a, 161, 1818, and 15 U.S.C. 78o–
11.
(b) Purpose. (1) This part requires
securitizers to retain an economic
interest in a portion of the credit risk for
any asset that the securitizer, through
the issuance of an asset-backed security,
transfers, sells, or conveys to a third
party. This part specifies the
permissible types, forms, and amounts
of credit risk retention, and it
establishes certain exemptions for
securitizations collateralized by assets
that meet specified underwriting
standards.
(2) Nothing in this part shall be read
to limit the authority of the OCC to take
supervisory or enforcement action,
including action to address unsafe or
unsound practices or conditions, or
violations of law.
(c) Scope. This part applies to any
securitizer that is a national bank, a
Federal branch or agency of a foreign
bank, or an operating subsidiary thereof.
(d) Effective dates. This part shall
become effective:
(1) With respect to any securitization
transaction collateralized by residential
mortgages, one year after the date on
which final rules under section 15G(b)
of the Exchange Act (15 U.S.C. 78o–
11(b)) are published in the Federal
Register; and
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Banks and banking, Bank holding
companies, State member banks,
Foreign banking organizations, Edge and
agreement corporations, Credit risk,
Reporting and recordkeeping
requirements, Risk retention,
Securitization, Mortgages, Commercial
loans, Commercial real estate, Auto
loans.
Authority and Issuance
For the reasons set forth in the
Supplementary Information, the Board
of Governors of the Federal Reserve
System proposes to add the text of the
common rule as set forth at the end of
the Supplementary Information as Part
244 to chapter II of Title 12, Code of
Federal Regulations, modified as
follows:
PART 244—CREDIT RISK RETENTION
(REGULATION RR)
4. The authority citation for part 244
is added to read as follows:
Authority: 12 U.S.C. 221 et seq., 1818,
1841 et seq., 3103 et seq., and 15 U.S.C. 78o–
11.
5. Section 244.1 is added to read as
follows:
§ 244.1
Authority, purpose, and scope
(a) Authority. (1) In general. This part
(Regulation RR) is issued by the Board
of Governors of the Federal Reserve
System under section 15G of the
Securities Exchange Act of 1934, as
amended (Exchange Act) (15 U.S.C.
78o–11), as well as under the Federal
Reserve Act, as amended (12 U.S.C. 221
et seq.); section 8 of the Federal Deposit
Insurance Act (FDI Act), as amended (12
U.S.C. 1818); the Bank Holding
Company Act of 1956, as amended (BHC
Act) (12 U.S.C. 1841 et seq.); and the
International Banking Act of 1978, as
amended (12 U.S.C. 3101 et seq.).
(2) Nothing in this part shall be read
to limit the authority of the Board to
take action under provisions of law
other than 15 U.S.C. 78o–11, including
action to address unsafe or unsound
practices or conditions, or violations of
law or regulation, under section 8 of the
FDI Act.
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(b) Purpose. This part requires any
securitizer to retain an economic
interest in a portion of the credit risk for
any asset that the securitizer, through
the issuance of an asset-backed security,
transfers, sells, or conveys to a third
party in a transaction within the scope
of section 15G of the Exchange Act. This
part specifies the permissible types,
forms, and amounts of credit risk
retention, and establishes certain
exemptions for securitizations
collateralized by assets that meet
specified underwriting standards or that
otherwise qualify for an exemption.
(c) Scope. (1) This part applies to any
securitizer that is:
(i) A state member bank (as defined in
12 CFR 208.2(g)); or
(ii) Any subsidiary of a state member
bank.
(2) Section 15G of the Exchange Act
and the rules issued thereunder apply to
any securitizer that is:
(i) A bank holding company (as
defined in 12 U.S.C. 1842);
(ii) A foreign banking organization (as
defined in 12 CFR 211.21(o));
(iii) An Edge or agreement corporation
(as defined in 12 CFR 211.1(c)(2) and
(3));
(iv) A nonbank financial company
that the Financial Stability Oversight
Council has determined under section
113 of the Dodd–Frank Wall Street
Reform and Consumer Protection Act
(the Dodd–Frank Act) (12 U.S.C. 5323)
shall be supervised by the Board and for
which such determination is still in
effect; or
(v) Any subsidiary of the foregoing.
The Federal Reserve will enforce section
15G of the Exchange Act and the rules
issued thereunder under section 8 of the
FDI Act against any of the foregoing
entities.
(3) On and after the transfer date
established under section 311 of the
Dodd-Frank Act (12 U.S.C. 5411), the
Federal Reserve will enforce section
15G of the Exchange Act and the rules
issued thereunder under section 8 of the
FDI Act against any securitizer that is a
savings and loan holding company and
any subsidiary thereof (as defined in 12
U.S.C. 1467a).
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Chapter III
List of Subjects in 12 CFR Part 373
Banks, Banking, State nonmember
banks, Credit risk, Reporting and
recordkeeping requirements, Risk
retention, Securitization, Mortgages,
Commercial loans, Commercial real
estate, Auto loans.
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24185
Ratio’’, ‘‘Machinery and equipment
(M&E) collateral’’, ‘‘Model year’’, ‘‘New
vehicle’’, ‘‘Payment-in-kind (PIK)’’,
‘‘Purchase price’’, ‘‘Salvage title’’, ‘‘Total
debt’’, ‘‘Total liabilities ratio’’, ‘‘Trade-in
allowance’’ and ‘‘Used vehicle’’.
d. Revise the definition of ‘‘Debt
service coverage (DSC) ratio’’ to read as
follows:
PART 373—CREDIT RISK RETENTION
Authority and Issuance
For the reasons stated in the
Supplementary Information, and under
the authority of 12 U.S.C. 4526, the
Federal Housing Finance Agency
proposes to add the text of the common
rule as set forth at the end of the
Supplementary Information as Part 1234
of subchapter B of chapter XII of title 12
of the Code of Federal Regulations,
modified as follows:
6. The authority citation for part 373
is added to read as follows:
CHAPTER XII—FEDERAL HOUSING
FINANCE AGENCY
*
Authority: 12 U.S.C. 1801 et seq. and 3103
et seq., and 15 U.S.C. 78o–11.
SUBCHAPTER B—ENTITY REGULATIONS
Authority and Issuance
For the reasons set forth in the
Supplementary Information, the Federal
Deposit Insurance Corporation proposes
to add the text of the common rule as
set forth at the end of the
Supplementary Information as Part 373
to chapter III of Title 12, Code of Federal
Regulations, modified as follows:
7. Section 373.1 is added to read as
follows:
srobinson on DSKHWCL6B1PROD with PROPOSALS
§ 373.1
8. The authority citation for part 1234
is added to read as follows:
Purpose and scope.
(a) Authority. (1) In general. This part
is issued by the Federal Deposit
Insurance Corporation (FDIC) under
section 15G of the Securities Exchange
Act of 1934, as amended (Exchange Act)
(15 U.S.C. 78o–11), as well as the
Federal Deposit Insurance Act (12
U.S.C. 1801 et seq.) and the
International Banking Act of 1978, as
amended (12 U.S.C. 3101 et seq.).
(2) Nothing in this part shall be read
to limit the authority of the FDIC to take
action under provisions of law other
than 15 U.S.C. 78o–11, including to
address unsafe or unsound practices or
conditions, or violations of law or
regulation under section 8 of the Federal
Deposit Insurance Act (12 U.S.C. 1818).
(b) Purpose. This part requires
securitizers to retain an economic
interest in a portion of the credit risk for
any asset that the securitizer, through
the issuance of an asset-backed security,
transfers, sells, or conveys to a third
party in a transaction within the scope
of section 15G of the Exchange Act. This
part specifies the permissible types,
forms, and amounts of credit risk
retention, and it establishes certain
exemptions for securitizations
collateralized by assets that meet
specified underwriting standards or that
otherwise qualify for an exemption.
(c) Scope. This part applies to any
securitizer that is:
(1) A state nonmember bank (as
defined in 12 U.S.C. 1813(e)(2));
(2) An insured federal or state branch
of a foreign bank (as defined in 12 CFR
347.202); or
(3) Any subsidiary of the foregoing.
FEDERAL HOUSING FINANCE
AGENCY
List of Subjects in 12 CFR Part 1234
Government sponsored enterprises,
Mortgages, Securities.
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PART 1234—CREDIT RISK RETENTION
Authority: 12 U.S.C. 4511(b), 4526, 4617;
15 U.S.C. 78o–11(b)(2).
9. Section 1234.1 is added to read as
follows:
§ 1234.1 Purpose, scope and reservation
of authority.
(a) Purpose. This part requires
securitizers to retain an economic
interest in a portion of the credit risk for
any residential mortgage asset that the
securitizer, through the issuance of an
asset-backed security, transfers, sells, or
conveys to a third party in a transaction
within the scope of section 15G of the
Exchange Act. This part specifies the
permissible types, forms, and amounts
of credit risk retention, and it
establishes certain exemptions for
securitizations collateralized by assets
that meet specified underwriting
standards or that otherwise qualify for
an exemption.
(b) Scope. Effective [DATE ONE
YEAR AFTER PUBLICATION IN THE
FEDERAL REGISTER AS A FINAL
RULE], this part will apply to any
securitizer that is an entity regulated by
the Federal Housing Finance Agency.
(c) Reservation of authority. Nothing
in this part shall be read to limit the
authority of the Director of the Federal
Housing Finance Agency to take
supervisory or enforcement action,
including action to address unsafe or
unsound practices or conditions, or
violations of law.
10. Amend § 1234.16 as follows:
a. Revise the section heading to read
as set forth below.
b. In the introductory text, remove the
words ‘‘§ 1234.17 through § 1234.20’’
and add in their place the words
‘‘§ 1234.19’’.
c. Remove the definitions of
‘‘Automobile loan’’, ‘‘Commercial loan’’,
‘‘Debt to income (DTI) ratio’’, ‘‘Earnings
before interest, taxes, depreciation, and
amortization (EBITDA)’’, ‘‘Leverage
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§ 1234.16 Definitions applicable to
qualifying commercial mortgages.
*
*
*
*
Debt service coverage (DSC) ratio
means the ratio of:
(1) The annual NOI less the annual
replacement reserve of the CRE property
at the time of origination of the CRE
loans; to
(2) The sum of the borrower’s annual
payments for principal and interest on
any debt obligation.
*
*
*
*
*
§§ 1234.17, 1234.18, and 1234.20
[Removed and reserved]
11. Remove and reserve §§ 1234.17,
1234.18 and 1234.20.
12. Amend § 1234.19 as follows:
a. Revise the section heading to read
as set forth below.
b. Add introductory text to read as set
forth below.
§ 1234.19
loans.
Exception for qualifying CRE
The risk retention requirements in
subpart B of this part shall not apply to
securitization transactions that satisfy
the standards provided in this section.
*
*
*
*
*
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Chapter II
List of Subjects in 17 CFR Part 246
Reporting and recordkeeping
requirements, Securities.
Authority and Issuance
For the reasons stated in the
Supplementary Information, the
Securities and Exchange Commission
proposes the amendments to 17 CFR
chapter II under the authority set forth
in Sections 7, 10, 19(a), and 28 of the
Securities Act and Sections 3, 13, 15,
15G, 23 and 36 of the Exchange Act.
PART 246—CREDIT RISK RETENTION
13. The authority citation for part 246
is added to read as follows:
Authority: 15 U.S.C. 77g, 77j, 77s, 77z–3,
78c, 78m, 78o, 78o–11, 78w, 78mm.
14. Part 246 is added as set forth at
the end of the Common Preamble.
15. Section 246.1 is added to read as
follows:
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Authority, purpose and scope.
srobinson on DSKHWCL6B1PROD with PROPOSALS
(a) Authority and purpose. This part
(Regulation RR) is issued by the
Securities and Exchange Commission
(‘‘Commission’’) jointly with the Board
of Governors of the Federal Reserve
System, the Federal Deposit Insurance
Corporation, the Office of the
Comptroller of the Currency, and, in the
case of the securitization of any
residential mortgage asset, together with
the Secretary of Housing and Urban
Development and the Federal Housing
Finance Agency, pursuant to Section
15G of the Securities Exchange Act of
1934 (15 U.S.C. 78o–11). The
Commission also is issuing this part
pursuant to its authority under Sections
7, 10, 19(a), and 28 of the Securities Act
and Sections 3, 13, 15, 23, and 36 of the
Exchange Act. This part requires
securitizers to retain an economic
interest in a portion of the credit risk for
any asset that the securitizer, through
the issuance of an asset-backed security,
transfers, sells, or conveys to a third
party. This part specifies the
permissible types, forms, and amounts
of credit risk retention, and establishes
certain exemptions for securitizations
collateralized by assets that meet
specified underwriting standards or
otherwise qualify for an exemption.
(b) The authority of the Commission
under this part shall be in addition to
the authority of the Commission to
otherwise enforce the federal securities
laws, including, without limitation, the
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18:07 Apr 28, 2011
Jkt 223001
antifraud provisions of the securities
laws.
DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
24 CFR Part 267
List of Subjects in 24 CFR Part 267
Mortgages.
Authority and Issuance
For the reasons stated in the
SUPPLEMENTARY INFORMATION, HUD
proposes to add the text of the common
rule as set forth at the end of the
SUPPLEMENTARY INFORMATION to 24 CFR
chapter II, subchapter B, as a new part
267 to read as follows:
PART 267—CREDIT RISK RETENTION
16. The authority citation for part 267
is added to read as follows:
Authority: 15 U.S.C. 78–o–11; 42 U.S.C.
3535(d).
17. Section 267.1 is added to read as
follows:
§ 267.1 Credit risk retention exceptions
and exemptions for HUD programs.
The credit risk retention regulations
codified at 12 CFR part 43 (Office of the
Comptroller of the Currency); 12 CFR
part 244 (Federal Reserve System); 12
CFR part 373 (Federal Deposit Insurance
Corporation); 17 CFR part 246
(Securities and Exchange Commission);
and 12 CFR part 1234 (Federal Housing
Finance Agency) include exceptions
PO 00000
Frm 00098
Fmt 4701
Sfmt 9990
and exemptions in Subpart D of each of
these codified regulations for certain
transactions involving programs and
entities under the jurisdiction of the
Department of Housing and Urban
Development.
Dated: March 28, 2011.
John Walsh,
Acting Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, March 30, 2011.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 29th of
March 2011.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: March 29, 2011.
Edward J. Demarco,
Acting Director, Federal Housing Finance
Agency.
By the Securities and Exchange
Commission.
Dated: March 30, 2011.
Elizabeth M. Murphy,
Secretary.
Jointly prescribed with the Agencies.
By the Department of Housing and Urban
Development.
Dated: March 31, 2011.
Shaun Donovan,
Secretary.
[FR Doc. 2011–8364 Filed 4–28–11; 8:45 am]
BILLING CODE P
E:\FR\FM\29APP2.SGM
29APP2
]]>Agencies
[Federal Register Volume 76, Number 83 (Friday, April 29, 2011)]
[Proposed Rules]
[Pages 24090-24186]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-8364]
[[Page 24089]]
Vol. 76
Friday,
No. 83
April 29, 2011
Part II
Department of the Treasury
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Office of the Comptroller of the Currency
12 CFR Part 43
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Federal Reserve System
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12 CFR Part 244
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Federal Deposit Insurance Corporation
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12 CFR Part 373
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Federal Housing Finance Agency
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12 CFR Part 1234
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Securities and Exchange Commission
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17 CFR Part 246
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Department of Housing and Urban Development
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24 CFR Part 267
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Credit Risk Retention; Proposed Rule
Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 /
Proposed Rules
[[Page 24090]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 43
[Docket No. OCC-2011-0002]
RIN 1557-AD40
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Part 244
[Docket No. 2011-1411]
RIN 7100-AD-70
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 373
RIN 3064-AD74
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FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1234
RIN 2590-AA43
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 246
[Release No. 34-64148; File No. S7-14-11]
RIN 3235-AK96
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 267
RIN 2501-AD53
Credit Risk Retention
AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); U.S. Securities and Exchange
Commission (Commission); Federal Housing Finance Agency (FHFA); and
Department of Housing and Urban Development (HUD).
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The OCC, Board, FDIC, Commission, FHFA, and HUD (the Agencies)
are proposing rules to implement the credit risk retention requirements
of section 15G of the Securities Exchange Act of 1934 (15 U.S.C. 78o-
11), as added by section 941 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. Section 15G generally requires the securitizer
of asset-backed securities to retain not less than five percent of the
credit risk of the assets collateralizing the asset-backed securities.
Section 15G includes a variety of exemptions from these requirements,
including an exemption for asset-backed securities that are
collateralized exclusively by residential mortgages that qualify as
``qualified residential mortgages,'' as such term is defined by the
Agencies by rule.
DATES: Comments must be received by June 10, 2011.
ADDRESSES: Interested parties are encouraged to submit written comments
jointly to all of the Agencies. Commenters are encouraged to use the
title ``Credit Risk Retention'' to facilitate the organization and
distribution of comments among the Agencies. Commenters are also
encouraged to identify the number of the specific request for comment
to which they are responding.
Office of the Comptroller of the Currency: Because paper mail in
the Washington, DC, area and at the OCC is subject to delay, commenters
are encouraged to submit comments by the Federal eRulemaking Portal or
e-mail, if possible. Please use the title ``Credit Risk Retention'' to
facilitate the organization and distribution of the comments. You may
submit comments by any of the following methods:
Federal eRulemaking Portal--``Regulations.gov'': Go to
https://www.regulations.gov, under the ``More Search Options'' tab click
next to the ``Advanced Docket Search'' option where indicated, select
``Comptroller of the Currency'' from the agency drop-down menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2011-0002''
to submit or view public comments and to view supporting and related
materials for this proposed rule. The ``How to Use This Site'' link on
the Regulations.gov home page provides information on using
Regulations.gov, including instructions for submitting or viewing
public comments, viewing other supporting and related materials, and
viewing the docket after the close of the comment period.
E-mail: regs.comments@occ.treas.gov.
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 2-3, Washington, DC 20219.
Fax: (202) 874-5274.
Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2-3,
Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket Number OCC-2011-0002'' in your comment. In general, OCC will
enter all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, e-mail addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this proposed rulemaking by any of the following methods:
Viewing Comments Electronically: Go to https://www.regulations.gov, under the ``More Search Options'' tab click next
to the ``Advanced Document Search'' option where indicated, select
``Comptroller of the Currency'' from the agency drop-down menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2011-0002''
to view public comments for this rulemaking action.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 250 E Street, SW., Washington, DC.
For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid
government-issued photo identification and submit to security screening
in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
Board of Governors of the Federal Reserve System: You may submit
comments, identified by Docket No. R-1411, by any of the following
methods:
Agency Web Site: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Address to Jennifer J. Johnson, Secretary, Board of
Governors of the
[[Page 24091]]
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551.
All public comments will be made available on the Board's Web site
at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, comments
will not be edited to remove any identifying or contact information.
Public comments may also be viewed electronically or in paper in Room
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between
9 a.m. and 5 p.m. on weekdays.
Federal Deposit Insurance Corporation: You may submit comments,
identified by RIN number, 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 the RIN number 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 must include the agency name
and RIN for this rulemaking and will be posted without change to https://www.fdic.gov/regulations/laws/federal/propose.html, including any
personal information provided.
Securities and Exchange Commission: You may submit comments by the
following method:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-14-11 on the subject line; or
Use the Federal eRulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-14-11. This
file number should be included on the subject line if e-mail is used.
To help us process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's Internet Web site (https://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. All comments received will be posted without change; we
do not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.
Federal Housing Finance Agency: You may submit your written
comments on the proposed rulemaking, identified by RIN number 2590-
AA43, by any of the following methods:
E-mail: Comments to Alfred M. Pollard, General Counsel,
may be sent by e-mail at RegComments@fhfa.gov. Please include ``RIN
2590-AA43'' in the subject line of the message.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at RegComments@fhfa.gov to ensure timely receipt by the
Agency. Please include ``RIN 2590-AA43'' in the subject line of the
message.
U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Alfred M.
Pollard, General Counsel, Attention: Comments/RIN 2590-AA43, Federal
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington,
DC 20552.
Hand Delivery/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA43,
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW.,
Washington, DC 20552. A hand-delivered package should be logged at the
Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m.
All comments received by the deadline will be posted for public
inspection without change, including any personal information you
provide, such as your name and address, on the FHFA website at https://www.fhfa.gov. Copies of all comments timely received will be available
for public inspection and copying at the address above on government-
business days between the hours of 10 a.m. and 3 p.m. To make an
appointment to inspect comments please call the Office of General
Counsel at (202) 414-6924.
Department of Housing and Urban Development: Interested persons are
invited to submit comments regarding this rule to the Regulations
Division, Office of General Counsel, Department of Housing and Urban
Development, 451 7th Street, SW., Room 10276, Washington, DC 20410-
0500. Communications must refer to the following docket number [FR-
5504-P-01] and title of this rule. There are two methods for submitting
public comments. All submissions must refer to the above docket number
and title.
Submission of Comments by Mail. Comments may be submitted
by mail to the Regulations Division, Office of General Counsel,
Department of Housing and Urban Development, 451 7th Street, SW., Room
10276, Washington, DC 20410-0500.
Electronic Submission of Comments. Interested persons may
submit comments electronically through the Federal eRulemaking Portal
at www.regulations.gov. HUD strongly encourages commenters to submit
comments electronically. Electronic submission of comments allows the
commenter maximum time to prepare and submit a comment, ensures timely
receipt by HUD, and enables HUD to make them immediately available to
the public. Comments submitted electronically through the
www.regulations.gov website can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
Note: To receive consideration as public comments,
comments must be submitted through one of the two methods specified
above. Again, all submissions must refer to the docket number and title
of the rule.
No Facsimile Comments. Facsimile (FAX) comments are not
acceptable.
Public Inspection of Public Comments. All properly
submitted comments and communications submitted to HUD will be
available for public inspection and copying between 8 a.m. and 5 p.m.
weekdays at the above address. Due to security measures at the HUD
Headquarters building, an appointment to review the public comments
must be scheduled in advance by calling the Regulations Division at
202-708-3055 (this is not a toll-free number). Individuals with speech
or hearing impairments may access this number via TTY by calling the
Federal Information Relay Service at 800-877-8339. Copies of all
comments submitted are available for inspection and downloading at
https://www.regulations.gov.
[[Page 24092]]
FOR FURTHER INFORMATION CONTACT: OCC: Chris Downey, Risk Specialist,
Financial Markets Group, (202) 874-4660; Kevin Russell, Director,
Retail Credit Risk, (202) 874-5170; Darrin Benhart, Director,
Commercial Credit Risk, (202) 874-5670; or Jamey Basham, Assistant
Director, or Carl Kaminski, Senior Attorney, Legislative and Regulatory
Activities Division, (202) 874-5090, Office of the Comptroller of the
Currency, 250 E Street, SW., Washington, DC 20219.
Board: Benjamin W. McDonough, Counsel, (202) 452-2036; April C.
Snyder, Counsel, (202) 452-3099; Sebastian R. Astrada, Attorney, (202)
452-3594; or Flora H. Ahn, Attorney, (202) 452-2317, Legal Division;
Thomas R. Boemio, Manager, (202) 452-2982; Donald N. Gabbai, Senior
Supervisory Financial Analyst, (202) 452-3358; or Sviatlana A. Phelan,
Financial Analyst, (202) 912-4306, Division of Banking Supervision and
Regulation; Andreas Lehnert, Deputy Director, Office of Financial
Stability Policy and Research, (202) 452-3325; or Brent Lattin,
Counsel, (202) 452-3367, Division of Consumer and Community Affairs,
Board of Governors of the Federal Reserve System, 20th and C Streets,
NW., Washington, DC 20551.
FDIC: Beverlea S. Gardner, Special Assistant to the Chairman, (202)
898-3640; Mark L. Handzlik, Counsel, (202) 898-3990; Phillip E. Sloan,
Counsel, (703) 562-6137; or Petrina R. Dawson, Counsel, (703) 562-2688,
Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Commission: Jay Knight, Attorney-Advisor in the Office of
Rulemaking, or Katherine Hsu, Chief of the Office of Structured
Finance, Division of Corporation Finance, at (202) 551-3753, U.S.
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-3628.
FHFA: Patrick J. Lawler, Associate Director and Chief Economist,
Patrick.Lawler@fhfa.gov, (202) 414-3746; Austin Kelly, Associate
Director for Housing Finance Research, Austin.Kelly@fhfa.gov, (202)
343-1336; Phillip Millman, Principal Capital Markets Specialist,
Phillip.Millman@fhfa.gov, (202) 343-1507; or Thomas E. Joseph, Senior
Attorney Advisor, Thomas.Joseph@fhfa.gov, (202) 414-3095; Federal
Housing Finance Agency, Third Floor, 1700 G Street, NW., Washington, DC
20552. The telephone number for the Telecommunications Device for the
Hearing Impaired is (800) 877-8339.
HUD: Robert C. Ryan, Deputy Assistant Secretary for Risk Management
and Regulatory Affairs, Office of Housing, Department of Housing and
Urban Development, 451 7th Street, SW., Room 9106, Washington, DC
20410; telephone number 202-402-5216 (this is not a toll-free number).
Persons with hearing or speech impairments may access this number
through TTY by calling the toll-free Federal Information Relay Service
at 800-877-8339.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. General Definitions and Scope
A. Asset-Backed Securities, Securitization Transaction and ABS
Interests
B. Securitizer, Sponsor, and Depositor
C. Originator
III. General Risk Retention Requirement
A. Minimum 5 Percent Risk Retention Required
B. Permissible Forms of Risk Retention
1. Vertical Risk Retention
2. Horizontal Risk Retention
3. L-Shaped Risk Retention
4. Revolving Asset Master Trusts (Seller's Interest)
5. Representative Sample
6. Asset-Backed Commercial Paper Conduits
7. Commercial Mortgage-Backed Securities
8. Treatment of Government-Sponsored Enterprises
9. Premium Capture Cash Reserve Account
C. Allocation to the Originator
D. Hedging, Transfer, and Financing Restrictions
IV. Qualified Residential Mortgages
A. Overall Approach to Defining Qualified Residential Mortgages
B. Exemption for QRMs
C. Eligibility Criteria
1. Eligible Loans, First Lien, No Subordinate Liens, Original
Maturity and Written Application Requirements
2. Borrower Credit History
3. Payment Terms
4. Loan-to-Value Ratio
5. Down Payment
6. Qualifying Appraisal
7. Ability To Repay
8. Points and Fees
9. Assumability Prohibition
D. Repurchase of Loans Subsequently Determined To Be Non-
Qualified After Closing
E. Request for Comment on Possible Alternative Approach
V. Reduced Risk Retention Requirements for ABS Backed by Qualifying
Commercial Real Estate, Commercial, or Automobile Loans
A. Asset Classes
B. ABS Collateralized Exclusively by Qualifying CRE Loans,
Commercial Loans, or Automobile Loans
C. Qualifying Commercial Loans
1. Ability To Repay
2. Risk Management and Monitoring Requirements
D. Qualifying CRE Loans
1. Ability To Repay
2. Loan-to-Value Requirement
3. Valuation of the Collateral
4. Risk Management and Monitoring Requirements
E. Qualifying Automobile Loans
1. Ability to Repay
2. Loan Terms
3. Reviewing Credit History
4. Loan-to-Value
F. Buy-Back Requirements for ABS Issuances Collateralized by
Qualifying Commercial, CRE or Automobile Loans
VI. General Exemptions
A. Exemption for Federally Insured or Guaranteed Residential,
Multifamily and Health Care Mortgage Assets
B. Other Exemptions
C. Exemption for Certain Resecuritization Transactions
D. Additional Exemptions
E. Safe Harbor for Certain Foreign-Related Transactions
VII. Solicitation of Comments on Use of Plain Language
VIII. Administrative Law Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Commission Economic Analysis
D. Executive Order 12866 Determination
E. OCC Unfunded Mandates Reform Act of 1995 Determination
F. Commission: Small Business Regulatory Enforcement Fairness
Act
G. FHFA: Considerations of Differences Between the Federal Home
Loan Banks and the Enterprises
I. Introduction
The Agencies are requesting comment on proposed rules (proposal or
proposed rules) to implement the requirements of section 941(b) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act, or
Dodd-Frank Act),\1\ which is codified as new section 15G of the
Securities Exchange Act of 1934 (the Exchange Act).\2\ Section 15G of
the Exchange Act, as added by section 941(b) of the Dodd-Frank Act,
generally requires the Board, the FDIC, the OCC (collectively, referred
to as the Federal banking agencies), the Commission, and, in the case
of the securitization of any ``residential mortgage asset,'' together
with HUD and FHFA, to jointly prescribe regulations that (i) require a
securitizer to retain not less than five percent of the credit risk of
any asset that the securitizer, through the issuance of an asset-backed
security (ABS), transfers, sells, or conveys to a third party, and (ii)
prohibit a securitizer from directly or indirectly hedging or otherwise
transferring the credit risk that the securitizer is required to retain
under section 15G and the Agencies' implementing rules.\3\
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\1\ Public Law 111-203, 124 Stat. 1376 (2010).
\2\ 15 U.S.C. 78o-11.
\3\ See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B)(ii).
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[[Page 24093]]
Section 15G of the Exchange Act exempts certain types of
securitization transactions from these risk retention requirements and
authorizes the Agencies to exempt or establish a lower risk retention
requirement for other types of securitization transactions. For
example, section 15G specifically provides that a securitizer shall not
be required to retain any part of the credit risk for an asset that is
transferred, sold, or conveyed through the issuance of ABS by the
securitizer, if all of the assets that collateralize the ABS are
qualified residential mortgages (QRMs), as that term is jointly defined
by the Agencies.\4\ In addition, section 15G states that the Agencies
must permit a securitizer to retain less than five percent of the
credit risk of commercial mortgages, commercial loans, and automobile
loans that are transferred, sold, or conveyed through the issuance of
ABS by the securitizer if the loans meet underwriting standards
established by the Federal banking agencies.\5\
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\4\ See 15 U.S.C. 78o-11(c)(1)(C)(iii), (4)(A) and (B).
\5\ See id. at sec. 78o-11(c)(1)(B)(ii) and (2).
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As shown in tables A, B, C, and D below, the securitization markets
are an important source of credit to U.S. households and businesses and
state and local governments.\6\
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\6\ Data are through September 2010. All data from Asset Backed
Alert except: CMBS data from Commercial Mortgage Alert, CLO data
from Securities Industry and Financial Markets Association. The
tables do not include any data on securities issued or guaranteed by
the Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation.
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[[Page 24095]]
[GRAPHIC] [TIFF OMITTED] TP29AP11.001
BILLING CODE 4810-33-C
Table D--Total U.S. Asset and Mortgage Backed Securitizations Issued per Year
[Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total 2002
2002 2003 2004 2005 2006 2007 2008 2009 2010 3Q2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Auto...................................... 95,484 86,350 72,881 103,717 82,000 66,773 35,469 53,944 43,104 639,724
CLO....................................... 30,388 22,584 32,192 69,441 171,906 138,827 27,489 2,033 ........ 494,860
CMBS...................................... 89,900 107,354 136,986 245,883 305,714 319,863 33,583 38,750 27,297 1,305,329
Credit Cards.............................. 73,004 67,385 51,188 62,916 72,518 94,470 61,628 46,581 6,149 535,839
Equipment................................. 7,062 9,022 6,288 9,030 8,404 6,066 3,014 7,240 5,010 61,137
Floorplan................................. 3,000 6,315 11,848 12,670 12,173 6,925 1,000 4,959 8,619 67,510
Other..................................... 135,384 196,769 330,161 444,137 516,175 165,515 19,872 10,652 24,936 1,843,601
RMBS...................................... 287,916 396,288 503,911 724,115 723,257 641,808 28,612 48,082 39,830 3,393,819
Student Loan.............................. 25,367 40,067 45,759 62,212 65,745 5,812,212 28,199 20,839 13,899 360,210
-------------------------------------------------------------------------------------------------------------
Total................................. 747,506 932,134 1,191,216 1,734,122 1,957,891 1,498,370 238,868 233,079 168,843 ..........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: 2010 Data are through the month of September.
When properly structured, securitization provides economic benefits
that lower the cost of credit to households and businesses.\7\ However,
when incentives are not properly aligned and there is a lack of
discipline in the origination process, securitization can result in
harm to investors, consumers, financial institutions, and the financial
system. During the financial crisis, securitization displayed
significant vulnerabilities to informational and incentive problems
among various parties involved in the process.\8\
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\7\ Securitization may reduce the cost of funding, which is
accomplished through several different mechanisms. For example,
firms that specialize in originating new loans and that have
difficulty funding existing loans may use securitization to access
more liquid capital markets for funding. In addition, securitization
can create opportunities for more efficient management of the asset-
liability duration mismatch generally associated with the funding of
long-term loans, for example, with short-term bank deposits.
Securitization also allows the structuring of securities with
differing maturity and credit risk profiles that may appeal to a
broad range of investors from a single pool of assets. Moreover,
securitization that involves the transfer of credit risk allows
financial institutions that primarily originate loans to particular
classes of borrowers, or in particular geographic areas, to limit
concentrated exposure to these idiosyncratic risks on their balance
sheets. See generally Report to the Congress on Risk Retention,
Board of Governors of the Federal Reserve System, at 8 (October
2010), available at https://federalreserve.gov/boarddocs/rptcongress/securitization/riskretention.pdf (Board Report).
\8\ See Board Report at 8-9.
---------------------------------------------------------------------------
For example, as noted in the legislative history of section 15G,
under the ``originate to distribute'' model, loans were made expressly
to be sold into securitization pools, with lenders often not expecting
to bear the credit risk of borrower default.\9\ In addition,
participants in the securitization chain may be able to affect the
value of the ABS in opaque ways, both before and after the sale of the
securities, particularly if those assets are resecuritized into complex
instruments
[[Page 24096]]
such as collateralized debt obligations (CDOs) and CDOs-squared.\10\
Moreover, some lenders using an ``originate-to-distribute'' business
model loosened their underwriting standards knowing that the loans
could be sold through a securitization and retained little or no
continuing exposure to the quality of those assets.\11\
---------------------------------------------------------------------------
\9\ See S. Rep. No. 111-176, at 128 (2010).
\10\ See id.
\11\ See id.
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The risk retention requirements added by section 15G are intended
to help address problems in the securitization markets by requiring
that securitizers, as a general matter, retain an economic interest in
the credit risk of the assets they securitize. As indicated in the
legislative history of section 15G, ``When securitizers retain a
material amount of risk, they have `skin in the game,' aligning their
economic interest with those of investors in asset-backed securities.''
\12\ By requiring that the securitizer retain a portion of the credit
risk of the assets being securitized, section 15G provides securitizers
an incentive to monitor and ensure the quality of the assets underlying
a securitization transaction, and thereby helps align the interests of
the securitizer with the interests of investors. Additionally, in
circumstances where the assets collateralizing the ABS meet
underwriting and other standards that should ensure the assets pose low
credit risk, the statute provides or permits an exemption.\13\
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\12\ See id. at 129.
\13\ See 15 U.S.C. 78o-11(c)(1)(B)(ii), (e)(1)-(2).
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The credit risk retention requirements of section 15G are an
important part of the legislative and regulatory efforts to address
weaknesses and failures in the securitization process and the
securitization markets. Section 15G complements other parts of the
Dodd-Frank Act intended to improve the securitization markets. These
include, among others, provisions that strengthen the regulation and
supervision of nationally recognized statistical rating agencies
(NRSROs) and improve the transparency of credit ratings; \14\ provide
for issuers of registered ABS offerings to perform a review of the
assets underlying the ABS and disclose the nature of the review; \15\
and require issuers of ABS to disclose the history of the repurchase
requests they received and repurchases they made related to their
outstanding ABS.\16\
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\14\ See, e.g., sections 932, 935, 936, 938, and 943 of the
Dodd-Frank Act.
\15\ See section 945 of the Dodd-Frank Act.
\16\ See section 943 of the Dodd-Frank Act.
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In developing the proposed rules, the Agencies have taken into
account the diversity of assets that are securitized, the structures
historically used in securitizations, and the manner in which
securitizers may have retained exposure to the credit risk of the
assets they securitize.\17\ As described in detail below, the proposed
rules provide several options securitizers may choose from in meeting
the risk retention requirements of section 15G, including, but not
limited to, retention of a five percent ``vertical'' slice of each
class of interests issued in the securitization or retention of a five
percent ``horizontal'' first-loss interest in the securitization, as
well as other risk retention options that take into account the manners
in which risk retention often has occurred in credit card receivable
and automobile loan and lease securitizations and in connection with
the issuance of asset-backed commercial paper. The proposed rules also
include a special ``premium capture'' mechanism designed to prevent a
securitizer from structuring an ABS transaction in a manner that would
allow the securitizer to effectively negate or reduce its retained
economic exposure to the securitized assets by immediately monetizing
the excess spread created by the securitization transaction.\18\ In
designing these options and the proposed rules in general, the Agencies
have sought to ensure that the amount of credit risk retained is
meaningful--consistent with the purposes of section 15G--while reducing
the potential for the proposed rules to negatively affect the
availability and costs of credit to consumers and businesses.
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\17\ Both the language and legislative history of section 15G
indicate that Congress expected the agencies to be mindful of the
heterogeneity of securitization markets. See, e.g., 15 U.S.C. 78o-
11(c)(1)(E), (c)(2), (e); S. Rep. No. 111-76, at 130 (2010) (``The
Committee believes that implementation of risk retention obligations
should recognize the differences in securitization practices for
various asset classes.'')
\18\ ``Excess spread'' is the difference between the gross yield
on the pool of securitized assets less the cost of financing those
assets (weighted average coupon paid on the investor certificates),
charge-offs, servicing costs, and any other trust expenses (such as
insurance premiums, if any).
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As required by section 15G, the proposed rules provide a complete
exemption from the risk retention requirements for ABS that are
collateralized solely by QRMs and establish the terms and conditions
under which a residential mortgage would qualify as a QRM. In
developing the proposed definition of a QRM, the Agencies carefully
considered the terms and purposes of section 15G, public input, and the
potential impact of a broad or narrow definition of QRMs on the housing
and housing finance markets.
As discussed in greater detail in Part V of this Supplementary
Information, the proposed rules would generally prohibit QRMs from
having product features that contributed significantly to the high
levels of delinquencies and foreclosures since 2007--such as terms
permitting negative amortization, interest-only payments, or
significant interest rate increases--and also would establish
underwriting standards designed to ensure that QRMs are of very high
credit quality consistent with their exemption from risk retention
requirements. These underwriting standards include, among other things,
maximum front-end and back-end debt-to-income ratios of 28 percent and
36 percent, respectively; \19\ a maximum loan-to-value (LTV) ratio of
80 percent in the case of a purchase transaction (with a lesser
combined LTV permitted for refinance transactions); a 20 percent down
payment requirement in the case of a purchase transaction; and credit
history restrictions.
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\19\ A front-end debt-to-income ratio measures how much of the
borrower's gross (pretax) monthly income is represented by the
borrower's required payment on the first-lien mortgage, including
real estate taxes and insurance. A back-end debt-to-income ratio
measures how much of a borrower's gross (pretax) monthly income
would go toward monthly mortgage and nonmortgage debt service
obligations.
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The proposed rules also would not require a securitizer to retain
any portion of the credit risk associated with a securitization
transaction if the ABS issued are exclusively collateralized by
commercial loans, commercial mortgages, or automobile loans that meet
underwriting standards included in the proposed rules for the
individual asset class. As for QRMs, these underwriting standards are
designed to be robust and ensure that the loans backing the ABS are of
very low credit risk. In this Supplementary Information, the Agencies
refer to these assets (including QRMs) as ``qualified assets.''
The Agencies recognize that many prudently underwritten residential
and mortgage loans, commercial loans, and automobile loans may not
satisfy all the underwriting and other criteria in the proposed rules
for qualified assets. Securitizers of ABS backed by such prudently
underwritten loans would, as a general matter, be required to retain
credit risk under the rule. However, as noted above, the Agencies have
sought to structure the proposed risk retention requirements in a
flexible manner that would allow the securitization markets for non-
qualified assets to function in a
[[Page 24097]]
manner that both facilitates the flow of credit to consumers and
businesses on economically viable terms and is consistent with the
protection of investors.
Section 15G allocates the authority for writing rules to implement
its provisions among the Agencies in various ways. As a general matter,
the Agencies collectively are responsible for adopting joint rules to
implement the risk retention requirements of section 15G for
securitizations that are backed by residential mortgage assets and for
defining what constitutes a QRM for purposes of the exemption for QRM-
backed ABS.\20\ The Federal banking agencies and the Commission,
however, are responsible for adopting joint rules that implement
section 15G for securitizations backed by all other types of
assets,\21\ and also are the agencies authorized to adopt rules in
several specific areas under section 15G.\22\ In addition, the Federal
banking agencies are responsible for establishing, by rule, the
underwriting standards for non-QRM residential mortgages, commercial
mortgages, commercial loans and automobile loans that would qualify ABS
backed by these types of loans for a less than five percent risk
retention requirement.\23\ Accordingly, when used in this proposal, the
term ``Agencies'' shall be deemed to refer to the appropriate Agencies
that have rulewriting authority with respect to the asset class,
securitization transaction, or other matter discussed. The Secretary of
the Treasury, as Chairperson of the Financial Stability Oversight
Council, coordinated the development of these joint proposed rules in
accordance with the requirements of section 15G.\24\
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\20\ See id. at sec. 78o-11(b)(2), (e)(4)(A) and (B).
\21\ See id. at sec. 78o-11(b)(1).
\22\ See, e.g. id. at sec. 78o-11(b)(1)(E) (relating to the risk
retention requirements for ABS collateralized by commercial
mortgages); (b)(1)(G)(ii) (relating to additional exemptions for
assets issued or guaranteed by the United States or an agency of the
United States); (d) (relating to the allocation of risk retention
obligations between a securitizer and an originator); and (e)(1)
(relating to additional exemptions, exceptions or adjustments for
classes of institutions or assets).
\23\ See id. at sec. 78o-11(b)(2)(B). Therefore, pursuant to
section 15G, only the Federal banking agencies are proposing the
underwriting definitions in Sec. --.16 (except the asset class
definitions of automobile loan, commercial loan, and commercial real
estate loan, which are being proposed by the Federal banking
agencies and the Commission), and the underwriting standards in
Sec. Sec. --.18(b)(1)-(6), --.19(b)(1)-(9), and --.20(b)(1)-(8) of
the proposed rules. At the final rule stage, FHFA proposes to adopt
only those provisions of the common rules that address the types of
asset securitization transactions in which its regulated entities
could be authorized to engage under existing law. The remaining
provisions, such as those addressing underwriting standards for non-
residential commercial loans and auto loans, would be designated as
[reserved], and the provisions adopted would be numbered and
otherwise designated so as to correspond to the equivalent
provisions appearing in the regulations of the other Agencies.
\24\ See id. at 78o-11(h).
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For ease of reference, the proposed rules of the Agencies are
referenced using a common designation of Sec. --.1 to Sec. --.23
(excluding the title and part designations for each Agency). With the
exception of HUD, each Agency will codify the rules, when adopted in
final form, within each of their respective titles of the Code of
Federal Regulations.\25\ Section --.1 of each Agency's proposed rules
identifies the entities or transactions that would be subject to such
Agency's rules.\26\
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\25\ Specifically, the agencies propose to codify the rules as
follows: 12 CFR part 43 (OCC); 12 CFR part 244 (Regulation RR)
(Board); 12 CFR part 373 (FDIC); 17 CFR part 246 (Commission); 12
CFR part 1234 (FHFA). As required by section 15G, HUD has jointly
prescribed the proposed rules for a securitization that is backed by
any residential mortgage asset and for purposes of defining a
qualified residential mortgage. HUD's codification in 24 CFR part
267 indicates that the proposed rules include exceptions and
exemptions in Subpart D of each of these rules for certain
transactions involving programs and entities under the jurisdiction
of HUD.
\26\ The joint proposed rules being adopted by the Agencies
would apply to all sponsors that fall within the scope of 15G,
including state and federal savings associations and savings and
loan holding companies. These entities are currently regulated and
supervised by the Office of Thrift Supervision (OTS), which is not
among the Federal banking agencies with rulemaking authority under
section 15G. Authority of the OTS under the Home Owners' Loan Act
(12 U.S.C. 1461 et seq.) with respect to such entities will transfer
from the OTS to the Board, FDIC, and OCC on the transfer date
provided in section 311 of the Dodd-Frank Act. This transfer will
take place well before the effective date of the Federal banking
agencies' final rules under section 15G. Accordingly, the final
rules issued by the appropriate Federal banking agency would include
the relevant set of these entities in the agency's Purpose,
Authority, and Scope section (Sec. --.1).
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In light of the joint nature of the Agencies' rulewriting authority
under section 15G, the appropriate Agencies will jointly approve any
written interpretations, written responses to requests for no-action
letters and legal opinions, or other written interpretive guidance
concerning the scope or terms of section 15G and the final rules issued
thereunder that are intended to be relied on by the public
generally.\27\ Similarly, the appropriate Agencies will jointly approve
any exemptions, exceptions, or adjustments to the final rules.\28\ For
these purposes, the phrase ``appropriate Agencies'' refers to the
Agencies with rulewriting authority for the asset class, securitization
transaction, or other matter addressed by the interpretation, guidance,
exemption, exceptions, or adjustments. The Agencies expect to
coordinate with each other to facilitate the processing, review and
action on requests for such written interpretations or guidance, or
additional exemptions, exceptions or adjustments.
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\27\ These items would not include staff comment letters and
informal written guidance provided to specific institutions or
matters raised in a report of examination or inspection of a
supervised institution, which are not intended to be relied on by
the public generally.
\28\ See 15 U.S.C. 78o-11(c)(1)(G)(i) and (e)(1); proposed rules
at Sec. --.22.
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II. General Definitions and Scope
Section --.2 of the proposed rules defines terms used throughout
the proposed rules. Certain of these definitions are discussed in this
part of the Supplementary Information. Other terms are discussed
together with the section of the proposed rules where they are used.
For example, certain definitions that relate solely to the exemptions
for securitizations based on QRMs and certain qualifying commercial,
commercial real estate, and automobile loans, are contained in, and are
discussed in the context of, those sections (see subpart C of the
proposed rules).
A. Asset-Backed Securities, Securitization Transaction and ABS
Interests
The proposed risk retention rules would apply to securitizers in
securitizations that involve the issuance of ``asset-backed
securities'' as defined in section 3(a)(77) of the Exchange Act, which
also was added to the Exchange Act by section 941 of the Dodd-Frank
Act.\29\ Section 3(a)(77) of the Exchange Act generally defines an
``asset-backed security'' to mean ``a fixed-income or other security
collateralized by any type of self-liquidating financial asset
(including a loan, lease, mortgage, or other secured or unsecured
receivable) that allows the holder of the security to receive payments
that depend primarily on cash flow from the asset.'' \30\ The proposed
rules incorporate by reference this definition of asset-backed security
from the Exchange Act.\31\ Consistent with this definition, the
proposed rules also define the term ``asset'' to mean a self-
liquidating financial asset, including loans, leases, or other
[[Page 24098]]
receivables.\32\ The proposal defines the term ``securitized asset'' to
mean an asset that is transferred, sold, or conveyed to an issuing
entity and that collateralizes the ABS interests issued by the issuing
entity.\33\
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\29\ See section 941(a) of the Dodd-Frank Act.
\30\ See 15 U.S.C. Sec. 78c(a)(77). The term also (i) includes
any other security that the Commission, by rule, determines to be an
asset-backed security for purposes of section 15G of the Exchange
Act; and (ii) does not include a security that is issued by a
finance subsidiary and held by the parent company of the finance
subsidiary or a company that is controlled by such parent company
provided that none of the securities issued by the finance
subsidiary are held by an entity that is not controlled by the
parent company.
\31\ See proposed rules at Sec. --.2 (definition of ``asset-
backed security'').
\32\ See proposed rules at Sec. --.2 (definition of ``asset'').
Because the term ``asset-backed security'' for purposes of section
15G includes only those securities that are collateralized by self-
liquidating financial assets, ``synthetic'' securitizations are not
within the scope of the proposed rules.
\33\ See proposed rules at Sec. --.2. Assets or other property
collateralize an issuance of ABS interests if the assets or property
serves as collateral for such issuance. Assets or other property
serve as collateral for an ABS issuance if they provide the cash
flow for the ABS interests issued by the issuing entity (regardless
of the legal structure of the issuance), and may include security
interests in assets or other property of the issuing entity,
fractional undivided property interests in the assets or other
property of the issuing entity, or any other property interest in
such assets or other property. The term collateral includes leases
that may convert to cash proceeds from the disposition of the
physical property underlying the assets. The cash flow from an asset
includes any proceeds of a foreclosure on, or sale of, the asset.
See proposed rules at Sec. --.2 (definition of ``collateral'' for
an ABS transaction).
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Section 15G does not appear to distinguish between transactions
that are registered with the Commission under the Securities Act of
1933 (the ``Securities Act'') and those that are exempt from
registration under the Securities Act. For example, section 15G
provides authority for exempting from the risk retention requirements
certain securities that are exempt from registration under the
Securities Act.\34\ In addition, the statutory definition of asset-
backed security is broader than the definition of asset-backed security
in the Commission's Regulation AB,\35\ which governs the disclosure
requirements for ABS offerings that are registered under the Securities
Act.\36\ The definition of asset-backed security for purposes of
section 15G also includes securities that are typically sold in
transactions that are exempt from registration under the Securities
Act, such as CDOs, as well as securities issued or guaranteed by a
government sponsored entity (GSE), such as the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac). In light of the foregoing, the proposed risk
retention requirements would apply to securitizers of ABS offerings
whether or not the offering is registered with the Commission under the
Securities Act.
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\34\ See, e.g., 15 U.S.C. 78o-11(c)(1)(G) (authorizing
exemptions from the risk retention requirements certain transactions
that are typically exempt from Securities Act registration); 15
U.S.C. 78o-11(e)(3)(B)(providing for certain exemptions for certain
assets, or securitizations based on assets, which are insured or
guaranteed by the United States).
\35\ 17 CFR 229.1100 through 17 CFR 229.1123.
\36\ See 15 U.S.C. 78b.
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As discussed further below, the proposed rules generally apply the
risk retention requirements to the securitizer in each ``securitization
transaction,'' which is defined as a transaction involving the offer
and sale of ABS by an issuing entity.\37\ Applying the risk retention
requirements to the securitizer of each issuance of ABS ensures that
the requirements apply in the aggregate to all ABS issued by an issuing
entity, including an issuing entity--such as a master trust--that
issues ABS periodically.
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\37\ An ``issuing entity'' is defined to mean, with respect to a
securitization transaction, the trust or other entity created at the
direction of the sponsor that owns or holds the pool of assets to be
securitized, and in whose name the ABS are issued. See proposed
rules at Sec. --.2.
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The proposed rules use the term ``ABS interest'' to refer to all
types of interests or obligations issued by an issuing entity, whether
or not in certificated form, including a security, obligation,
beneficial interest or residual interest, the payments on which are
primarily dependent on the cash flows on the collateral held by the
issuing entity. The term, however, does not include common or preferred
stock, limited liability interests, partnership interests, trust
certificates, or similar interests in an issuing entity that are issued
primarily to evidence ownership of the issuing entity, and the
payments, if any, on which are not primarily dependent on the cash
flows of the collateral held by the issuing entity.\38\
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\38\ See proposed rules at Sec. --.2. In securitization
transactions where ABS interests are issued and some or all of the
cash proceeds of the transaction are retained by the issuing entity
to purchase, during a limited time period after the closing of the
securitization, self-liquidating financial assets to support the
securitization, the terms ``asset,'' ``collateral,'' and
``securitized assets'' should be construed to include such cash
proceeds as well as the assets purchased with such proceeds and any
assets transferred to the issuing entity on the closing date.
Accordingly, the terms ``asset-backed security'' and ``ABS
interest'' should also be construed to include securities and other
interests backed by such proceeds. Such securitization transactions
are commonly referred to as including a ``pre-funding account.''
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B. Securitizer, Sponsor, and Depositor
Section 15G generally provides for the Agencies to apply the risk
retention requirements of the statute to a ``securitizer'' of ABS.
Section 15G(a)(3) in turn provides that the term ``securitizer'' with
respect to an issuance of ABS includes both ``(A) an issuer of an
asset-backed security; or (B) a person who organizes and initiates an
asset-backed securities transaction by selling or transferring assets,
either directly or indirectly, including through an affiliate, to the
issuer.''\39\
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\39\ See 15 U.S.C. 78o-11(a)(3).
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The Agencies note that the second prong of this definition (i.e.,
the person who organizes and initiates the ABS transaction by selling
or transferring assets, either directly or indirectly, including
through an affiliate, to the issuer) is substantially identical to the
definition of a ``sponsor'' of a securitization transaction in the
Commission's Regulation AB governing disclosures for ABS offerings
registered under the Securities Act.\40\ In light of this, the proposed
rules provide that a ``sponsor'' of an ABS transaction is a
``securitizer'' for the purposes of section 15G, and define the term
``sponsor'' in a manner consistent with the definition of that term in
the Commission's Regulation AB.\41\
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\40\ See Item 1101 of the Commission's Regulation AB (17 CFR
229.1101) (defining a sponsor as ``a person who organizes and
initiates an asset-backed securities transaction by selling or
transferring assets, either directly or indirectly, including
through an affiliate, to the issuing entity.'')
\41\ See proposed rules at Sec. ----.2. Consistent with the
Commission's definition of sponsor, the Agencies interpret the term
``issuer'' as used in section 15G(a)(3)(B) to refer to the issuing
entity that issues the ABS.
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The proposal would, as a general matter, require that a sponsor of
a securitization transaction retain the credit risk of the securitized
assets in the form and amount required by the proposed rules. The
Agencies believe that proposing to apply the risk retention requirement
to the sponsor of the ABS--as permitted by section 15G--is appropriate
in light of the active and direct role that a sponsor typically has in
arranging a securitization transaction and selecting the assets to be
securitized.\42\ In circumstances where two or more entities each meet
the definition of sponsor for a single securitization transaction, the
proposed rules would require that one of the sponsors retain a portion
of the credit risk of the underlying assets in accordance with the
requirements of this proposal.\43\ Each sponsor in the transaction,
however, would remain responsible for ensuring that at least one
[[Page 24099]]
sponsor complied with the requirements.
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\42\ For example, in the context of collateralized loan
obligations (CLOs), the CLO manager generally acts as the sponsor by
selecting the commercial loans to be purchased by an agent bank for
inclusion in the CLO collateral pool, and then manages the
securitized assets once deposited in the CLO structure.
\43\ See proposed rules at Sec. --.3(a). Because the term
sponsor is used throughout the proposed rules, the term is
separately defined in Sec. --.2 of the proposed rules. The
definition of ``sponsor'' in Sec. --.2 is identical to the sponsor
part of the proposed rules' definition of a ``securitizer.''
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As noted above, the definition of ``securitizer'' in section
15G(a)(3)(A) includes the ``issuer of an asset-backed security.'' The
term ``issuer'' when used in the federal securities laws may have
different meanings depending on the context in which it is used. For
example, for several purposes under the federal securities laws,
including the Securities Act \44\ and the Exchange Act \45\ and the
rules promulgated under these Acts,\46\ the term ``issuer'' when used
with respect to an ABS transaction is defined to mean the entity--the
depositor--that deposits the assets that collateralize the ABS with the
issuing entity. The Agencies interpret the reference in section
15G(a)(3)(A) to an ``issuer of an asset-backed security'' as referring
to the ``depositor'' of the ABS, consistent with how that term has been
defined and used under the federal securities laws in connection with
ABS.\47\ As noted above, the proposed rules generally would apply the
risk retention requirements of section 15G to a sponsor of a
securitization transaction (and not the depositor for the
securitization transaction).
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\44\ Section 2(a)(4) of Securities Act (15 U.S.C. 77b(a)(4))
defines the term ``issuer'' in part to include every person who
issues or proposes to issue any security, except that with respect
to certificates of deposit, voting-trust certificates, or collateral
trust certificates, or with respect to certificates of interest or
shares in an unincorporated investment trust not having a board of
directors (or persons performing similar functions), the term issuer
means the person or persons performing the acts and assuming the
duties of depositor or manager pursuant to the provisions of the
trust or other agreement or instrument under which the securities
are issued.
\45\ See Exchange Act sec. 3(a)(8) (15 U.S.C. 78c(a)(8)
(defining ``issuer'' under the Exchange Act).
\46\ See, e.g., Securities Act Rule 191 (17 CFR 230.191) and
Exchange Act Rule 3b-19 (17 CFR 240.3b-19).
\47\ For asset-backed securities transactions where there is not
an intermediate transfer of the assets from the sponsor to the
issuing entity, the term depositor refers to the sponsor. For asset-
backed securities transactions where the person transferring or
selling the pool assets is itself a trust (such as in an issuance
trust structure), the depositor of the issuing entity is the
depositor of that trust. See proposed rules at Sec. --.2.
Securities Act Rule 191 and Exchange Act Rule 3b-19 also note that
the person acting as the depositor in its capacity as depositor to
the issuing entity is a different ``issuer'' from that person in
respect of its own securities in order to make clear--for example--
that any applicable exemptions from Securities Act registration that
person may have with respect to its own securities are not
applicable to the asset-backed securities. That distinction does not
appear relevant here.
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C. Originator
As permitted by section 15G, Sec. --.13 of the proposed rules
permit a sponsor to allocate its risk retention obligations to the
originator(s) of the securitized assets in certain circumstances and
subject to certain conditions. The proposed rules define the term
originator in the same manner as section 15G, that is, as a person who,
through the extension of credit or otherwise, creates a financial asset
that collateralizes an asset-backed security, and sells the asset
directly or indirectly to a securitizer (i.e., a sponsor or depositor).
Because this definition refers to the person that ``creates'' a loan or
other receivable, only the original creditor under a loan or
receivable--and not a subsequent purchaser or transferee--is an
``originator'' of the loan or receivable for purposes of section
15G.\48\
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\48\ See 15 U.S.C. 78o-11(a)(3).
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Request for Comment
1. Do the proposed rules appropriately implement the terms
``securitizer'' and ``originator'' as used in section 15G and
consistent with its purpose?
2. Are there other terms, beyond those defined in Sec. --.2 of the
proposed rules, that the Agencies should define?
3(a). As a general matter, is it appropriate to impose the risk
retention requirements on the sponsor of an ABS transaction, rather
than the depositor for the transaction? 3(b). If not, why?
4(a). With respect to the terms defined, would you define any of
the terms differently? 4(b). If so, which ones would you define
differently, and how would you define them? For example, credit risk is
defined to mean, among other things, the risk of loss that could result
from failure of the issuing entity to make required payments or from
bankruptcy of the issuing entity.
5. Is it appropriate for the definition of credit risk to include
risk of no
