Credit Risk Retention, 57927-58048 [2013-21677]
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Vol. 78
Friday,
No. 183
September 20, 2013
Part II
Department of the Treasury
Office of the Comptroller of the Currency
Federal Reserve System
Federal Deposit Insurance Corporation
Federal Housing Finance Agency
Securities and Exchange Commission
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Department of Housing and Urban
Development
12 CFR Parts 43, 244, 373, et al.
17 CFR Part 246
24 CFR Part 267
Credit Risk Retention; Proposed Rule
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Federal Register / Vol. 78, No. 183 / Friday, September 20, 2013 / Proposed Rules
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 43
[Docket No. OCC–2013–0010]
RIN 1557–AD40
FEDERAL RESERVE SYSTEM
12 CFR Part 244
[Docket No. R–1411]
RIN 7100–AD70
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 Nos. 34–70277]
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.
AGENCY:
The OCC, Board, FDIC,
Commission, FHFA, and HUD (the
agencies) are seeking comment on a
joint proposed rule (the proposed rule,
or the proposal) to revise the proposed
rule the agencies published in the
Federal Register on April 29, 2011, and
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
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SUMMARY:
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of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (DoddFrank Act). Section 15G generally
requires the securitizer of asset-backed
securities to retain not less than 5
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
October 30, 2013.
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 email, 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. Enter ‘‘Docket ID
OCC–2013–0010’’ in the Search Box and
click ‘‘Search’’. Results can be filtered
using the filtering tools on the left side
of the screen. Click on ‘‘Comment Now’’
to submit public comments. Click on the
‘‘Help’’ tab on the Regulations.gov home
page to get information on using
Regulations.gov.
• Email: regs.comments@
occ.treas.gov.
• Mail: Legislative and Regulatory
Activities Division, Office of the
Comptroller of the Currency, 400 7th
Street SW., Suite 3E–218, Mail Stop
9W–11, Washington, DC 20219.
• Fax: (571) 465–4326.
• Hand Delivery/Courier: 400 7th
Street SW., Suite 3E–218, Mail Stop
9W–11, Washington, DC 20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
Number OCC–2013–0010’’ 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
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business or personal information that
you provide such as name and address
information, email 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. Enter
‘‘Docket ID OCC–2013–0010’’ in the
Search box and click ‘‘Search’’.
Comments can be filtered by agency
using the filtering tools on the left side
of the screen. Click on the ‘‘Help’’ tab
on the Regulations.gov home page to get
information on using Regulations.gov,
including instructions for viewing
public comments, viewing other
supporting and related materials, and
viewing the docket after the close of the
comment period.
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 400 7th 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) 649–6700. 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.
• Email: 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 Robert deV.
Frierson, Secretary, Board of Governors
of the Federal Reserve System, 20th
Street and Constitution Avenue NW.,
Washington, DC 20551.
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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 9:00 a.m.
and 5:00 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.
Follow instructions for submitting
comments on the agency Web site.
• Email: Comments@FDIC.gov.
Include RIN 3064–AD74 in 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/Courier: Guard
station at the rear of the 550 17th Street
Building (located on F Street) on
business days between 7:00 a.m. and
5:00 p.m.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
Instructions: All comments will be
posted without change to https://
www.fdic.gov/regulations/laws/federal,
including any personal information
provided. Paper copies of public
comments may be ordered from the
Public Information Center by telephone
at (877) 275–3342 or (703) 562–2200.
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 email 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.
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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 email is used. To help us process and
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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 Web site 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
10:00 a.m. and 3:00 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:
• Email: Comments to Alfred M.
Pollard, General Counsel, may be sent
by email 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 email 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,
Constitution Center, (OGC) Eighth Floor,
400 7th Street SW., Washington, DC
20024.
• Hand Delivery/Courier: The hand
delivery address is: Alfred M. Pollard,
General Counsel, Attention: Comments/
RIN 2590–AA43, Federal Housing
Finance Agency, Constitution Center,
(OGC) Eighth Floor, 400 7th Street SW.,
Washington, DC 20024. A handdelivered package should be logged in at
the Seventh Street entrance Guard Desk,
First Floor, on business days between
9:00 a.m. and 5:00 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 Web site 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. at the
Federal Housing Finance Agency,
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Constitution Center, 400 7th Street SW.,
Washington, DC 20024. To make an
appointment to inspect comments
please call the Office of General Counsel
at (202) 649–3804.
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 above
docket number and title. 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 Web site 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
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Federal Register / Vol. 78, No. 183 / Friday, September 20, 2013 / Proposed Rules
800–877–8339. Copies of all comments
submitted are available for inspection
and downloading at
www.regulations.gov.
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FOR FURTHER INFORMATION CONTACT:
OCC: Kevin Korzeniewski, Attorney,
Legislative and Regulatory Activities
Division, (202) 649–5490, Office of the
Comptroller of the Currency, 400 7th
Street SW., Washington, DC 20219.
Board: Benjamin W. McDonough,
Senior Counsel, (202) 452–2036; April
C. Snyder, Senior Counsel, (202) 452–
3099; Brian P. Knestout, Counsel, (202)
452–2249; David W. Alexander, Senior
Attorney, (202) 452–2877; or Flora H.
Ahn, Senior Attorney, (202) 452–2317,
Legal Division; Thomas R. Boemio,
Manager, (202) 452–2982; Donald N.
Gabbai, Senior Supervisory Financial
Analyst, (202) 452–3358; Ann P.
McKeehan, Senior Supervisory
Financial Analyst, (202) 973–6903; or
Sean M. Healey, Senior Financial
Analyst, (202) 912–4611, Division of
Banking Supervision and Regulation;
Karen Pence, Assistant Director,
Division of Research & Statistics, (202)
452–2342; or Nikita Pastor, Counsel,
(202) 452–3667, Division of Consumer
and Community Affairs, Board of
Governors of the Federal Reserve
System, 20th and C Streets NW.,
Washington, DC 20551.
FDIC: Rae-Ann Miller, Associate
Director, (202) 898–3898; George
Alexander, Assistant Director, (202)
898–3718; Kathleen M. Russo,
Supervisory Counsel, (703) 562–2071; or
Phillip E. Sloan, Counsel, (703) 562–
6137, Federal Deposit Insurance
Corporation, 550 17th Street NW.,
Washington, DC 20429.
Commission: Steven Gendron,
Analyst Fellow; Arthur Sandel, Special
Counsel; David Beaning, Special
Counsel; or Katherine Hsu, Chief, (202)
551–3850, in the Office of Structured
Finance, Division of Corporation
Finance, 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) 649–
3190; Ronald P. Sugarman, Principal
Legislative Analyst, Ron.Sugarman@
fhfa.gov, (202) 649–3208; Phillip
Millman, Principal Capital Markets
Specialist, Phillip.Millman@fhfa.gov,
(202) 649–3080; or Thomas E. Joseph,
Associate General Counsel,
Thomas.Joseph@fhfa.gov, (202) 649–
3076; Federal Housing Finance Agency,
Constitution Center, 400 7th Street SW.,
Washington, DC 20024. The telephone
number for the Telecommunications
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Device for the Hearing Impaired is (800)
877–8339.
HUD: Michael P. Nixon, Office of
Housing, Department of Housing and
Urban Development, 451 7th Street SW.,
Room 10226, 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
A. Background
B. Overview of the Original Proposal and
Public Comment
C. Overview of the Proposed Rule
II. General Definitions and Scope
A. Overview of Significant Definitions in
the Original Proposal and Comments
1. Asset-Backed Securities, Securitization
Transactions, and ABS Interests
2. Securitizer, Sponsor, and Depositor
3. Originator
4. Servicing Assets, Collateral
B. Proposed General Definitions
III. General Risk Retention Requirement
A. Minimum Risk Retention Requirement
B. Permissible Forms of Risk Retention—
Menu of Options
1. Standard Risk Retention
2. Revolving Master Trusts
3. Representative Sample
4. Asset-Backed Commercial Paper
Conduits
5. Commercial Mortgage-Backed Securities
6. Government-Sponsored Enterprises
7. Open Market Collateralized Loan
Obligations
8. Municipal Bond ‘‘Repackaging’’
Securitizations
9. Premium Capture Cash Reserve Account
C. Allocation to the Originator
D. Hedging, Transfer, and Financing
Restrictions
IV. General Exemptions
A. Exemption for Federally Insured or
Guaranteed Residential, Multifamily,
and Health Care Mortgage Loan Assets
B. Exemption for Securitizations of Assets
Issued, Insured, or Guaranteed by the
United States or Any Agency of the
United States and Other Exemptions
C. Exemption for Certain Resecuritization
Transactions
D. Other Exemptions From Risk Retention
Requirements
1. Utility Legislative Securitizations
2. Seasoned Loans
3. Legacy Loan Securitizations
4. Corporate Debt Repackagings
5. ‘‘Non-Conduit’’ CMBS Transactions
6. Tax Lien-Backed Securities Sponsored
by a Municipal Entity
7. Rental Car Securitizations
E. Safe Harbor for Foreign Securitization
Transactions
F. Sunset on Hedging and Transfer
Restrictions
G. Federal Deposit Insurance Corporation
Securitizations
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V. Reduced Risk Retention Requirements and
Underwriting Standards for ABS Backed
by Qualifying Commercial, Commercial
Real Estate, or Automobile Loans
A. Qualifying Commercial Loans
B. Qualifying Commercial Real Estate
Loans
1. Ability To Repay
2. Loan-to-Value Requirement
3. Collateral Valuation
4. Risk Management and Monitoring
C. Qualifying Automobile Loans
1. Ability To Repay
2. Loan Terms
3. Reviewing Credit History
4. Loan-to-Value
D. Qualifying Asset Exemption
E. Buyback Requirement
VI. Qualified Residential Mortgages
A. Overview of Original Proposal and
Public Comments
B. Approach to Defining QRM
1. Limiting Credit Risk
2. Preserving Credit Access
C. Proposed Definition of QRM
D. Exemption for QRMs
E. Repurchase of Loans Subsequently
Determined To Be Non-Qualified After
Closing
F. Alternative Approach to Exemptions for
QRMs
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. OCC Unfunded Mandates Reform Act of
1995 Determination
E. Commission: Small Business Regulatory
Enforcement Fairness Act
F. FHFA: Considerations of Differences
Between the Federal Home Loan Banks
and the Enterprises
I. Introduction
The agencies are requesting comment
on a proposed rule that re-proposes with
modifications a previously proposed
rule to implement the requirements of
section 941 of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (the Act, or Dodd–Frank Act).1
Section 15G of the Exchange Act, as
added by section 941(b) of the DoddFrank 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 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
1 Public Law 111–203, 124 Stat. 1376 (2010).
Section 941 of the Dodd-Frank Act amends the
Securities Exchange Act of 1934 (the Exchange Act)
and adds a new section 15G of the Exchange Act.
15 U.S.C. 78o–11.
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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.2
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.3 In addition, section 15G
provides that a securitizer may retain
less than 5 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.4
In April 2011, the agencies published
a joint notice of proposed rulemaking
that proposed to implement section 15G
of the Exchange Act (original proposal).5
The proposed rule revises the original
proposal, as described in more detail
below.
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.6 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,7 and are authorized to adopt
rules in several specific areas under
section 15G.8 In addition, the Federal
2 See 15 U.S.C. 78o–11(b), (c)(1)(A) and
(c)(1)(B)(ii).
3 See 15 U.S.C. 78o–11(c)(1)(C)(iii), (e)(4)(A) and
(B).
4 See id. at section 78o–11(c)(1)(B)(ii) and (2).
5 Credit Risk Retention; Proposed Rule, 76 FR
24090 (April 29, 2011) (Original Proposal).
6 See id. at section 78o–11(b)(2), (e)(4)(A) and (B).
7 See id. at section 78o–11(b)(1).
8 See, e.g. id. at sections 78o–11(b)(1)(E) (relating
to the risk retention requirements for ABS
collateralized by commercial mortgages);
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banking agencies are jointly 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 risk retention requirement of less than
5 percent.9 Accordingly, when used in
this Notice of Proposed Rulemaking, 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.
For ease of reference, the re-proposed
rules of the agencies are referenced
using a common designation of § __.1 to
§ __.21 (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.10 Section __.1 of each
agency’s rule identifies the entities or
transactions subject to such agency’s
rule.
The preamble to the original proposal
described the agencies’ intention to
jointly approve any written
interpretations, written responses to
requests for no-action letters and general
counsel opinions, or other written
interpretive guidance (written
interpretations) concerning the scope or
terms of section 15G of the Exchange
Act and the final rules issued
thereunder that are intended to be relied
on by the public generally. The agencies
also intended for the appropriate
agencies to jointly approve any
exemptions, exceptions, or adjustments
to the final rules. 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,
(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).
9 See id. at section 78o–11(b)(2)(B).
10 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); 12 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. Because the
proposed rules would exempt the programs and
entities under HUD’s jurisdiction from the
requirements of the proposed rules, HUD does not
propose to codify the rules into its title of the CFR
at the time the rules are adopted in final form.
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guidance, exemption, exception, or
adjustment.
Consistent with section 15G of the
Exchange Act, the risk retention
requirements would become effective,
for securitization transactions
collateralized by residential mortgages,
one year after the date on which final
rules are published in the Federal
Register, and two years after that date
for any other securitization transaction.
A. Background
As the agencies observed in the
preamble to the original proposal, the
securitization markets are an important
link in the chain of entities providing
credit to U.S. households and
businesses, and state and local
governments.11 When properly
structured, securitization provides
economic benefits that can lower the
cost of credit to households and
businesses.12 However, when incentives
are not properly aligned and there is a
lack of discipline in the credit
origination process, securitization can
result in harmful consequences to
investors, consumers, financial
institutions, and the financial system.
During the financial crisis,
securitization transactions displayed
significant vulnerabilities to
informational and incentive problems
among various parties involved in the
process.13 Investors did not have access
to the same information about the assets
collateralizing ABS as other parties in
the securitization chain (such as the
sponsor of the securitization transaction
or an originator of the securitized
loans).14 In addition, assets were
resecuritized into complex instruments,
such as collateralized debt obligations
(CDOs) and CDOs-squared, which made
it difficult for investors to discern the
11 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 from a single pool of assets that
appeal to a broad range of investors. 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.
12 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).
13 See Board Report at 8–9.
14 See S. Rep. No. 111–176, at 128 (2010).
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true value of, and risks associated with,
an investment in the securitization.15
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
loans.16
Congress intended the risk retention
requirements added by section 15G 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. By
requiring that the securitizer retain a
portion of the credit risk of the assets
being securitized, the requirements of
section 15G provide securitizers an
incentive to monitor and ensure the
quality of the assets underlying a
securitization transaction, and, thus,
help 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
help to ensure the assets pose low credit
risk, the statute provides or permits an
exemption.17
Accordingly, 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. Such other
parts include provisions that strengthen
the regulation and supervision of
national recognized statistical rating
organizations (NRSROs) and improve
the transparency of credit ratings; 18
provide for issuers of registered ABS
offerings to perform a review of the
assets underlying the ABS and disclose
the nature of the review; 19 and require
issuers of ABS to disclose the history of
the requests they received and
repurchases they made related to their
outstanding ABS.20
B. Overview of the Original Proposal
and Public Comment
In developing the original proposal,
the agencies took into account the
diversity of assets that are securitized,
the structures historically used in
15 See
id.
id.
17 See 15 U.S.C. 78o–11(c)(1)(B)(ii), (e)(1)–(2).
18 See, e.g. sections 932, 935, 936, 938, and 943
of the Dodd-Frank Act (15 U.S.C. 78o–7, 78o–8).
19 See section 945 of the Dodd-Frank Act (15
U.S.C. 77g).
20 See section 943 of the Dodd-Frank Act (15
U.S.C. 78o–7).
16 See
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securitizations, and the manner in
which securitizers 21 have retained
exposure to the credit risk of the assets
they securitize.22 The original proposal
provided several options from which
sponsors could choose to meet section
15G’s risk retention requirements,
including, for example, retention of a 5
percent ‘‘vertical’’ interest in each class
of ABS interests issued in the
securitization, retention of a 5 percent
‘‘horizontal’’ first-loss interest in the
securitization, and other options
designed to reflect the way in which
market participants have historically
structured credit card receivable and
asset-backed commercial paper conduit
securitizations. The original proposal
also included a special ‘‘premium
capture’’ mechanism designed to
prevent a sponsor from structuring a
securitization transaction in a manner
that would allow the sponsor to offset
or minimize its retained economic
exposure to the securitized assets by
monetizing the excess spread created by
the securitization transaction.
The original proposal also included
disclosure requirements that were
specifically tailored to each of the
permissible forms of risk retention. The
disclosure requirements were an
integral part of the original proposal
because they would have provided
investors with pertinent information
concerning the sponsor’s retained
interests in a securitization transaction,
such as the amount and form of interest
retained by sponsors.
As required by section 15G, the
original proposal provided a complete
exemption from the risk retention
requirements for ABS that are
collateralized solely by QRMs and
established the terms and conditions
under which a residential mortgage
would qualify as a QRM. In developing
the proposed definition of a QRM, the
agencies considered the terms and
purposes of section 15G, public input,
and the potential impact of a broad or
narrow definition of QRM on the
housing and housing finance markets. In
addition, the agencies developed the
QRM proposal to be consistent with the
21 As discussed in the original proposal and
further below, the agencies propose that a
‘‘sponsor,’’ as defined in a manner consistent with
the definition of that term in the Commission’s
Regulation AB, would be a ‘‘securitizer’’ for the
purposes of section 15G.
22 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.’’).
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requirement of section 15G 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 DoddFrank Act, 23 and regulations adopted
thereunder.24
The original proposal would generally
have prohibited QRMs from having
product features that were observed to
contribute significantly to the high
levels of delinquencies and foreclosures
since 2007. These included features
permitting negative amortization,
interest-only payments, or significant
interest rate increases. The QRM
definition in the original proposal also
included other underwriting standards
associated with lower risk of default,
including a down payment requirement
of 20 percent in the case of a purchase
transaction, maximum loan-to-value
ratios of 75 percent on rate and term
refinance loans and 70 percent for cashout refinance loans, as well as credit
history criteria (or requirements). The
QRM standard in the original proposal
also included maximum front-end and
back-end debt-to-income ratios. As
explained in the original proposal, the
agencies intended for the QRM proposal
to reflect very high quality underwriting
standards, and the agencies expected
that a large market for non-QRM loans
would continue to exist, providing
ample liquidity to mortgage lenders.
Consistent with the statute, the
original proposal also provided that
sponsors would not have to hold risk
retention for securitized commercial,
commercial real estate, and automobile
loans that met proposed underwriting
23 See 15 U.S.C. 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.’’).
24 See 78 FR 6408 (January 30, 2013), as amended
by 78 FR 35430 (June 12, 2013). These two final
rules were preceded by a proposed rule defining
QM, issued by the Board and published in the
Federal Register. See 76 FR 27390 (May 11, 2011).
The Board had initial responsibility for
administration and oversight of TILA prior to
transfer to the Consumer Financial Protection
Bureau.
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standards that incorporated features and
requirements historically associated
with very low credit risk in those asset
classes.
With respect to securitization
transactions sponsored by the Federal
National Mortgage Association (Fannie
Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac)
(jointly, the Enterprises), the agencies
proposed to recognize the 100 percent
guarantee of principal and interest
payments by the Enterprises on issued
securities as meeting the risk retention
requirement. However, this recognition
would only remain in effect for as long
as the Enterprises operated under the
conservatorship or receivership of
FHFA with capital support from the
United States.
In response to the original proposal,
the agencies received comments from
over 10,500 persons, institutions, or
groups, including nearly 300 unique
comment letters. The agencies received
a significant number of comments
regarding the appropriate amount and
measurement of risk retention. Many
commenters generally supported the
proposed menu-based approach of
providing sponsors flexibility to choose
from a number of permissible forms of
risk retention, although several argued
for more flexibility in selecting risk
retention options, including using
multiple options simultaneously.
Comments on the disclosure
requirements in the original proposal
were limited.
Many commenters expressed
significant concerns with the proposed
standards for horizontal risk retention
and the premium capture cash reserve
account (PCCRA), which were intended
to ensure meaningful risk retention.
Many commenters asserted that these
proposals would lead to significantly
higher costs for sponsors, possibly
discouraging them from engaging in
new securitization transactions.
However, some commenters supported
the PCCRA concept, arguing that the
more restrictive nature of the account
would be offset by the requirement’s
contribution to more conservative
underwriting practices.
Other commenters expressed
concerns with respect to standards in
the original proposal for specific asset
classes, such as the proposed option for
third-party purchasers to hold risk
retention in commercial mortgagebacked securitizations instead of
sponsors (as contemplated by section
15G). Many commenters also expressed
concern about the underwriting
standards for non-residential asset
classes, generally criticizing them as too
conservative to be utilized effectively by
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sponsors. Several commenters criticized
application of the original proposal to
managers of certain collateralized loan
obligation (CLO) transactions and
argued that the original proposal would
lead to more concentration in the
industry and reduce access to credit for
many businesses.
An overwhelming majority of
commenters criticized the agencies’
proposed QRM standard. Many of these
commenters asserted that the proposed
definition of QRM, particularly the 20
percent down payment requirement,
would significantly increase the costs of
credit for most home buyers and restrict
access to credit. Some of these
commenters asserted that the proposed
QRM standard would become a new
‘‘government-approved’’ standard, and
that lenders would be reluctant to
originate mortgages that did not meet
the standard. Commenters also argued
that this proposed standard would make
it more difficult to reduce the
participation of the Enterprises in the
mortgage market. Commenters argued
that the proposal was inconsistent with
legislative intent and strongly urged the
agencies to eliminate the down payment
requirement, make it substantially
smaller, or allow private mortgage
insurance to substitute for the
requirement within the QRM standard.
Commenters also argued that the
agencies should align the QRM
definition with the definition of QM, as
implemented by the Consumer
Financial Protection Bureau (CFPB).25
Various commenters also criticized
the agencies’ proposed treatment of the
Enterprises. A commenter asserted that
the agencies’ recognition of the
Enterprises’ guarantee as retained risk
(while in conservatorship or
receivership with capital support from
the United States) would impede the
policy goal of reducing the role of the
Enterprises and the government in the
mortgage securitization market and
encouraging investment in private
residential mortgage securitizations. A
number of other commenters, however,
supported the proposed approach for
the Enterprises.
The preamble to the original proposal
described the agencies’ intention to
jointly approve certain types of written
interpretations concerning the scope of
section 15G and the final rules issued
thereunder. Several commenters on the
original proposal expressed concern
about the agencies’ processes for issuing
written interpretations jointly and the
25 See 78 FR 6407 (January 30, 2013), as amended
by 78 FR 35429 (June 12, 2013) and 78 FR 44686
(July 24, 2013).
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possible uncertainty about the rules that
may arise due to this process.
The agencies have endeavored to
provide specificity and clarity in the
proposed rule to avoid conflicting
interpretations or uncertainty. In the
future, if the heads of the agencies
determine that further guidance would
be beneficial for market participants,
they may jointly publish interpretive
guidance documents, as the federal
banking agencies have done in the past.
In addition, the agencies note that
market participants can, as always, seek
guidance concerning the rules from
their primary federal banking regulator
or, if such market participant is not a
depository institution or a governmentsponsored enterprise, the Commission.
In light of the joint nature of the
agencies’ rule writing authority, the
agencies continue to view the consistent
application of the final rule as a benefit
and intend to consult with each other
when adopting staff interpretations or
guidance on the final rule that would be
shared with the public generally. The
agencies are considering whether to
require that such staff interpretations
and guidance be jointly issued by the
agencies with rule writing authority and
invite comment.26
The specific provisions of the original
proposal and public comments received
thereon are discussed in further detail
below.
C. Overview of the Proposed Rule
The agencies have carefully
considered the many comments
received on the original proposal as well
as engaged in further analysis of the
securitization and lending markets in
light of the comments. As a result, the
agencies believe it would be appropriate
to modify several important aspects of
the original proposal and are issuing a
new proposal incorporating these
modifications. The agencies have
concluded that a new proposal would
give the public the opportunity to
review and provide comment on the
agencies’ revised design of the risk
retention regulatory framework and
assist the agencies in determining
whether the revised framework is
appropriately structured.
The proposed rule takes account of
the comments received on the original
proposal. In developing the proposed
26 These items would not include interpretation
and guidance in staff comment letters and other
staff guidance directed to specific institutions that
is not intended to be relied upon by the public
generally. Nor would it include interpretations and
guidance contained in administrative or judicial
enforcement proceedings by the agencies, or in an
agency report of examination or inspection or
similar confidential supervisory correspondence.
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rule, the agencies consistently have
sought to ensure that the amount of
credit risk required of a sponsor would
be meaningful, consistent with the
purposes of section 15G. The agencies
have also sought to minimize the
potential for the proposed rule to
negatively affect the availability and
costs of credit to consumers and
businesses.
As described in detail below, the
proposed rule would significantly
increase the degree of flexibility that
sponsors would have in meeting the risk
retention requirements of section 15G.
For example, the proposed rule would
permit a sponsor to satisfy its obligation
by retaining any combination of an
‘‘eligible vertical interest’’ and an
‘‘eligible horizontal residual interest’’ to
meet the 5 percent minimum
requirement. The agencies are also
proposing that horizontal risk retention
be measured by fair value, reflecting
market practice, and are proposing a
more flexible treatment for payments to
a horizontal risk retention interest than
that provided in the original proposal.
In combination with these changes, the
agencies propose to remove the PCCRA
requirement.27 The agencies have
incorporated proposed standards for the
expiration of the hedging and transfer
restrictions and proposed new
exemptions from risk retention for
certain resecuritizations, seasoned
loans, and certain types of securitization
transactions with low credit risk. In
addition, the agencies propose a new
risk retention option for CLOs that is
similar to the allocation to originator
concept proposed for sponsors
generally.
Furthermore, the agencies are
proposing revised standards with
respect to risk retention by a third-party
purchaser in commercial mortgagebacked securities (CMBS) transactions
and an exemption that would permit
transfer (by a third-party purchaser or
sponsor) of a horizontal interest in a
CMBS transaction after five years,
subject to standards described below.
The agencies have carefully
considered the comments received on
the QRM standard in the original
proposal as well as various ongoing
developments in the mortgage markets,
including mortgage regulations. For the
reasons discussed more fully below, the
agencies are proposing to revise the
QRM definition in the original proposal
to equate the definition of a QRM with
27 The
proposal would also eliminate the
‘‘representative sample’’ option, which commenters
had argued would be impractical.
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the definition of QM adopted by the
CFPB.28
The agencies invite comment on all
aspects of the proposed rule, including
comment on whether any aspects of the
original proposal should be adopted in
the final rule. Please provide data and
explanations supporting any positions
offered or changes suggested.
II. General Definitions and Scope
A. Overview of Significant Definitions in
the Original Proposal and Comments
1. Asset-Backed Securities,
Securitization Transactions, and ABS
Interests
The original proposal provided that
the proposed risk retention
requirements would have applied to
sponsors in securitizations that involve
the issuance of ‘‘asset-backed securities’’
and defined the terms ‘‘asset-backed
security’’ and ‘‘asset’’ consistent with
the definitions of those terms in the
Exchange Act. The original proposal
noted that 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. It further noted that the
proposed definition of ABS, which
would have been broader than that of
the Commission’s Regulation AB,29
included securities that are typically
sold in transactions that are exempt
from registration under the Securities
Act, such as CDOs and securities issued
or guaranteed by an Enterprise. As a
result, the proposed risk retention
requirements would have applied to
securitizers of ABS offerings regardless
of whether the offering was registered
with the Commission under the
Securities Act.
Under the original proposal, risk
retention requirements would have
applied to the securitizer in each
‘‘securitization transaction,’’ defined as
a transaction involving the offer and
sale of ABS by an issuing entity. The
original proposal also explained that the
term ‘‘ABS interest’’ would 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, but would not include
interests, such as common or preferred
stock, in an issuing entity that are
issued primarily to evidence ownership
of the issuing entity, and the payments,
28 See 78 FR 6407 (January 30, 2013), as amended
by 78 FR 35429 (June 12, 2013) and 78 FR 44686
(July 24, 2013).
29 See 17 CFR 229.1100 through 17 CFR 229.1123.
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if any, which are not primarily
dependent on the cash flows of the
collateral held by the issuing entity.
With regard to these three definitions,
some commenters were critical of what
they perceived to be the overly broad
scope of the terms and advocated for
express exemptions or exclusions from
their application. Some commenters
expressed concern that the definition of
‘‘asset-backed securities’’ could be read
to be broader than intended and
requested clarification as to the precise
contours of the definition. For example,
certain commenters were concerned that
the proposed ABS definition could
unintentionally include securities that
do not serve the same purpose or
present the same set of risks as ‘‘assetbacked securities,’’ such as securities
which are, either directly or through a
guarantee, full-recourse corporate
obligations of a creditworthy entity that
is not a special-purpose vehicle (SPV),
but are also secured by a pledge of
financial assets. Other commenters
suggested that the agencies provide a
bright-line safe harbor that defines
conditions under which risk retention is
not required even if a security is
collateralized by self-liquidating assets
and advocated that certain securities be
expressly excluded from the proposed
rule’s definition of ABS.
Similarly, a number of commenters
requested clarification with regard to
the scope of the definition of ‘‘ABS
interest,’’ stating that its broad
definition could potentially capture a
number of items not traditionally
considered ‘‘interests’’ in a
securitization, such as non-economic
residual interests, servicing and special
servicing fees, and amounts payable by
the issuing entity under a derivatives
contract. With regard to the definition of
‘‘securitization transaction,’’ a
commenter recommended that
transactions undertaken solely to
manage financial guarantee insurance
related to the underlying obligations not
be considered ‘‘securitizations.’’
2. Securitizer, Sponsor, and Depositor
Section 15G stipulates that its risk
retention requirements be applied to a
‘‘securitizer’’ of an ABS and, in turn,
that a securitizer is both an issuer of an
ABS or a person who organizes and
initiates a securitization transaction by
selling or transferring assets, either
directly or indirectly, including through
an affiliate or issuer. The original
proposal noted that the second prong of
this definition is substantially identical
to the definition of a ‘‘sponsor’’ of a
securitization transaction in the
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Commission’s Regulation AB.30
Accordingly, the original proposal
would have defined the term ‘‘sponsor’’
in a manner consistent with the
definition of that term in the
Commission’s Regulation AB.31
Other than issues concerning CLOs,
which are discussed in Part III.B.7 of
this Supplementary Information,
comments with regard to these terms
were generally limited to requests that
the final rules provide that certain
specified persons—such as
underwriting sales agents—be expressly
excluded from the definition of
securitizer or sponsor for the purposes
of the risk retention requirements.
3. Originator
The original proposal would have
defined the term ‘‘originator’’ in the
same manner as section 15G, namely, as
a person who, through the extension of
credit or otherwise, creates a financial
asset that collateralizes an ABS, and
sells the asset directly or indirectly to a
securitizer (i.e., a sponsor or depositor).
The original proposal went on to note
that 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—
would have been an originator of the
loan or receivable for purposes of
section 15G.
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4. Securitized Assets, Collateral
The original proposal referred to the
assets underlying a securitization
transaction as the ‘‘securitized assets,’’
meaning assets that are transferred to
the SPV that issues the ABS interests
and that stand as collateral for those
ABS interests. ‘‘Collateral’’ would be
defined as the property that provides
the cash flow for payment of the ABS
interests issued by the issuing entity.
Taken together, these definitions were
meant to suggest coverage of the loans,
leases, or similar assets that the
depositor places into the issuing SPV at
the inception of the transaction, though
it would have also included other assets
such as pre-funded cash reserve
30 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.’’).
31 As discussed in the original proposal, when
used in the federal securities laws, the term
‘‘issuer’’ may have different meanings depending on
the context in which it is used. For the purposes
of section 15G, the original proposal provided that
the agencies would have interpreted an ‘‘issuer’’ of
an asset-back security to refer to the ‘‘depositor’’ of
an ABS, consistent with how that term has been
defined and used under the federal securities laws
in connection with an ABS.
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accounts. Commenters pointed out that,
in addition to this property, the issuing
entity may hold other assets. For
example, the issuing entity may acquire
interest rate derivatives to convert
floating rate interest income to fixed
rate, or the issuing entity may accrete
cash or other liquid assets in reserve
funds that accumulate cash generated by
the securitized assets. As another
example, commenters noted that an
asset-backed commercial paper conduit
may hold a liquidity guarantee from a
bank on some or all of its securitized
assets.
B. Proposed General Definitions
The agencies have carefully
considered all of the comments raised
with respect to the general definitions of
the original proposal. The agencies do
not believe that significant changes to
these definitions are necessary and,
accordingly, are proposing to maintain
the general definitions in substantially
the same form as they were presented in
the original proposal, with one
exception.32
To describe the additional types of
property that could be held by an
issuing entity, the agencies are
proposing a definition of ‘‘servicing
assets,’’ which would be any rights or
other assets designed to assure the
servicing, timely payment, or timely
distribution of proceeds to security
holders, or assets related or incidental to
purchasing or otherwise acquiring and
holding the issuing entity’s securitized
assets. These may include cash and cash
equivalents, contract rights, derivative
agreements of the issuing entity used to
hedge interest rate and foreign currency
risks, or the collateral underlying the
securitized assets. As noted in the rule
text, it also includes proceeds of assets
collateralizing the securitization
transactions, whether in the form of
voluntary payments from obligors on
the assets or otherwise (such as
liquidation proceeds). The agencies are
proposing this definition in order to
ensure that the provisions of the
proposal appropriately accommodate
the need, in administering a
securitization transaction on an ongoing
basis, to hold various assets other than
the loans or similar assets that are
transferred into the asset pool by the
securitization depositor. The proposed
definition is similar to elements of the
definition of ‘‘eligible assets’’ in Rule
32 Regarding comments about what securities
constitutes an ABS interest under the proposed
definition, the agencies preliminarily believe that
non-economic residual interests would constitute
ABS interests. However, as the proposal makes
clear, fees for services such as servicing fees would
not fall under the definition of an ABS interest.
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3a–7 under the Investment Company
Act of 1940, which specifies conditions
under which the issuer of nonredeemable fixed-income securities
backed by self-liquidating financial
assets will not be deemed to be an
investment company.
To facilitate the agencies revised
proposal for the QRM definition, the
agencies are proposing to define the
term ‘‘residential mortgage’’ by
reference to the definition of ‘‘covered
transaction’’ to be found in the CFPB’s
Regulation Z.33 Accordingly, for
purposes of the proposed rule, a
residential mortgage would mean a
consumer credit transaction that is
secured by a dwelling, as such term is
also defined in Regulation Z 34
(including any real property attached to
a dwelling) and any transaction that is
exempt from the definition of ‘‘covered
transaction’’ under the CFPB’s
Regulation Z.35 Therefore, the term
‘‘residential mortgage’’ would include
home equity lines of credit, reverse
mortgages, mortgages secured by
interests in timeshare plans, and
temporary loans. By defining residential
mortgage in this way, the agencies seek
to ensure that relevant definitions in the
proposed rule and in the CFPB’s rules
on and related to QM are harmonized to
reduce compliance burden and
complexity, and the potential for
conflicting definitions and
interpretations where the proposed rule
and the QM standard intersect.
Additionally, the agencies are proposing
to include those loans excluded from
the definition of ‘‘covered transaction’’
in the definition of ‘‘residential
mortgage’’ for purposes of risk retention
so that those categories of loans would
be subject to risk retention requirements
that are applied to residential mortgage
securitizations under the proposed rule.
III. General Risk Retention
Requirement
A. Minimum Risk Retention
Requirement
Section 15G of the Exchange Act
generally requires that the agencies
jointly prescribe regulations that require
a securitizer to retain not less than 5
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
33 See 78 FR 6584 (January 30, 2013), to be
codified at 12 CFR 1026.43.
34 12 CFR 1026.2(a)(19).
35 Id.
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by QRMs). Consistent with the statute,
the original proposal generally required
that a sponsor retain an economic
interest equal to at least 5 percent of the
aggregate credit risk of the assets
collateralizing an issuance of ABS (the
base risk retention requirement). Under
the original proposal, the base risk
retention requirement would have
applied to all securitization transactions
that are within the scope of section 15G,
regardless of whether the sponsor were
an insured depository institution, a
bank holding company or subsidiary
thereof, a registered broker-dealer, or
other type of entity.36
The agencies requested comment on
whether the minimum 5 percent risk
retention requirement was appropriate
or whether a higher risk retention
requirement should be established.
Several commenters expressed support
for the minimum 5 percent risk
retention requirement, with some
commenters supporting a higher risk
retention requirement. However, other
commenters suggested tailoring the risk
retention requirement to the specific
risks of distinct asset classes.
Consistent with the original proposal,
the proposed rule would apply a
minimum 5 percent base risk retention
requirement to all securitization
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 brokerdealer, or other type of entity, and
regardless of whether the sponsor is a
supervised entity.37 The agencies
continue to believe that this exposure
should provide a sponsor with an
incentive to monitor and control the
underwriting of assets being securitized
and help align the interests of the
sponsor with those of investors in the
ABS. In addition, the sponsor also
would be prohibited from hedging or
otherwise transferring its retained
interest prior to the applicable sunset
36 Synthetic securitizations and securitizations
that meet the requirements of the foreign safe
harbor are examples of securitization transactions
that are not within the scope of section 15G.
37 See proposed rule at §§ __.3 through __.10.
Similar to the original proposal, the proposed rule,
in some instances, would permit a sponsor to allow
another person to retain the required amount of
credit risk (e.g., originators, third-party purchasers
in commercial mortgage-backed securities
transactions, and originator-sellers 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, 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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date, as discussed in Part III.D of this
SUPPLEMENTARY INFORMATION.
The agencies note that the base risk
retention requirement under the
proposed rule would be a regulatory
minimum. The sponsor, originator, or
other party to a securitization may
retain additional exposure to the credit
risk of assets that the sponsor,
originator, or other party helps
securitize beyond that required by the
proposed rule, either on its own
initiative or in response to the demands
or requirements of private market
participants.
B. Permissible Forms of Risk
Retention—Menu of Options
Section 15G expressly provides the
agencies the authority to determine the
permissible forms through which the
required amount of risk retention must
be held.38 Accordingly, the original
proposal provided sponsors with
multiple options to satisfy the risk
retention requirements of section 15G.
The flexibility provided in the original
proposal’s menu of options for
complying with the risk retention
requirement was 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. The menu of options
approach was designed to be consistent
with the various ways in which a
sponsor or other entity, in historical
market practices, may have retained
exposure to the credit risk of securitized
assets.39 Historically, whether or 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 and regulatory
capital considerations, and whether
there was a market for the type of
interest that might ordinarily be
retained (at least initially by the
sponsor).
The agencies requested comment on
the appropriateness of the menu of
options in the original proposal and the
permissible forms of risk retention that
were proposed. Commenters generally
38 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.’’).
39 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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supported the menu-based approach of
providing sponsors with the flexibility
to choose from a number of permissible
forms of risk retention. Many
commenters requested that sponsors be
permitted to use multiple risk retention
options in any percentage combination,
as long as the aggregate percentage of
risk retention would be at least 5
percent.
The agencies continue to believe that
providing options for risk retention is
appropriate in order to accommodate
the variety of securitization structures
that would be subject to the proposed
rule. Accordingly, subpart B of the
proposed rule would maintain a menu
of options approach to risk retention.
Additionally, the agencies have
considered commenters’ concerns about
flexibility in combining forms of risk
retention and are proposing
modifications to the various forms of
risk retention, and how they may be
used, to increase flexibility and
facilitate different circumstances that
may accompany various securitization
transactions. Additionally, the
permitted forms of risk retention in the
proposal would be 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 5 percent of the
credit risk of the securitized assets. Each
of the forms of risk retention being
proposed by the agencies is described
below.
1. Standard Risk Retention
a. Overview of Original Proposal and
Public Comments
In the original proposal, to fulfill risk
retention for any transactions (standard
risk retention), the agencies proposed to
allow sponsors to use one of three
methods: (i) Vertical risk retention; (ii)
horizontal risk retention; and (iii) Lshaped risk retention.
Under the vertical risk retention
option in the original proposal, a
sponsor could satisfy its risk retention
requirement by retaining at least 5
percent of each class of ABS interests
issued as part of the securitization
transaction. As discussed in the original
proposal, this would provide the
sponsor with an interest in the entire
securitization transaction. The agencies
received numerous comments
supporting the vertical risk retention
option as an appropriate way to align
the interests of the sponsor with those
of the investors in the ABS in a manner
that would be easy to calculate.
However, some commenters expressed
concern that the vertical risk retention
option would expose the sponsor to
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substantially less risk of loss than if the
sponsor had retained risk under the
horizontal risk retention option, thereby
making risk retention less effective.
Under the horizontal risk retention
option in the original proposal, a
sponsor could satisfy its risk retention
obligations by retaining a first-loss
‘‘eligible horizontal residual interest’’ in
the issuing entity in an amount equal to
at least 5 percent of the par value of all
ABS interests in the issuing entity that
were issued as part of the securitization
transaction. In lieu of holding an
eligible horizontal residual interest, the
original proposal allowed a sponsor to
cause to be established and funded, in
cash, a reserve account at closing
(horizontal cash reserve account) in an
amount equal to at least 5 percent of the
par value of all the ABS interests issued
as part of the transaction (i.e., the same
dollar amount (or corresponding
amount in the foreign currency in which
the ABS are issued, as applicable) as
would be required if the sponsor held
an eligible horizontal residual interest).
Under the original proposal, an
interest qualified as an eligible
horizontal residual interest only if it
was an ABS interest that was allocated
all losses on the securitized assets until
the par value of the class was reduced
to zero and had the most subordinated
claim to payments of both principal and
interest by the issuing entity. While the
original proposal would have permitted
the eligible horizontal residual interest
to receive its pro rata share of scheduled
principal payments on the underlying
assets in accordance with the relevant
transaction documents, the eligible
horizontal residual interest generally
could not receive any other payments of
principal made on a securitized asset
(including prepayments) until all other
ABS interests in the issuing entity were
paid in full.
The agencies solicited comment on
the structure of the eligible horizontal
residual interest, including the
proposed approach to measuring the
size of the eligible horizontal residual
interest and the proposal to restrict
unscheduled payments of principal to
the sponsor holding horizontal risk
retention. Several commenters
expressed support for the horizontal risk
retention option and believed that it
would effectively align the interests of
the sponsor with those of the investors
in the ABS. However, many commenters
raised concerns about the agencies’
proposed requirements for the eligible
horizontal residual interest. Many
commenters requested clarification as to
the definition of ‘‘par value’’ and how
sponsors should calculate the eligible
horizontal residual interest when
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measuring it against 5 percent of the par
value of the ABS interests. Moreover,
several commenters recommended that
the agencies use different approaches to
the measurement of the eligible
horizontal residual interest. A few of
these commenters recommended the
agencies take into account the ‘‘fair
value’’ of the ABS interests as a more
appropriate economic measure of risk
retention.
Several commenters pointed out that
the restrictions in the original proposal
on principal payments to the eligible
horizontal residual interest would be
impractical to implement. For example,
some commenters expressed concern
that the restriction would prevent the
normal operation of a variety of ABS
structures, where servicers do not
distinguish which part of a monthly
payment is interest or principal and
which parts of principal payments are
scheduled or unscheduled.
The original proposal also contained
an ‘‘L-shaped’’ risk retention option,
whereby a sponsor, subject to certain
conditions, could use an equal
combination of vertical risk retention
and horizontal risk retention to meet its
5 percent risk retention requirement.40
The agencies requested comment on
whether a higher proportion of the risk
retention held by a sponsor under this
option should be composed of a vertical
component or a horizontal component.
Many commenters expressed general
support for the L-shaped option, but
recommended that the agencies allow
sponsors to utilize multiple risk
retention options in different
combinations or in any percentage
combination as long as the aggregate
percentage of risk retained is at least 5
percent. Commenters suggested that the
flexibility would permit sponsors to
fulfill the risk retention requirements by
selecting a method that would minimize
the costs of risk retention to sponsors
and any resulting increase in costs to
borrowers.
b. Proposed Combined Risk Retention
Option
The agencies carefully considered all
of the comments on the horizontal,
40 Specifically, the original proposal would have
allowed a sponsor to meet its risk retention
obligations under the rules by retaining: (1) 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 (2) 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).
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vertical, and L-shaped risk retention
with respect to the original proposal.
In the proposed rule, to provide more
flexibility to accommodate various
sponsors and securitization transactions
and in response to comments, the
agencies are proposing to combine the
horizontal, vertical, and L-shaped risk
retention options into a single risk
retention option with a flexible
structure.41 Additionally, to provide
greater clarity for the measurement of
risk retention and to help prevent
sponsors from structuring around their
risk retention requirement by negating
or reducing the economic exposure they
are required to maintain, the proposal
would require sponsors to measure their
risk retention requirement using fair
value, determined in accordance with
U.S. generally accepted accounting
principles (GAAP).42
The proposed rule would provide for
a combined standard risk retention
option that would permit a sponsor to
satisfy its risk retention obligation by
retaining an ‘‘eligible vertical interest,’’
an ‘‘eligible horizontal residual
interest,’’ or any combination thereof, in
a total amount equal to no less than 5
percent of the fair value of all ABS
interests in the issuing entity that are
issued as part of the securitization
transaction. The eligible horizontal
residual interest may consist of either a
single class or multiple classes in the
issuing entity, provided that each
interest qualifies, individually or in the
aggregate, as an eligible horizontal
residual interest.43 In the case of
multiple classes, this requirement
would mean that the classes must be in
consecutive order based on
subordination level. For example, if
there were three levels of subordinated
classes and the two most subordinated
classes had a combined fair value equal
to 5 percent of all ABS interests, the
sponsor would be required to retain
these two most subordinated classes if
it were going to discharge its risk
retention obligations by holding only
eligible horizontal residual interests. As
discussed below, the agencies are
proposing to refine the definitions of the
eligible vertical interest and the eligible
horizontal residual interest as well.
This standard risk retention option
would provide sponsors with greater
flexibility in choosing how to structure
their retention of credit risk in a manner
compatible with the practices of the
securitization markets. For example, in
proposed rule at § __.4.
Financial Accounting Standards Board
Accounting Standards Codification Topic 820.
43 See proposed rule at § __.2 (definition of
‘‘eligible horizontal residual interest’’).
41 See
42 Cf.
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securitization transactions where the
sponsor would typically retain less than
5 percent of an eligible horizontal
residual interest, the standard risk
retention option would permit the
sponsor to hold the balance of the risk
retention as a vertical interest. In
addition, the flexible standard risk
retention option should not in and of
itself result in a sponsor having to
consolidate the assets and liabilities of
a securitization vehicle onto its own
balance sheet because the standard risk
retention option does not mandate a
particular proportion of horizontal to
vertical interest or require retention of a
minimum eligible horizontal residual
interest. Under the proposed rule, a
sponsor would be free to hold more of
an eligible vertical interest in lieu of an
eligible horizontal residual interest. The
inclusion of more of a vertical interest
could reduce the significance of the risk
profile of the sponsor’s economic
exposure to the securitization vehicle.
The significance of the sponsor’s
exposure is one of the characteristics the
sponsor evaluates when determining
whether to consolidate the
securitization vehicle for accounting
purposes.
As proposed, a sponsor may satisfy its
risk retention requirements with respect
to a securitization transaction by
retaining at least 5 percent of the fair
value of each class of ABS interests
issued as part of the securitization
transaction. A sponsor using this
approach must retain at least 5 percent
of the fair value 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 5 percent of the fair value
of each such class or interest.
A sponsor may also satisfy its risk
retention requirements under the
vertical option by retaining a ‘‘single
vertical security.’’ A single vertical
security would be an ABS interest
entitling the holder to a specified
percentage (e.g., 5 percent) of the
principal and interest paid on each class
of ABS interests in the issuing entity
(other than such single vertical security)
that result in the security representing
the same percentage of fair value of each
class of ABS interests. By permitting the
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sponsor to hold the vertical form of risk
retention as a single security, the
agencies intend to provide sponsors an
option that is simpler than carrying
multiple securities representing a
percentage share of every series,
tranche, and class issued by the issuing
entity, each of which might need to be
valued by the sponsor on its financial
statements every financial reporting
period. The single vertical security
option provides the sponsor with the
same principal and interest payments
(and losses) as the vertical stack, in the
form of one security to be held on the
sponsor’s books.
The agencies considered the
comments on the measurement of the
eligible horizontal residual interest in
the original proposal and are proposing
a fair value framework for calculating
the standard risk retention because it
uses methods more consistent with
market practices. The agencies’ use of
par value in the original proposal sought
to establish a simple and transparent
measure, but the PCCRA requirement,
which the agencies proposed to ensure
that the eligible horizontal residual
interest had true economic value,
tended to introduce other complexities.
In addition, the use of fair value as
defined in GAAP provides a consistent
framework for calculating standard risk
retention across very different
securitization transactions and different
classes of interests within the same type
of securitization structure.
However, fair value is a methodology
susceptible to yielding a range of results
depending on the key variables selected
by the sponsor in determining fair
value. Accordingly, as part of the
agencies’ proposal to rely on fair value
as a measure that will adequately reflect
the amount of a sponsor’s economic
‘‘skin in the game,’’ the agencies
propose to require disclosure of the
sponsor’s fair value methodology and all
significant inputs used to measure its
eligible horizontal residual interest, as
discussed below in this section.
Sponsors that elect to utilize the
horizontal risk retention option must
disclose the reference data set or other
historical information which would
meaningfully inform third parties of the
reasonableness of the key cash flow
assumptions underlying the measure of
fair value. For the purposes of this
requirement, key assumptions may
include default, prepayment, and
recovery. The agencies believe these key
metrics will help investors assess
whether the fair value measure used by
the sponsor to determine the amount of
its risk retention are comparable to
market expectations.
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The agencies are also proposing limits
on payments to holders of the eligible
horizontal residual interest, but the
limits differ from those in the original
proposal, based on the fair value
measurement. The agencies continue to
believe that limits are necessary to
establish economically meaningful
horizontal risk retention that better
aligns the sponsor’s incentives with
those of investors. However, the
agencies also intend for sponsors to be
able to satisfy their risk retention
requirements with the retention of an
eligible horizontal residual interest in a
variety of ABS structures, including
those structures that, in contrast to
mortgage-backed securities transactions,
do not distinguish between principal
and interest payments and between
principal losses and other losses.
The proposed restriction on projected
cash flows to be paid to the eligible
horizontal residual interest would limit
how quickly the sponsor can recover the
fair value amount of the eligible
horizontal residual interest in the form
of cash payments from the securitization
(or, if a horizontal cash reserve account
is established, released to the sponsor or
other holder of such account). The
proposed rule would prohibit the
sponsor from structuring a deal where it
receives such amounts at a faster rate
than the rate at which principal is paid
to investors in all ABS interests in the
securitization, measured for each future
payment date. Since the cash flows
projected to be paid to sponsors (or
released to the sponsor or other holder
of the horizontal cash reserve account)
and all ABS interests would already be
calculated at the closing of the
transactions as part of the fair value
calculation, it should not be unduly
complex or burdensome for sponsors to
project the cash flows to be paid to the
eligible horizontal residual interest (or
released to the sponsor or other holder
of the horizontal cash reserve account)
and the principal to be paid to all ABS
interests on each payment date. To
compute the fair value of projected cash
flows to be paid to the eligible
horizontal residual interest (or released
to the sponsor or other holder of the
horizontal cash reserve account) on each
payment date, the sponsor would
discount the projected cash flows to the
eligible horizontal residual interest on
each payment date (or released to the
sponsor or other holder of the horizontal
cash reserve account) using the same
discount rate that was used in the fair
value calculation (or the amount that
must be placed in an eligible horizontal
cash reserve account, equal to the fair
value of an eligible horizontal residual
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interest). To compute the cumulative
fair value of cash flows projected to be
paid to the eligible horizontal residual
interest through each payment date, the
sponsor would add the fair value of cash
flows to the eligible horizontal residual
interest (or released to the sponsor or
other holder of the horizontal cash
reserve account) from issuance through
each payment date (or the termination
of the horizontal cash reserve account).
The ratio of the cumulative fair value of
cash flows projected to be paid to the
eligible horizontal residual interest (or
released to the sponsor or other holder
of the horizontal cash reserve account)
at each payment date divided by the fair
value of the eligible horizontal residual
interest (or the amount that must be
placed in an eligible horizontal cash
reserve account, equal to the fair value
of an eligible horizontal residual
interest) at issuance (the EHRI recovery
percentage) measures how quickly the
sponsor can be projected to recover the
fair value of the eligible horizontal
residual interest. To measure how
quickly investors as a whole are
projected to be repaid principal through
each payment date, the sponsor would
divide the cumulative amount of
principal projected to be paid to all ABS
interests through each payment date by
the total principal of ABS interests at
issuance (ABS recovery percentage).
In order to comply with the proposed
rule, the sponsor, prior to the issuance
of the eligible horizontal residual
interest (or funding a horizontal cash
reserve account), or at the time of any
subsequent issuance of ABS interests, as
applicable, would have to certify to
investors that it has performed the
calculations required by section
4(b)(2)(i) of the proposed rule and that
the EHRI recovery percentages are not
expected to be larger than the ABS
recovery percentages for any future
payment date.44 In addition, the sponsor
would have to maintain record of such
calculations and certifications in written
form in its records and must provide
disclosure upon request to the
Commission and its appropriate Federal
banking agency, if any, until three years
after all ABS interests are no longer
outstanding. If this test fails for any
payment date, meaning that the eligible
horizontal residual interest is projected
to recover a greater percentage of its fair
value than the percentage of principal
projected to be repaid to all ABS
interests with respect to such future
payment date, the sponsor, absent
provisions in the cash flow waterfall
that prohibit such excess projected
payments from being made on such
44 See
proposed rule at § __.4(b).
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payment date, would not be in
compliance with the requirements of
section 4(b)(2) of the proposed rule. For
example, the schedule of target
overcollateralization in an automobile
loan securitization might need to be
adjusted so that the sponsor’s retained
interest satisfies the eligible horizontal
residual interest repayment restriction.
The cash flow projection would be a
one-time calculation performed at
issuance on projected cash flows. This
is in part to limit operational burdens
and to allow for sponsors to receive the
upside from a transaction performing
above expectations in a timely fashion.
It should also minimize increases in the
cost of credit to borrowers as a result of
the risk retention requirement. At the
same time, the restriction that a sponsor
cannot structure a transaction in which
the sponsor is projected to recover the
fair value of the eligible horizontal
residual interest any faster than all
investors are repaid principal should
help to maintain the alignment of
interests of the sponsor with those of
investors in the ABS, while providing
flexibility for various types of
securitization structures. Moreover, the
restriction would permit a transaction to
be structured so that the sponsor could
receive a large, one-time payment,
which is a feature common in deals
where certain cash flows that would
otherwise be paid to the eligible
horizontal residual interest are directed
to pay other classes, such as a money
market tranche in an automobile loan
securitization, provided that such
payment did not cause a failure to
satisfy the projected payment test.
On the other hand, the restriction
would prevent the sponsor from
structuring a transaction in which the
sponsor is projected to be paid an
amount large enough to increase the
leverage of the transaction by more than
the amount which existed at the
issuance of the asset-backed securities.
In other words, the purpose of the
restriction is to prevent sponsors from
structuring a transaction in which the
eligible horizontal residual interest is
projected to receive such a
disproportionate amount of money that
the sponsor’s interests are no longer
aligned with investors’ interests. For
example, if the sponsor has recovered
all of the fair value of an eligible
horizontal residual interest, the sponsor
effectively has no retained risk if losses
on the securitized assets occur later in
the life of the transaction.
In addition, in light of the fact that the
EHRI recovery percentage calculation is
determined one time, before closing of
the transaction, based on the sponsor’s
projections, the agencies are proposing
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to include an additional disclosure
requirement about the sponsor’s past
performance in respect to the EHRI
recovery percentage calculation. For
each transaction that includes an EHRI,
the sponsor will be required to make a
disclosure that looks back to all other
EHRI transactions the sponsor has
brought out under the requirements of
the risk retention rules for the previous
five years, and disclose the number of
times the actual payments made to the
sponsor under the EHRI exceeded the
amounts projected to be paid to the
sponsor in determining the Closing Date
Projected Cash Flow Rate (as defined in
section 4(a) of the proposed rule).
Similar to the original proposal, the
proposed rule would allow a sponsor, in
lieu of holding all or part of its risk
retention in the form of an eligible
horizontal residual interest, to cause to
be established and funded, in cash, a
reserve account at closing (horizontal
cash reserve account) in an amount
equal to the same dollar amount (or
corresponding amount in the foreign
currency in which the ABS are issued,
as applicable) as would be required if
the sponsor held an eligible horizontal
residual interest.45
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. Some commenters on the original
proposal recommended relaxing the
investment restrictions on the
horizontal cash reserve account to
accommodate foreign transactions. The
proposed rule includes several
important restrictions and limitations
on such a horizontal cash reserve
account to ensure that a sponsor that
establishes a horizontal cash reserve
account would be exposed to the same
amount and type of credit risk on the
underlying assets as would be the case
if the sponsor held an eligible horizontal
residual interest. For securitization
transactions where the underlying loans
or the ABS interests issued are
denominated in a foreign currency, the
amounts in the account may be invested
in sovereign bonds issued in that foreign
currency or in fully insured deposit
accounts denominated in the foreign
currency in a foreign bank (or a
subsidiary thereof) whose home country
supervisor (as defined in section 211.21
of the Board’s Regulation K) 46 has
adopted capital standards consistent
with the Capital Accord of the Basel
Committee on Banking Supervision, as
amended, provided the foreign bank is
proposed rule at § __.4(c).
CFR 211.21.
45 See
46 12
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subject to such standards.47 In addition,
amounts that could be withdrawn from
the account to be distributed to a holder
of the account would be restricted to the
same degree as payments to the holder
of an eligible horizontal residual interest
(such amounts to be determined as
though the account was an eligible
horizontal residual interest), and the
sponsor would be required to comply
with all calculation requirements that it
would have to perform with respect to
an eligible horizontal residual interest
in order to determine permissible
distributions from the cash account.
Disclosure requirements would also
be required with respect to a horizontal
cash reserve account, including the fair
value and calculation disclosures
required with respect to an eligible
horizontal residual interest, as
discussed below.
The original proposal included
tailored disclosure requirements for the
vertical, horizontal, and L-shaped risk
retention options. A few commenters
recommended deleting the proposed
requirement that the sponsor disclose
the material assumptions and
methodology used in determining the
aggregate dollar amount of ABS interests
issued by the issuing entity in the
securitization. In the proposed rule, the
agencies are proposing disclosure
requirements similar to those in the
original proposal, with some
modifications, and are proposing to add
new requirements for the fair value
measurement and to reflect the structure
of the proposed standard risk retention
option.
The proposed rule would require
sponsors to provide or cause to be
provided to potential investors a
reasonable 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) disclosure of:
• The fair value (expressed as a
percentage of the fair value of all ABS
interests issued in the securitization
transaction and dollar amount (or
corresponding amount in the foreign
currency in which the ABS are issued,
as applicable)) of the eligible horizontal
residual interest that will be retained (or
was retained) by the sponsor at closing,
and the fair value (expressed as a
percentage of the fair value of all ABS
47 Otherwise, as in the original proposal, amounts
in a horizontal cash reserve account may only be
invested in: (1) United States Treasury securities
with remaining maturities of one year or less; and
(2) 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 rule at § __.4(c)(2).
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interests issued in the securitization
transaction and dollar amount (or
corresponding amount in the foreign
currency in which the ABS are issued,
as applicable)) 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 to be retained by the sponsor;
• A description of the methodology
used to calculate the fair value of all
classes of ABS interests;
• The key inputs and assumptions
used in measuring the total fair value of
all classes of ABS interests and the fair
value of the eligible horizontal residual
interest retained by the sponsor
(including the range of information
considered in arriving at such key
inputs and assumptions and an
indication of the weight ascribed
thereto) and the sponsor’s technique(s)
to derive the key inputs;
• For sponsors that elect to utilize the
horizontal risk retention option, the
reference data set or other historical
information that would enable investors
and other stakeholders to assess the
reasonableness of the key cash flow
assumptions underlying the fair value of
the eligible horizontal residual interest.
Examples of key cash flow assumptions
may include default, prepayment, and
recovery;
• Whether any retained vertical
interest is retained as a single vertical
security or as separate proportional
interests;
• Each class of ABS interests in the
issuing entity underlying the single
vertical security at the closing of the
securitization transaction and the
percentage of each class of ABS interests
in the issuing entity that the sponsor
would have been required to retain if
the sponsor held the eligible vertical
interest as a separate proportional
interest in each class of ABS interest in
the issuing entity; and
• The fair value (expressed as a
percentage of the fair value of all ABS
interests issued in the securitization
transaction and dollar amount (or
corresponding amount in the foreign
currency in which the ABS are issued,
as applicable)) of any single vertical
security or separate proportional
interests that will be retained (or was
retained) by the sponsor at closing, and
the fair value (expressed as a percentage
of the fair value of all ABS interests
issued in the securitization transaction
and dollar amount (or corresponding
amount in the foreign currency in which
the ABS are issued, as applicable)) of
the single vertical security or separate
proportional interests required to be
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retained by the sponsor in connection
with the securitization transaction.
Consistent with the original proposal,
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
1(a). Should the agencies require a
minimum proportion of risk retention
held by a sponsor under the standard
risk retention option to be composed of
a vertical component or a horizontal
component? 1(b). Why or why not?
2(a). The agencies observe that
horizontal risk retention, as first-loss
residual position, generally would
impose the most economic risk on a
sponsor. Should a sponsor be required
to hold a higher percentage of risk
retention if the sponsor retains only an
eligible vertical interest under this
option or very little horizontal risk
retention? 2(b). Why or why not?
3. Are the disclosures proposed
sufficient to provide investors with all
material information concerning the
sponsor’s retained interest in a
securitization transaction and the
methodology used to calculate fair
value, as well as enable investors and
the agencies to monitor whether the
sponsor has complied with the rule?
4(a). Is the requirement for sponsors
that elect to utilize the horizontal risk
retention option to disclose the
reference data set or other historical
information that would enable investors
and other stakeholders to assess the
reasonableness of the key cash flow
assumptions underlying the fair value of
the eligible horizontal residual interest
useful? 4(b). Would the requirement to
disclose this information impose a
significant cost or undue burden to
sponsors? 4(c). Why or why not? 4(d). If
not, how should proposed disclosures
be modified to better achieve those
objectives?
5(a). Does the proposal require
disclosure of any information that
should not be made publicly available?
5(b). If so, should such information be
made available to the Commission and
Federal banking agencies upon request?
6. Are there any additional factors
that the agencies should consider with
respect to the standard risk retention?
7. To what extent would the flexible
standard risk retention option address
concerns about a sponsor having to
consolidate a securitization vehicle for
accounting purposes due to the risk
retention requirement itself, given that
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the standard risk retention option does
not require a particular proportion of
horizontal to vertical interest?
8(a). Is the proposed approach to
measuring risk retention appropriate?
8(b). Why or why not?
9(a). Would a different measurement
of risk retention be more appropriate?
9(b). Please provide details and data
supporting any alternative measurement
methodologies.
10(a). Is the restriction on certain
projected payments to the sponsor with
respect to the eligible horizontal
residual interest appropriate and
sufficient? 10(b). Why or why not?
11(a). The proposed restriction on
certain projected payments to the
sponsor with respect to the eligible
horizontal residual interest compares
the rate at which the sponsor is
projected to recover the fair value of the
eligible horizontal residual interest with
the rate which all other investors are
projected to be repaid their principal. Is
this comparison of two different cash
flows an appropriate means of providing
incentives for sound underwriting of
ABS? 11(b). Could it increase the cost to
the sponsor of retaining an eligible
horizontal residual interest? 11(c).
Could sponsors or issuers manipulate
this comparison to reduce the cost to the
sponsor of retaining an eligible
horizontal residual interest? How?
11(d). If so, are there adjustments that
could be made to this requirement that
would reduce or eliminate such possible
manipulation? 11(e). Would some other
cash flow comparison be more
appropriate? 11(f). If so, which cash
flows should be compared? 11(g). Does
the proposed requirement for the
sponsor to disclose, for previous ABS
transactions, the number of times the
sponsor was paid more than the issuer
predicted for such transactions reach
the right balance of incremental burden
to the sponsor while providing
meaningful information to investors?
11(h). If not, how should it be modified
to better achieve those objectives?
12(a). Does the proposed form of the
single vertical security accomplish the
agencies’ objective of providing a way
for sponsors to hold vertical risk
retention without the need to perform
valuation of multiple securities for
accounting purposes each financial
reporting period? 12(b). Is there a
different approach that would be more
efficient?
13(a). Is three years after all ABS
interests are no longer outstanding an
appropriate time period for the
sponsors’ record maintenance
requirement with respect to the
calculations and other requirements in
section 4? 13(b). Why or why not? 13(c).
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If not, what would be a more
appropriate time period?
14(a). Would the calculation
requirements in section 4 of the
proposed rule likely be included in
agreed upon procedures with respect to
an interest retained pursuant to the
proposed rule? 14(b). Why or why not?
14(c). If so, what costs may be
associated with such a practice?
c. Alternative Eligible Horizontal
Residual Interest Proposal
The agencies have also considered,
and request comment on, an alternative
provision relating to the amount of
principal payments received by the
eligible horizontal residual interest.
Under this alternative, on any payment
date, in accordance with the
transaction’s governing documents, the
cumulative amount paid to an eligible
horizontal residual interest may not
exceed a proportionate share of the
cumulative amount paid to all holders
of ABS interests in the transaction. The
proportionate share would equal the
percentage, as measured on the date of
issuance, of the fair value of all of the
ABS interests issued in the transaction
that is represented by the fair value of
the eligible horizontal residual interest.
For purposes of this calculation, fees
and expenses paid to service providers
would not be included in the
cumulative amounts paid to holders of
ABS interests. All other amounts paid to
holders of ABS would be included in
the calculations, including principal
repayment, interest payments, excess
spread and residual payments. The
transaction documents would not allow
distribution to the eligible horizontal
residual interest any amounts payable to
the eligible horizontal residual interest
that would exceed the eligible
horizontal residual interest’s permitted
proportionate share. Such excess
amounts could be paid to more senior
classes, placed into a reserve account, or
allocated in any manner that does not
otherwise result in payments to the
holder of the eligible horizontal residual
interest that would exceed the allowed
amount.
By way of illustration, assume the fair
value of the eligible horizontal residual
interest for a particular transaction was
equal to 10 percent of the fair value of
all ABS interests issued in that
transaction. In order to meet the
requirements of the proposal, the
cumulative amount paid to the sponsor
in its capacity as holder of the eligible
horizontal residual interest on any given
payment date could not exceed 10
percent of the cumulative amount paid
to all holders of ABS interests,
excluding payment of expenses and fees
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57941
to service providers. This would allow
large payments to the eligible horizontal
residual interest so long as such
payments do not otherwise result in
payments to the holder of the eligible
horizontal residual interest that would
exceed the allowed amount.
The agencies request comment on this
alternative mechanism for allowing the
eligible horizontal residual interest to
receive unscheduled principal
payments, including whether the
agencies should adopt the alternative
proposal instead of the proposed
mechanism for these payments
described above.
Request for Comment
15(a). Other than a cap in the priority
of payments on amounts to be paid to
the eligible horizontal residual interest
and related calculations on distribution
dates and related provisions to allocate
any amounts above the cap, would there
be any additional steps necessary to
comply with the alternative proposal?
15(b). If so, please describe those
additional steps and any associated
costs.
16. Would the cost and difficulty of
compliance with the alternative
proposal, including monitoring
compliance, be higher or lower, than
with the proposal?
17(a). Does the alternative proposal
accommodate more or less of the current
market practice than the proposal?
17(b). If there is a difference, please
provide data with respect to the scale of
that difference.
18. With respect to the alternative
proposal, should amounts other than
payment of expenses and fees to service
providers be excluded from the
calculations?
19(a). Does the alternative proposal
adequately accommodate structures
with unscheduled payments of
principal, such as scheduled step
downs? 19(b). Does the alternative
adequately address structures which do
not distinguish between interest and
principal received from underlying
assets for purposes of distributions?
20(a). Are there asset classes or
transaction structures for which the
alternative proposal would not be
economically viable? 20(b). Are there
asset classes or transaction structures for
which the alternative proposal would be
more economically feasible than the
proposal?
21. Should both the proposal and the
alternative proposal be made available
to sponsors?
22(a). The proposal includes a
restriction on how payments on an
eligible horizontal residual interest must
be structured but does not restrict actual
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payments to the eligible horizontal
residual interest, which could be
different than the projected payments if
losses are higher or lower than
expected. The alternative proposal for
payments on eligible horizontal residual
interests does not place restrictions on
structure but does restrict actual
payments to the eligible horizontal
residual interest. Does the proposal or
the alternative proposal better align the
sponsor’s interests with investors’
interests? 22(b). Why or why not?
2. Revolving Master Trusts
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a. Overview
Securitization sponsors frequently use
a revolving master trust when they seek
to issue more than one series of ABS
collectively backed by a common pool
of assets that change over time.48
Pursuant to the original proposal, the
seller’s interest form of risk retention
would only be available to revolving
master trusts.
The seller’s interest is an undivided
interest held by the master trust
securitization sponsor in the pool of
receivables or loans held in the trust. It
entitles the sponsor to a percentage of
all payments of principal, interest, and
fees, as well as recoveries from
defaulted assets that the trust
periodically receives on receivables and
loans held in the trust, as well as the
same percentage of all payment defaults
on those assets. Investors in the various
series of ABS issued by the trust have
claims on the remaining principal and
interest, as a source of repayment for the
ABS interests they hold.49 Typically,
the seller’s interest is pari passu to the
investors’ interest with respect to
collections and losses on the securitized
assets, though in some revolving master
trusts, it is subordinated to the
investors’ interest in this regard. If the
seller’s interest is pari passu, it
generally becomes subordinated to
48 In a revolving master trust securitization, assets
(e.g., credit card receivables or dealer floorplan
financings) are periodically added to the pool to
collateralize current and future issuances of the
securities backed by the pool. Often, but not always,
the assets are receivables generated by revolving
lines of credit originated by the sponsor. A major
exception would be the master trusts used in the
United Kingdom to finance residential mortgages.
49 Generally, the trust sponsor retains the right to
any excess cash flow from payments of interest and
fees received by the trust that exceeds the amount
owed to ABS investors. Excess cash flow from
payments of principal is paid to the sponsor in
exchange for newly generated receivables in the
trust’s existing revolving accounts. However, the
specific treatment of excess interest, fees, and
principal payments with respect to any ABS series
within the trust is a separate issue, discussed in
connection with the agencies’ proposal to give
sponsors credit for some forms of eligible horizontal
risk retention at the series level, as explained in
further detail below.
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investors’ interests in the event of an
early amortization of the ABS interests
held by investors, as discussed more
below. Commenters representing the
interests of securitization sponsors
generally favored the seller’s interest
approach but requested certain
modifications.
The agencies are proposing to
maintain the seller’s interest as the
specific risk retention option for master
trusts, with changes from the original
proposal that reflect many of the
comments received, as discussed in
further detail below. The modifications
to this option are intended to refine this
method of risk retention to better reflect
the way revolving master trust
securitizations operate in the current
market.
As discussed in greater detail below,
among other things, the agencies are
proposing to modify the original
proposal with respect to master trusts
by:
• Allowing sponsors that hold a firstloss exposure in every series of ABS
issued by a master trust to count the
percent of such interest that is held
consistently across all ABS series
toward the minimum 5 percent seller’s
interest requirement;
• Removing the restriction in the
original proposal that prohibited the use
of the seller’s interest risk retention
option for master trust securitizations
backed by non-revolving assets;
• Clarifying how the seller’s interest
can be used in connection with multilevel legacy trusts and master trusts in
which some of the seller’s interest
corresponds to loans or receivables held
in a legacy master trust;
• Revising the calculation of the 5
percent seller’s interest amount so it is
based on the trust’s amount of
outstanding ABS rather than the amount
of trust assets;
• Clarifying the rules regarding the
use of certain structural features,
including delinked credit enhancement
structures, where series-specific credit
enhancements that do not support the
seller’s interest-linked structures, and
the limited use of assets that are not part
of the seller’s interest to administer the
features of the ABS issued to investors;
and
• Clarify how the rule would apply to
a revolving master trust in early
amortization.
b. Definitions of Revolving Master Trust
and Seller’s Interest
The seller’s interest form of retention
would only be available to revolving
master trusts. These are trusts
established to issue ABS interests on
multiple issuance dates out of the same
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trust. In some instances the trust will
issue to investors a series with multiple
classes of tranched ABS periodically. In
others, referred to as ‘‘delinked credit
enhancement structures,’’ the master
trust maintains one or more series, but
issues tranches of ABS of classes in the
series periodically, doing so in amounts
that maintain levels of subordination
between classes as required in the
transaction documents. The revolving
master trust risk retention option is
designed to accommodate both of these
structures.
The agencies’ original proposal would
require that all securitized assets in the
master trust must be loans or other
extensions of credit that arise under
revolving accounts. The agencies
received comments indicating that a
small number of securitizers in the
United States, such as insurance
premium funding trusts, use revolving
trusts to securitize short-term loans,
replacing loans as they mature with new
loans, in order to sustain cash flow and
collateral support to longer-term
securities. In response to commenters,
the agencies are proposing to expand
the securitized asset requirement to
include non-revolving loans.50
Nevertheless, as with the original
proposal, all ABS interests issued by the
master trust must be collateralized by
the master trust’s common pool of
receivables or loans. Furthermore, the
common pool’s principal balance must
revolve so that cash representing
principal remaining after payment of
principal due, if any, to outstanding
ABS on any payment date, as well as
cash flow from principal payments
allocated to seller’s interest is reinvested
in new extensions of credit at a price
that is predetermined at the transaction
and new receivables or loans are added
to the pool from time to time to
collateralize existing series of ABS
issued by the trust. The seller’s interest
option would not be available to a trust
that issues series of ABS at different
times backed by segregated independent
pools of securitized assets within the
trust as a series trust, or a trust that
issues shorter-term ABS interests
backed by a static pool of long-term
loans, or a trust with a re-investment
period that precedes an ultimate
amortization period.
In general, the seller’s interest
represents the seller/sponsor’s interest
in the portion of the receivables or loans
that does not collateralize outstanding
50 Revolving master trusts are also used in the
United Kingdom to securitize mortgages, and U.S.
investors may invest in RMBS issued by these
trusts. This proposed change would make it easier
for these issuers to structure their securitizations in
compliance with section 15G for such purpose.
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investors’ interests in ABS issued under
series. Investor interests include any
sponsor/seller’s retained ABS issued
under a series. As discussed above, a
seller’s interest is a typical form of risk
retention in master trusts, whereby the
sponsor of a master trust holds an
undivided interest in the securitized
assets. The original proposal defined
‘‘seller’s interest’’ consistent with these
features, 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 proposal would define ‘‘seller’s
interest’’ similarly to the original
proposal. However, in response to
comments, the agencies have made
changes to the definition from the
original proposal to reflect market
practice. The first change would modify
the definition to reflect the fact that the
seller’s interest is pari passu with
investors’ interests at the series level,
not at the level of all investors’ interests
collectively. The agencies are proposing
this change because each series in a
revolving master trust typically uses
senior-subordinate structures under
which investors are entitled to different
payments out of that series’ percentage
share of the collections on the trust’s
asset pool, so some investors in
subordinated classes are subordinate to
the seller’s interest. The second change
would modify the definition to reflect
the fact that, in addition to the
receivables and loans that collateralize
the trust’s ABS interests, a master trust
typically includes servicing assets.51 To
the extent these assets are allocated as
collateral only for a specific series, these
assets are not part of the seller’s
interest.52 Furthermore, the proposal
51 The definition of ‘‘servicing assets’’ is
discussed in Part II.B of this Supplementary
Information.
52 Although this language allows certain assets
held by the trust to be allocated as collateral only
for a specific series and excluded from the seller’s
interest, it does not allow a trust to claim eligibility
for the seller’s interest form of risk retention unless
the seller’s interest is, consistent with the revolving
master trust definition, generally collateralized by
a common pool of assets, the composition of which
changes over time, and that securitizes all ABS
interests in the trust. Absent broad exposure to the
securitized assets, the seller’s interest ceases to be
a vertical form of risk retention. The proposed
language is designed to accommodate limited forms
of exclusion from the seller’s interest in connection
with administering the trust, dealing with the
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clarifies that the seller’s interest amount
is the unpaid principal balance of the
seller’s interest in the common pool of
receivables or loans. The seller’s interest
amount must at least equal the required
minimum seller’s interest.
In addition, the agencies are
considering whether they should make
additional provisions for subordinated
seller’s interests. In some revolving
master trusts, there is an interest similar
to a seller’s interest, except that instead
of the interest being pari passu with the
investors’ interest with respect to
principal collections and interest and
fee collections, the sponsor’s (or
depositor’s) share of the collections in
the interest are subordinated, to
enhance the ABS interests issued to
investors at the series level. The
agencies are considering whether to
permit these subordinated interests to
count towards the 5 percent seller’s
interest treatment, since they perform a
loss-absorbing function that is
analogous to a horizontal interest
(whereas a typical seller’s interest is
analogous to a vertical interest, and
typically is only subordinated in the
event of early amortization). Because
they are subordinated, however, the
agencies are considering requiring them
be counted toward the 5 percent
requirement on a fair value basis,
instead of the face value basis applied
for regular, unsubordinated seller’s
interests.53 The sponsor would be
required to apply the same fair value
standards as the rule imposes under the
general risk retention requirement.
In addition to these definitional
changes, the agencies are proposing
modifications to the overall structure of
the master trust risk retention option as
it was proposed in the original proposal,
in light of comments concerning the
manner in which the seller’s interest is
held. In some cases, the seller’s interest
may be held by the sponsor, as was
specified in the original proposal, but in
other instances, it may be held by
another entity, such as the depositor, or
two or more originators may sponsor a
single master trust to securitize
receivables generated by both firms,
with each firm holding a portion of the
seller’s interest. Accordingly, the
agencies are proposing to allow the
revolving versus amortizing periods for investor
ABS series, implementation of interest rate features,
and similar aspects of these securitization
transactions.
53 The fair value determination would be for
purposes of the amount of subordinated seller’s
interest included in the numerator of the 5 percent
ratio. The denominator would be the unpaid
principal balance of all outstanding investors’ ABS
interests, as is proposed for regular, unsubordinated
seller’s interests.
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57943
seller’s interest to be held by any
wholly-owned affiliate of the sponsor.54
In response to comments, the agencies
are also proposing to allow the seller’s
interest to be retained in multiple
interests, rather than a single interest.
This approach is intended to address
legacy trust structures and would
impose requirements on the division of
the seller’s interest in such structures. In
these structures, a sponsor that controls
an older revolving master trust that no
longer issues ABS to investors keeps the
trust in place, with the credit lines that
were designated to the trust over the
years still in operation and generating
new receivables for the legacy trust. The
legacy trust issues certificates
collateralized by these receivables to a
newer issuing trust, which typically also
has credit lines designated to the trust,
providing the issuing trust with its own
pool of receivables. The issuing trust
issues investors’ ABS interests backed
by receivables held directly by the
issuing trust and also indirectly in the
legacy trust (as evidenced by the
collateral certificates held by the issuing
trust).
The proposal would permit the
seller’s interest for the legacy trust’s
receivables to be held separately, but
still be considered eligible risk
retention, by the sponsor at the issuing
trust level because it functions as
though it were part of the seller’s
interest associated with all the
securitized assets held by the issuing
trust (i.e., its own receivables and the
collateral certificates). However, the
portion of the seller’s interest held
through the legacy trust must be
proportional to the percentage of assets
the collateral certificates comprise of the
issuing trust’s assets. If the sponsor held
more, and the credit quality of the
receivables feeding the issuing trust
turned out to be inferior to the credit
lines feeding the legacy trust, the
sponsor would be able to avoid the full
effect of those payment defaults at the
issuing trust level.
The proposal would require the
sponsor to retain a minimum seller’s
interest in the receivables or loans held
by the trust representing at least 5
percent of the total unpaid principal
balance of the investors’ ABS interests
issued by the trust and outstanding.55
54 The requirement for the holder to be a whollyowned affiliate of the sponsor is consistent with the
restrictions on permissible transferees of risk
retention generally required to be held by the
sponsor under the rule. See Part III.D.2 of this
Supplementary Information.
55 The agencies originally proposed 5 percent of
the total receivables and loans in the trust, but are
persuaded by commenters that this is
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The sponsor would be required to meet
this 5 percent test at the closing of each
issuance of securities by the master
trust, and at every seller’s interest
measurement date specified under the
securitization transaction documents,
but no less than monthly. The sponsor
would remain subject to its obligation to
meet the seller’s interest requirement on
these measurement dates until the trust
no longer has ABS interests outstanding
to any third party.
The agencies are proposing to include
the principal balance instead of the fair
value of outstanding ABS interests as
the basis for the calculation of the
minimum seller’s interest requirement.
The agencies currently consider this
approach to be sufficiently conservative,
because sponsors of revolving master
trusts do not include senior interestonly bonds or premium bonds in their
ABS structures. If this were not the case,
it would be more appropriate to require
the minimum seller’s interest
requirement to be included based on the
fair value basis of outstanding ABS
interests. However, the fair value
determination would create additional
complexity and costs, especially given
the frequency of the measurements
required. In consideration of this, the
agencies would expect to include in any
final rule a prohibition against the
seller’s interest approach for any
revolving trust that includes senior
interest-only bonds or premium bonds
in the ABS interest it issues to investors.
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Request for Comment
23(a). Is such prohibition appropriate?
23(b). If not, what is a better approach,
and why? Commenters proposing an
alternative approach should provide
specific information about which
revolving trusts in the marketplace
currently include such interests in their
capital structures, and the manner in
which they could comply with a fair
value approach.
24. In revising the definition of
‘‘seller’s interest’’ the agencies have
modified the rule text to exclude ‘‘assets
that collateralize other specified ABS
interests issued by the issuing entity’’ as
well as rule text excluding ‘‘servicing
assets,’’ which is a defined term under
the proposal. Are such exclusions
redundant, or would they exclude rights
to assets or cash flow that are commonly
included as seller’s interest?
disproportionate to the base risk retention
requirement in some cases. Revolving master trusts
may hold receivables far in excess of the amount
of investors’ ABS interests outstanding, for
example, when the sponsor has other funding
sources at more favorable costs than those available
from investors in the master trust’s ABS.
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c. Combining Seller’s Interest With
Horizontal Risk Retention at the Series
Level
The original proposal for revolving
asset master trusts focused primarily on
the seller’s interest form of risk
retention. Commenters requested that
the agencies modify the original
proposal to recognize as risk retention
the various forms of subordinated
exposures sponsors hold in master trust
securitization transactions. The
proposal would permit sponsors to
combine the seller’s interest with either
of two horizontal types of risk retention
held at the series level, one of which
meets the same criteria as the standard
risk retention requirement, and the
other of which is eligible under the
special conditions discussed below.
To be eligible to combine the seller’s
interest with horizontal risk retained at
the series level, the sponsor would be
required to maintain a specified amount
of horizontal risk retention in every
series issued by the trust. If the sponsor
retained these horizontal interests in
every series across the trust, the sponsor
would be permitted to reduce its seller’s
interest by a corresponding percentage.
For example, if the sponsor held 2
percent, on a fair value basis, of all the
securities issued in each series in either
of the two forms of permitted horizontal
interests, the sponsor’s seller’s interest
requirement would be reduced to 3
percent of the unpaid principal balance
of all investor interests outstanding,
instead of 5 percent. However, if the
sponsor ever subsequently issued a
series (or additional classes or tranches
out of an existing series of a delinked
structure) that did not meet this 2
percent minimum horizontal interest
requirement, the sponsor would be
required to increase its minimum
seller’s interest up to 5 percent for the
entire trust (i.e., 5 percent of the total
unpaid principal balance of all the
investors’ ABS interest outstanding in
every series, not just the series for
which the sponsor decided not to hold
the minimum 2 percent horizontal
interest).
The agencies propose to permit the
sponsor to hold horizontal interests at
the series level in the form of a
certificated or uncertificated ABS
interest. The interest in the series would
need to be issued in a form meeting the
definition of an eligible horizontal
residual interest or a specialized
horizontal form, available only to
revolving master trusts. The residual
interest held by sponsors of revolving
trusts at the series level typically does
not meet the requirement of the
proposed definition of eligible
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horizontal residual interest which
would limit the rate of payments to the
sponsor to the rate of payments made to
the holders of senior ABS interests.
Many revolving asset master trusts are
collateralized with receivables that pay
relatively high rates of interest, such as
credit and charge card receivables or
floor plan financings. The ABS interests
sold to investors are structured so there
is an initial revolving period, under
which the series’ share of borrower
repayments of principal on the
receivables are used by the trust to
purchase new, replacement receivables.
Subsequently, during the ‘‘controlled
amortization’’ phase, principal
payments are accumulated for the
purpose of amortizing and paying off
the securities on an expected maturity
date. Under the terms of the transaction,
principal payments are handled in a
separate waterfall from interest
payments. The series’ share of interest
payments received by the trust each
period (typically a month) is used to pay
trust expenses and the interest due to
holders of ABS interests.56 Because the
series’ share of cash flow from interest
payments is generally in excess of
amounts needed to pay principal and
interest, it is used to cover the series’
share of losses on receivables that were
charged-off during the period and a
surplus typically still remains. This
residual interest is returned to the
sponsor (though it may, under the terms
of the transaction, first be made
available to other series in the trust to
cover shortfalls in interest due and
receivable losses during the period that
were not covered by other series’ shares
of the trust’s proceeds).
This subordinated claim to residual
interest by the sponsor is a form of
horizontal risk retention; the residual
interest is payable to the sponsor only
to the extent it exceeds the amount
needed to cover principal losses on
more senior securities in the series. The
agencies therefore believe it would be
appropriate to recognize this form of
risk retention as an acceptable method
of meeting a sponsor’s risk retention
requirement for revolving master trusts.
Accordingly, the agencies are proposing
to recognize the fair value of the
sponsor’s claim to this residual interest
as a permissible form of horizontal risk
retention for revolving master trust
structures, for which the sponsor could
take credit against the seller’s interest
requirement in the manner described
above. Under the proposal, the sponsor
would receive credit for the residual
interest whether it is certificated or
56 In some trusts the expenses are senior in
priority, but this varies.
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uncertificated, subject to the following
requirements:
• Each series distinguishes between
the series’ share of collection of interest,
fees, and principal from the securitized
assets (separate waterfalls);
• The sponsor’s claim to any of the
series’ share of interest and fee proceeds
each period pursuant to the horizontal
residual interest is subordinated to all
interest due to all ABS interests in the
series for that period, and further
reduced by the series’ share of defaults
on principal of the trust’s securitized
assets for that period (that is, chargedoff receivables);
• The horizontal residual interest, to
the extent it has claims to any part of
the series’ share of principal proceeds,
has the most subordinated claim; and
• The horizontal residual interest is
only eligible for recognition as risk
retention so long as the trust is a
revolving trust.
Some commenters on the original
proposal also requested that the sponsor
be permitted to combine the seller’s
interest with other vertical forms of risk
retention at the series level. The
agencies are not aware of any current
practice of vertical holding at the series
level. The agencies would consider
including, as part of the seller’s interest
form of risk retention, vertical forms of
risk retention (subject to an approach
similar to the one described in this
proposal for horizontal interests) if it
was, in fact, market practice to hold
vertical interests in every series of ABS
issued by revolving master trusts. The
agencies have considered this
possibility but, especially in light of the
lack of market practice, are not
proposing to allow sponsors to meet
their risk retention requirement in this
manner.
In addition, the sponsor would need
to make the calculations and disclosures
on every measurement date required
under the rule for the seller’s interest
and horizontal interest, as applicable,
under the proposed rule. Furthermore,
the sponsor would be required to retain
the disclosures in its records and make
them available to the Commission or
supervising Federal banking agency (as
applicable) until three years after all
ABS interests issued in a series are no
longer outstanding.
Request for Comment
25(a). Is there a market practice of
retaining vertical forms of risk retention
at the series level? 25(b). What
advantages and disadvantages would
there be in allowing sponsors to meet
their risk retention requirement through
a combination of seller’s interest and
vertical holdings at the series level?
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26(a). Are the disclosure and
recordkeeping requirements in the
proposal appropriate? 26(b). Why or
why not? 26(c). Is there a different time
frame that would be more appropriate
and if so, what would it be?
d. Early Amortization
The original proposal did not address
the impact of early amortization on the
seller’s interest risk retention option. As
noted above, revolving master trusts
issue ABS interests with a revolving
period, during which each series’ share
of principal collections on the trust’s
receivables are used to purchase
replacement receivables from the
sponsor. The terms of the revolving trust
securitization describe various
circumstances under which all series
will stop revolving and principal
collections will be used to amortize
investors’ ABS interests as quickly as
possible. These terms are designed to
protect investors from declines in the
credit quality of the trust’s asset pool.
Early amortization is exceedingly rare,
but when it occurs, the seller’s interest
may fall below its minimum
maintenance level, especially if the
terms of the securitization subordinate
the seller’s interest to investor interests
either through express subordination or
through a more beneficial reallocation to
other investors of collections that would
otherwise have been allocated to the
seller’s interest. Accordingly, the
agencies are revising the proposed rule
to address the circumstances under
which a sponsor would fall out of
compliance with risk retention
requirements after such a reduction in
the seller’s interest in the early
amortization context.
Under the proposed rule, a sponsor
that suffers a decline in its seller’s
interest during an early amortization
period caused by an unsecured adverse
event would not violate the rule’s risk
retention requirements as a result of
such decline, provided that each of the
following four requirements were met:
• The sponsor was in full compliance
with the risk retention requirements on
all measurement dates before the early
amortization trigger occurred;
• The terms of the seller’s interest
continue to make it pari passu or
subordinate to each series of investor
ABS with respect to allocation of losses;
• The master trust issues no
additional ABS interests after early
amortization is initiated to any person
not wholly-owned by the sponsor; 57
and
57 In other words, the sponsor is not prohibited
from repaying all outstanding investors’ ABS
interests and maintaining the trust as a legacy trust,
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• To the extent that the sponsor is
relying on any horizontal interests of the
type described in the preceding
subsection to reduce the percentage of
its required seller’s interest, those
interests continue to absorb losses as
described above.
The ability of a sponsor to avoid a
violation of the risk retention in this
way is only available to sponsors of
master trusts comprised of revolving
assets. If securitizers of ordinary nonrevolving assets were permitted to avail
themselves of the seller’s interest and
this early amortization treatment, they
could create master trust transactions
that revolved only briefly, with ‘‘easy’’
early amortization triggers, and thereby
circumvent the cash distribution
restrictions otherwise applicable to risk
retention interests under section 4 of the
proposed rule.
As an ancillary provision to this
proposed early amortization treatment,
the agencies are proposing to recognize
so-called excess funding accounts as a
supplement to the seller’s interest. An
excess funding account is a segregated
account in the revolving master trust, to
which certain collections on the
securitized assets that would otherwise
be payable to the holder of the seller’s
interest are diverted if the amount of the
seller’s interest falls below the
minimum specified in the deal
documentation.58 If an early
amortization event for the trust is
triggered, the cash in the excess funding
account is distributed to investors’ ABS
interests in the same manner as
collections on the securitized assets.
Accordingly, funding of an excess
funding account would typically be
temporary, eventually resolved either by
the sponsor adding new securitized
assets to restore the trust to its
minimum seller’s interest amount (and
the funds trapped in the excess funding
account subsequently would be paid to
the sponsor), or by the subsequent early
amortization of the trust for failure to
attain the minimum seller’s interest over
multiple measurement dates.
As a general matter, the agencies
would not propose to confer eligible risk
retention status on an account that is
funded by cash flow from securitized
which could be used at a later date to issue
collateral certificates to a new issuing trust.
58 Ordinarily, if the seller’s interest would not
meet the minimum amount required under a
formula contained in the deal documentation, the
sponsor is required to designate additional eligible
credit plans to the transaction and transfer the
receivables from those credit plans into the trust to
restore the securitized assets in the trust to the
specified ratio. If the sponsor cannot do this for
some reason, the excess funding account activates
to trap certain funds that would otherwise be paid
to the sponsor out of the trust.
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assets. However, for the other forms of
risk retention proposed by the agencies,
the amount of retention is measured and
set at the inception of the transaction.
Due to the revolving nature of the
master trusts, periodic measurement of
risk retention at the trust level is
necessary for an effective seller’s
interest option.
The agencies are therefore proposing
the above-described early amortization
treatment for trusts that enter early
amortization, analogous to the
measurement at inception under the
other approaches. If a revolving trust
breaches its minimum seller’s interest,
the excess funding account (under the
conditions described in the proposed
rule) functions as an interim equivalent
to the seller’s interest for a brief period
and gives the sponsor an opportunity to
restore securitized asset levels to normal
levels.59 Under the proposed rule, the
amount of the seller’s interest may be
reduced on a dollar-for-dollar basis by
the amount of cash retained in an excess
funding account triggered by the trust’s
failure to meet the minimum seller’s
interest, if the account is pari passu
with (or subordinate to) each series of
the investors’ ABS interests and funds
in the account are payable to investors
in the same manner as collections on
the securitized assets.
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
Request for Comment
27(a). Are there changes the agencies
should consider making to the proposed
early amortization and excess funding
account provisions in order to align
them better with market practice while
still serving the agencies’ stated purpose
of these sections? 27(b). If so, what
changes should the agencies consider?
e. Compliance by the Effective Date
Commenters requested that they only
be required to maintain a 5 percent
seller’s interest for the amount of the
investors’ ABS interests issued after the
effective date of the regulations. As a
general principle, the agencies also do
not seek to apply risk retention to ABS
issued before the effective date of the
regulations. On the other hand, the
agencies believe that the treatment
requested by commenters is not
appropriate, because the essence of the
seller’s interest form of risk retention is
that it is a pro rata, pari passu exposure
to the entire asset pool. Accordingly, at
59 In addition, the only excess funding account
that is eligible for consideration under the proposed
rule is one that is triggered from the trust’s failure
to meet its collateral tests in a given period; this is
materially different than a violation of, for example,
a base rate trigger, which signals unexpected
problems with the credit quality of the securitized
assets in the pool.
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present, the agencies propose to require
sponsors relying on the seller’s interest
approach to comply with the rule with
respect to the entirety of the unpaid
principal balance of the trust’s
outstanding investors’ ABS interests
after the effective date of the rule,
without regard to whether the investors’
ABS interests were issued before or after
the rule’s effective date.
If the terms of the agreements under
which an existing master trust
securitization operates do not require
the sponsor to hold a minimum seller’s
interest to the exact terms of the
proposed rule, then the sponsor could
find revising the terms of outstanding
series to conform to the rule’s exact
requirements to be difficult or
impracticable. Therefore, the agencies
propose to recognize a sponsor’s
compliance with the risk retention
requirements based on the sponsor’s
actual conduct. If a sponsor has the
ability under the terms of the master
trust’s documentation to retain a level of
seller’s interest (adjusted by qualifying
horizontal interests at the series level, if
any), and does not retain a level of
seller’s interest as required, the agencies
would consider this to be failure of
compliance with the proposed rule’s
requirements.
Request for Comment
28(a). The agencies request comment
as to how long existing revolving master
trusts would need to come into
compliance with the proposed risk
retention rule under the conditions
described above. Do existing master
trust agreements effectively prohibit
compliance? 28(b). Why or why not?
28(c). From an investor standpoint,
what are the implications of the
treatment requested by sponsor
commenters, under which sponsors
would only hold a seller’s interest with
respect to post-effective date issuances
of ABS interests out of the trust?
29(a). Should the agencies approve
exceptions on a case by case basis
during the post-adoption
implementation period, subject to casespecific conditions appropriate to each
trust? 29(b). How many trusts would
need relief and under what
circumstances should such relief be
granted?
30. The agencies seek to formulate the
seller’s interest form of risk retention in
a fashion that provides meaningful risk
retention on par with the base forms of
risk retention under the rule, and at the
same time accommodates prudent
features of existing market structures.
The agencies request comment whether
the proposal accomplishes both these
goals and, if not, what additional
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changes the agencies should consider to
that end.
3. Representative Sample
a. Overview of Original Proposal and
Public Comment
The original proposal would have
provided that a sponsor could satisfy its
risk retention requirement for a
securitization transaction by retaining
ownership of a randomly selected
representative sample of assets, equal to
at least 5 percent of the unpaid
principal balance of all pool assets
initially identified for securitizing that
is equivalent in all material respects to
the securitized assets. To ensure that the
sponsor retained exposure to
substantially the same type of credit risk
as investors in the securitized
transaction, the sponsor electing to use
the representatives sample option
would have been required to construct
a ‘‘designated pool’’ of assets consisting
of at least 1,000 separate assets from
which the securitized assets and the
assets comprising the representative
sample would be drawn and containing
no assets other than securitized assets or
assets comprising the representative
sample. The proposed rule would have
required a sponsor to select a sample of
assets from the designated pool using a
random selection process that would
not take into account any characteristics
other than unpaid principal balance and
to then assess that representative sample
to ensure that, for each material
characteristic of the assets in the pool,
the mean of any quantitative
characteristic and the proportion of any
categorical characteristic is within a 95
percent two-tailed confidence interval
of the mean or proportion of the same
characteristics of the assets in the
designated pool. If the representative
sample did not satisfy this requirement,
the proposal stipulated that a sponsor
repeat the random selection process
until it selected a qualifying sample or
opt to use another risk retention form.
The original proposal set forth a
variety of safeguards meant to ensure
that a sponsor using the representative
sample option created the representative
pool in conformance with the
requirements described above. These
included a requirement to obtain a
report regarding agreed-upon
procedures from an independent public
accounting firm describing whether the
sponsor has the required procedures in
place for selecting the assets to be
retained, maintains documentation that
clearly identifies the assets in the
representative sample, and ensures that
the retained assets are not included in
the designated pool of any other
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securitizations. The proposed rule also
would have required, until all of the
securities issued in the related
securitization had been paid in full or
the related issuing entity had been
dissolved, that servicing of the assets in
the representative sample and in the
securitization pool be performed by the
same entity under the same contractual
standards and that the individuals
responsible for this servicing must not
be able to identify an asset as being part
of the representative sample or the
securitization pool. In addition, the
sponsor would have been required to
make certain specified disclosures.
While some commenters were
supportive of the proposal’s inclusion of
the representative sample option, many
commenters were critical of the option.
A number of commenters stated that it
would be impractical to implement this
option for a variety of reasons, including
that it would be unworkable with
respect to various asset classes, would
be subject to manipulation, and was too
burdensome with respect to its
disclosure requirements. Other
commenters recommended that the
option be limited for use with
automobile loans and other loans that
are not identified at origination for sale
through securitization. A number of
commenters expressed concerns
regarding the required size of the
designated pool, including that the pool
size was too large to be practical, that it
would favor larger lenders, and that it
would not work well with larger loans,
such as jumbo residential mortgagebacked securities and commercial
mortgages.
Commenters were generally critical of
the proposed requirement for a
procedures report, contending that the
report would impose costs upon a
sponsor without a commensurate
benefit. Additionally, commenters
representing accounting firms and
professionals questioned the value of
the procedures report and stated that if
not provided to investors in the
securitized transaction, the report could
run afoul of certain rules governing the
professional standards of accountants.
Commenters also recommended that the
blind servicing requirement of the
option be modified to allow for certain
activities, such as loss mitigation,
assignment of loans to special servicers,
disclosure of loan level data, and
remittance of funds to appropriate
parties.
b. Proposed Treatment
The agencies have considered the
comments on the representative sample
option in the original proposal and are
concerned that, based on observations
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by commenters, the representative
sample option would be difficult to
implement and may result in the costs
of its utilization outweighing its
benefits. Therefore, the agencies are not
proposing to include a representative
sample option in the re-proposed rule.
The agencies believe that the other
proposed risk retention options would
be better able to achieve the purposes of
section 15G, including the standard risk
retention option, while reducing the
potential to negatively affect the
availability and costs of credit to
consumers and businesses.
Request for Comment
31(a). Should the agencies include a
representative sample option as a form
of risk retention? 31(b). If so, how
should such an option be constructed,
consistent with establishing a
statistically representative sample?
31(c). What benefits would including
such an option provide to the
securitization market, investors,
borrowers, or others?
4. Asset-Backed Commercial Paper
Conduits
a. Overview of the Original Proposal
and Public Comments
The original proposal included a risk
retention option specifically designed
for asset-backed commercial paper
(ABCP) structures. As explained in the
original proposal, ABCP is a type of
liability that is typically issued by a
special purpose vehicle (commonly
referred to as a ‘‘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
securitized assets collateralizing the
ABS interests that support the ABCP
may consist of a wide range of assets
including automobile loans, commercial
loans, trade receivables, credit card
receivables, student loans, and other
loans. 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 longerterm assets with shorter-term
liabilities.60 The original proposal was
designed to take into account the special
structures through which some conduits
typically issue ABCP, as well as the
manner in which participants in the
securitization chain of these conduits
typically retain exposure to the credit
risk of the underlying assets.
60 See
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57947
Under the original proposal, this risk
retention option would have been
available only for short-term ABCP
collateralized by asset-backed securities
that were issued or initially sold
exclusively to ABCP conduits and
supported by a liquidity facility that
provides 100 percent liquidity coverage
from a banking institution. The option
would not have been available to ABCP
conduits that lack 100 percent liquidity
coverage or ABCP conduits that operate
purchased securities or arbitrage
programs 61 in the secondary market.
In a typical ABCP conduit, the
sponsor of the ABCP conduit approves
the originators whose loans or
receivables will collateralize the ABS
interests that support the ABCP issued
by the conduit. Banks can use ABCP
conduits that they sponsor to meet the
borrowing needs of a bank customer and
offer that customer a more attractive
cost of funds than a commercial loan or
a traditional debt or equity financing. In
such a transaction, the customer (an
‘‘originator-seller’’) may sell 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
ABS interest that is purchased by the
ABCP conduit and a residual ABS
interest that absorbs first losses on the
receivables and that is retained by the
originator-seller. The residual ABS
interest retained by the originator-seller
typically is sized with the intention that
it be 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 ABS interests purchased
from one or more intermediate SPVs
(which are supported by the
subordination provided by the residual
ABS interests retained by the originatorsellers). The sponsor of this type of
ABCP conduit, which is usually a bank
or other regulated financial institution
or an affiliate or subsidiary of a bank or
other regulated financial institution,
also typically provides (or arranges for
another regulated financial institution
or group of financial institution to
provide) 100 percent liquidity coverage
on the ABCP issued by the conduit. This
liquidity coverage typically requires the
61 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 coverage, though terms are
more limited than those of the ABCP conduits
eligible for special treatment pursuant to the
proposed rule.
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support provider to provide funding to,
or purchase assets or ABCP from, the
ABCP conduit in the event that the
conduit lacks the funds necessary to
repay maturing ABCP issued by the
conduit.
The original proposal included
several conditions designed to ensure
that this option would be available only
to the type of ABCP conduits that do not
purchase securities in the secondary
market, as described above. For
example, this option would have been
available only with respect to ABCP
issued by an ‘‘eligible ABCP conduit,’’
as defined by the original proposal. The
original proposal defined an eligible
ABCP conduit as an issuing entity that
issues ABCP and that meets each of the
following criteria.62 First, the issuing
entity would have been required to have
been bankruptcy remote or otherwise
isolated for insolvency purposes from
the sponsor and any intermediate SPV.
Second, the ABS issued by an
intermediate SPV to the issuing entity
would have been required to be
collateralized solely by assets originated
by a single originator-seller.63 Third, all
the interests issued by an intermediate
SPV would have been required to be
transferred to one or more ABCP
conduits or retained by the originatorseller. Fourth, a regulated liquidity
provider would have been required to
enter 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 of the ABCP issued
by the issuing entity by lending to, or
purchasing assets or ABCP from, the
issuing entity in the event that funds
were required to repay maturing ABCP
issued by the issuing entity.64
62 See Original Proposal at § __.2 (definition of
‘‘eligible ABCP conduit’’).
63 Under the original proposal, an originatorseller would mean an entity that creates financial
assets through one or more extensions of credit or
otherwise and sells those financial 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 original proposal
defined 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 Original Proposal at
§ __.2 (definitions of ‘‘originator-seller’’ and
‘‘intermediate SPV’’).
64 The original proposal defined 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
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Under the original proposal, the
sponsor of an eligible ABCP conduit
would have been permitted to satisfy its
base risk retention obligations if each
originator-seller that transferred assets
to collateralize the ABS interests that
supported the ABCP issued by the
conduit retained the same amount and
type of credit risk as would be required
under the horizontal risk retention
option under the original proposal as if
the originator-seller was the sponsor of
the intermediate SPV. Specifically, the
original proposal provided that a
sponsor of an ABCP securitization
transaction could satisfy its base risk
retention requirement with respect to
the issuance of ABCP by an eligible
ABCP conduit if each originator-seller
retained an eligible horizontal residual
interest in each intermediate SPV
established by or on 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 would
have been required to equal at least 5
percent of the par value of all interests
issued by the intermediate SPV.
Accordingly, each originator-seller
would have been required to retain
credit exposure to the receivables sold
by that originator-seller to support
issuance of the ABCP. The originatorseller also would have been prohibited
from selling, transferring, or hedging the
eligible horizontal residual interest that
it is required to retain. This option was
designed to accommodate the special
structure and features of these types of
ABCP programs.
The original proposal also would have
imposed certain obligations directly on
the sponsor in recognition of the key
role the sponsor plays in organizing and
operating an eligible ABCP conduit.
First, the original proposal provided
that the sponsor of an eligible ABCP
conduit that issues ABCP in reliance on
the option would have been responsible
for compliance with the requirements of
this risk retention option. Second, the
sponsor would have been required to
maintain policies and procedures to
monitor the originator-sellers’
compliance with the requirements of the
proposal.
The sponsor also would have been
required to provide, or cause to be
provided, to potential purchasers a
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.
PO 00000
Frm 00022
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Sfmt 4702
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 retained an interest in the
securitization transaction pursuant to
section 9 of the original proposal
(including a description of the form,
amount, and nature of such interest),
and of the regulated liquidity provider
that provided liquidity coverage 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.65 In developing the risk
retention option for eligible ABCP
conduits in the original proposal, the
agencies considered the factors set forth
in section 15G(d)(2) of the Exchange
Act.66 The original proposal included
conditions designed to ensure that the
interests in the intermediate SPVs sold
to an eligible ABCP conduit would have
low credit risk, and to ensure that
originator-sellers had 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 original
proposal was designed to effectuate the
risk retention requirements of section
15G of the Exchange Act in a manner
that facilitated reasonable access to
credit by consumers and businesses
through the issuance of ABCP backed by
consumer and business receivables.
Finally, as noted above, an originatorseller would have been subject to the
same restrictions on transferring or
hedging the retained eligible horizontal
residual interest to a third party as
applied to sponsors under the original
proposal.
b. Comments on the Original Proposal
Commenters generally supported
including an option specifically for
ABCP structures. Commenters
65 See 15 U.S.C. 78o–11(c)(1)(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).
66 See id. at Section 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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expressed concern, however, about
several aspects of the option. Many
commenters recommended allowing the
credit enhancements usually found in
ABCP conduit programs (i.e., 100
percent liquidity facilities or programwide credit enhancement) to qualify as
a form of risk retention, in addition to
the proposed option, because sponsors
that provide this level of protection to
their conduit programs are already
exposed to as much (or more) risk of
loss as a sponsor that holds an eligible
horizontal residual interest. Several
commenters also requested that the
agencies permit originator-sellers to also
use the other permitted menu options,
such as master trusts.
Commenters generally did not
support the restrictions in the definition
of ‘‘eligible ABCP conduit’’ in the
original proposal because these
restrictions would prevent ABCP multiseller conduits from financing ABS that
was collateralized by securitized assets
originated by more than one originator.
In particular, the restriction that assets
held by an intermediate SPV must have
been ‘‘originated by a single originatorseller’’ would, as these commenters
asserted, preclude funding assets that an
originator-seller acquires from a third
party or from multiple affiliated
originators under a corporate group,
which commenters asserted was a
common market practice. Many
commenters noted that the requirement
that all of the interests issued by the
intermediate SPV be transferred to one
or more ABCP conduits or retained by
the originator-seller did not take into
account that, in many cases, an
intermediate SPV may also sell interests
to investors other than ABCP conduits.
Some commenters also observed that
the original proposal did not appear to
accommodate ABCP conduit
transactions where originator-sellers sell
their entire interest in the securitized
receivables to an intermediate SPV in
exchange for cash consideration and an
equity interest in the SPV. The SPV, in
turn, would hold the retained interest.
Therefore, these commenters
recommended that the rule permit an
originator-seller to retain its interest
through its or its affiliate’s ownership of
the equity in the intermediate SPV,
rather than directly. In addition, a
commenter requested that the agencies
revise the ABCP option to accommodate
structures where the intermediate SPV
is the originator. A few commenters
requested that the agencies expand the
definition of eligible liquidity provider
to include government entities, and to
allow multiple liquidity providers for
one sponsor. Some commenters also
criticized the monitoring and disclosure
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requirements for the ABCP option in the
original proposal. A few commenters
recommended that the ABCP option be
revised so that ABCP with maturities of
up to 397 days could use the ABCP
option.
c. Proposed ABCP Option
The agencies are proposing an option
for ABCP securitization transactions
that retains the basic structure of the
original proposal with modifications to
a number of requirements intended to
address issues raised by commenters.67
As with the original proposal, the
proposal permits the sponsor to satisfy
its base risk retention requirement 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 as if the originator-seller was
the sponsor of the intermediate SPV.
The agencies continue to believe that
such an approach, as modified by the
proposal, is appropriate in light of the
considerations set forth in section
15G(d)(2) of the Exchange Act.68 These
modifications are intended to allow the
ABCP option to accommodate certain of
the wider variety of market practices
observed in the comments on the
original proposal while establishing a
meaningful risk retention requirement.
In summary, these modifications are
designed to permit somewhat more
flexibility on behalf of originator-sellers
that finance through ABCP conduits
extensions of credit they create in
connection with their business
67 As with the original proposal, the proposal
permits the sponsor to satisfy its base risk retention
requirement 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 as if the originator-seller
was the sponsor of the intermediate SPV, provided
that all other conditions to this option are satisfied.
The agencies continue to believe that such an
approach, as modified by the proposal, is
appropriate in light of the considerations set forth
in section 15G(d)(2) of the Exchange Act. See note
66, supra. In developing the risk retention option
for eligible ABCP conduits in the original proposal,
the agencies considered the factors set forth in
section 15G(d)(2) of the Exchange Act. The proposal
include conditions designed to ensure that the
interests in the intermediate SPVs sold to an
eligible ABCP conduit would have low credit risk,
and to ensure that originator-sellers had 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 originatorseller would be subject to the same restrictions on
transferring or hedging the retained interest to a
third party as applied to sponsors of securitization
transactions.
68 See note 66, supra.
PO 00000
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57949
operations. The additional flexibility
granted under the revised proposal
permits affiliated groups of originatorsellers to finance credits through a
combined intermediate SPV. It also
permits additional flexibility where an
originator seller uses an intermediate
SPV not only to finance credits through
an ABCP conduit, but also other ABS
channels, such as direct private
placements in the investor market. The
proposal also permits additional
flexibility to accommodate the
structures of intermediate SPVs, such as
revolving master trusts and passthrough intermediate special purpose
vehicles (ISPVs). Nevertheless, the
revised proposal retains the original
proposal’s core requirements, including
the 100 percent liquidity coverage
requirement. The revised proposal also
does not accommodate ‘‘aggregators’’
who use ABCP to finance assets
acquired in the market; the assets
underlying each intermediate SPV must
be created by the respective originatorseller.
First, the proposal would introduce
the concept of a ‘‘majority-owned
originator-seller affiliate’’ (OS affiliate),
which would be defined under the
proposal as an entity that, directly or
indirectly, majority controls, is majority
controlled by, or is under common
majority control with, an originatorseller participating in an eligible ABCP
conduit. For purposes of this definition,
majority control would mean ownership
of more than 50 percent of the equity of
an entity or ownership of any other
controlling financial interest in the
entity (as determined under GAAP).
Under the proposal, both an originatorseller and a majority-owned OS affiliate
could sell or transfer assets that these
entities have originated to an
intermediate SPV.69 However,
intermediate SPVs could not acquire
assets directly from non-affiliates. This
modification addresses the agencies’
concern about asset aggregators that
acquire loans and receivables from
multiple sources in the market, place
them in an intermediate SPV, and issue
interests to ABCP conduits. Where, as in
69 With the majority ownership standard, the
agencies are proposing to require a high level of
economic identity of interest between firms that are
permitted to use a common intermediate SPV as a
vehicle to finance their assets. The agencies are
concerned that a lower standard of affiliation in this
regard could make it more difficult for the conduit
sponsor and liquidity provider to understand the
credit quality of assets backing the conduit.
Moreover, a lower standard of affiliation creates
opportunities for an originator-seller to act as an
aggregator by securitizing purchased assets through
special-purpose vehicles the originator-seller
creates and controls for such purposes, and putting
the ABS issued by those special-purpose vehicles
into the intermediate SPV.
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the case of an eligible ABCP conduit, a
banking institution provides 100
percent liquidity coverage to the
conduit, the Federal banking agencies
are concerned that the aggregation
model could interfere with the liquidity
provider’s policies and practices for
monitoring and managing the risk
exposure of the guarantee. In light of the
purposes of section 15G, the Federal
banking agencies do not believe that
extending the ABCP option to ABCP
conduits that are used to finance the
purchase and securitization of
receivables purchased in the secondary
market would consistently help ensure
high quality underwriting of ABS.
Second, the proposal would allow for
multiple intermediate SPVs between an
originator-seller and a majority-owned
OS affiliate. As indicated in the
comments on the original proposal,
there are instances where, for legal or
other purposes, there is a need for
multiple intermediate SPVs. Under the
proposal, an intermediate SPV would be
defined to be a direct or indirect whollyowned affiliate 70 of the originator-seller
that is bankruptcy remote or otherwise
isolated for insolvency purposes from
the eligible ABCP conduit, the
originator-seller, and any majoritycontrolled OS affiliate that, directly or
indirectly, sells or transfers assets to
such intermediate SPV. The
intermediate SPV would be permitted to
acquire assets originated by the
originator-seller or its majoritycontrolled OS affiliate from the
originator-seller or majority-controlled
OS affiliate, or it could also acquire
assets or asset-backed securities from
another controlled intermediate SPV
collateralized solely by securitized
assets originated by the originator-seller
or its majority-controlled OS affiliate
and servicing assets. Finally,
intermediate SPVs in structures with
multiple intermediate SPVs that do not
issue asset-backed securities
collateralized solely by ABS interests
must be pass-through entities that either
transfer assets to other SPVs in
anticipation of securitization (e.g., a
depositor) or transfer ABS interests to
the ABCP conduit or another
intermediate SPV. Finally, under the
proposal, all ABS interests held by an
eligible ABCP conduit must be issued in
a securitization transaction sponsored
by an originator-seller and supported by
securitized assets originated or created
by an originator-seller or one or more
majority-owned OS affiliates of the
originator-seller.
70 See proposed rule at § __.2 (definition of
‘‘affiliate’’).
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Third, the proposed rule, in contrast
to the original proposal, would allow an
intermediate SPV to sell asset-backed
securities that it issues to third parties
other than ABCP conduits. For example,
the agencies believe that some
originator-sellers operate a revolving
master trust to finance extensions of
credit the originator-seller creates in
connection with its business operations.
The master trust sometimes issues a
series of ABS backed by an interest in
those credits directly to investors
through a private placement transaction
or registered offering, and other times
issues an interest to an eligible ABCP
conduit. The proposed rule would
accommodate this practice.
Fourth, the proposal would clarify
and expand (as compared to the original
proposal) the types of collateral that an
eligible ABCP conduit could acquire
from an originator-seller. Under the
proposed definition of ‘‘eligible ABCP
conduit’’, a conduit could acquire any of
the following types of assets: (1) ABS
interests supported by securitized assets
originated by an originator-seller or one
or more majority-controlled OS affiliates
of the originator seller, and by servicing
assets; 71 (2) special units of beneficial
interest or similar interests in a trust or
special purpose vehicle that retains
legal title to leased property underlying
leases that were transferred to an
intermediate SPV in connection with a
securitization collateralized solely by
such leases originated by an originatorseller or majority-controlled OS affiliate
and by servicing assets; and (3) interests
in a revolving master trust collateralized
solely by assets originated by an
originator-seller or majority-controlled
OS affiliate; and by servicing assets.72
Consistent with this principle, the
agencies seek to clarify that the ABS
interests acquired by the conduit could
not be collateralized by securitized
assets otherwise purchased or acquired
by the intermediate SPV’s originatorseller, majority-controlled OS affiliate,
or by the intermediate SPV from
unaffiliated originators or sellers. The
ABS interests also would have to be
acquired by the ABCP conduit in an
initial issuance by or on behalf of an
71 The purpose of this clarification is to allow
originator-sellers certain additional flexibility in
structuring their participation in eligible ABCP
conduits, while retaining the core principle that the
assets being financed have been originated by the
originator-seller or a majority-controlled OS
affiliate, not purchased and aggregated.
72 The definition of ‘‘servicing assets’’ is
discussed in Part II.B of this Supplementary
Information. The agencies are allowing an ABCP
conduit to hold servicing assets, and thus
acknowledge the kinds of rights and assets that a
typical ABCP conduit needs to have in order to
conduct the activities required in a securitization.
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intermediate SPV, (1) directly from the
intermediate SPV, (2) from an
underwriter of the securities issued by
the intermediate SPV, or (3) from
another person who acquired the
securities directly from the intermediate
SPV. In addition, the ABCP conduit
would have to be collateralized solely
by asset-backed securities acquired by
the ABCP conduit in an initial issuance
by or on behalf of an intermediate SPV
directly from the intermediate SPVs,
from an underwriter of the securities
issued by the intermediate SPV, or from
another person who acquired the
securities directly from the intermediate
SPV and servicing assets. Because
eligible ABCP conduits can only
purchase ABS interests in an initial
issuance, eligible ABCP conduits may
not aggregate ABS interests by
purchasing them in the secondary
market.
Fifth, in response to comments on the
original proposal that an originatorseller should be able to use a wider
variety of risk retention options, the
proposal would expand the retention
options available to the originator-seller.
Under the proposed rule, an eligible
ABCP conduit would satisfy its risk
retention requirements if, with respect
to each asset-backed security the ABCP
conduit acquires from an intermediate
SPV, the originator-seller or majoritycontrolled OS affiliate held risk
retention in the same form, amount, and
manner as would be required using the
standard risk retention or revolving
asset master trust options. Thus, in the
example above of an originator-seller
that finances credits through a revolving
master trust, the originator-seller could
retain risk in the form of a seller’s
interest meeting the requirements of the
revolving master trust provisions of the
proposed rule.
Sixth, consistent with the original
proposal, the proposal requires that 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) of 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. The proposal
clarifies that 100 percent liquidity
coverage means that, in the event that
the ABCP conduit is unable for any
reason to repay maturing ABCP issued
by the issuing entity, the total amount
for which the liquidity provider may be
obligated is equal to 100 percent of the
amount of ABCP outstanding plus
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accrued and unpaid interest. Amounts
due pursuant to the required liquidity
coverage may not be subject to credit
performance of the ABS held by the
ABCP conduit or reduced by the amount
of credit support provided to the ABCP
conduit. Liquidity coverage that only
funds performing receivables or
performing ABS interests will not meet
the requirements of the ABCP option.
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d. Duty To Monitor and Disclosure
Requirements
Consistent with the original proposal,
the agencies are proposing that the
sponsor of an eligible ABCP conduit
would continue to be responsible for
compliance. Some commenters on the
original proposal requested that the
agencies replace the monitoring
obligation with a contractual obligation
of an originator-seller to maintain
compliance. However, the agencies
believe that the sponsor of an ABCP
conduit is in the best position to
monitor compliance by originatorsellers. Accordingly, the proposal would
continue to require the sponsor of an
ABCP conduit to monitor compliance by
an originator-seller.
e. Disclosure Requirements
The agencies also are proposing
disclosure requirements that are similar
to those in the original proposal, with
two changes. First, the agencies are
proposing to remove the requirement
that the sponsor of the ABCP conduit
disclose the names of the originatorsellers. The proposal would continue to
require the sponsor of an ABCP conduit
to provide to each purchaser of ABCP
the name and form of organization of
the regulated liquidity provider that
provides liquidity coverage to the
eligible ABCP conduit, including a
description of the form, amount, and
nature of such liquidity coverage, and
notice of any failure to fund. In
addition, with respect to each ABS
interest held by the ABCP conduit, the
sponsor of the ABCP conduit would be
required to provide the asset class or
brief description of the underlying
receivables for each ABS interest, the
standard industrial category code (SIC
Code) for the originator-seller or
majority-controlled OS affiliate that will
retain (or has retained) pursuant to this
section an interest in the securitization
transaction, and a description of the
form, amount (expressed as a percentage
and as a dollar amount (or
corresponding amount in the foreign
currency in which the ABS are issued,
as applicable) of the fair value of all
ABS interests issued in the
securitization transaction. Finally, an
ABCP conduit sponsor relying on the
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ABCP option would be required to
provide, or cause to be provided, upon
request, to the Commission and its
appropriate Federal banking agency, if
any, in writing, all of the information
required to be provided to investors and
the name and form of organization of
each originator-seller or majoritycontrolled OS affiliate that will retain
(or has retained) an interest in the
underlying securitization transactions.
Second, a sponsor of an ABCP
conduit would be required to promptly
notify investors, the Commission, and
its appropriate Federal banking agency,
if any, in writing of (1) the name and
form of organization of any originatorseller that fails to maintain its risk
retention as required by the proposed
rule and the amount of asset-backed
securities issued by an intermediate
SPV of such originator-seller and held
by the ABCP conduit; (2) the name and
form of organization of any originatorseller that hedges, directly or indirectly
through an intermediate SPV, its risk
retention in violation of its risk
retention requirements and the amount
of asset-backed securities issued by an
intermediate SPV of such originatorseller and held by the ABCP conduit;
and (3) and any remedial actions taken
by the ABCP conduit sponsor or other
party with respect to such asset-backed
securities. In addition, the sponsor of an
ABCP conduit would be required to take
other appropriate steps upon learning of
a violation by an originator-seller of its
risk retention obligations including, as
appropriate, curing any breach of the
requirements, or removing from the
eligible ABCP conduit any asset-backed
security that does not comply with the
applicable requirements. To cure the
non-compliance of the non-conforming
asset, the sponsor could, among other
things, purchase the non-conforming
asset from the ABCP conduit, purchase
5 percent of the outstanding ABCP and
comply with the vertical risk retention
requirements, or declare an event of
default under the underlying transaction
documents (assuming the sponsor
negotiated such a term) and accelerate
the repayment of the underlying assets.
f. Other Items
In most cases, the sponsor of the
ABCP issued by the conduit will be the
bank or an affiliate of the bank that
organizes the conduit. The agencies note
that the use of the ABCP option by the
sponsor of an eligible ABCP conduit
would not relieve the originator-seller
from its independent obligation to
comply with its own risk retention
obligations under the revised proposal,
if any. In most, if not all, cases, the
originator-seller will be the sponsor of
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the asset-backed securities issued by an
intermediate SPV and will therefore be
required to hold an economic interest in
the credit risk of the assets
collateralizing the asset-backed
securities issued by the intermediate
SPV. The agencies also note that a
sponsor of an ABCP conduit would not
be limited to using the ABCP option to
satisfy its risk retention requirements.
An ABCP conduit sponsor could rely on
any of the risk retention options
described in section 4 of the proposed
rule.
The agencies are proposing
definitions of ‘‘ABCP’’ and ‘‘eligible
liquidity provider’’ that are the same as
the definitions in the original proposal.
The agencies believe it would be
inappropriate to expand the ABCP
option to commercial paper that has a
term of over nine months, because a
duration of nine months accommodates
almost all outstanding issuances and the
bulk of those issuances have a
significantly shorter term of 90 days or
less. In addition, the agencies have not
expanded the definition of eligible
liquidity provider to include sovereign
entities. The agencies do not believe
that prudential requirements could be
easily designed to accommodate a
sovereign entity that functions as a
liquidity provider to an ABCP conduit.
Request for Comments
32(a). To the extent that the proposed
ABCP risk retention option does not
reflect market practice, how would
modifying the proposal help ensure
high quality underwriting of ABCP?
32(b). What structural or definitional
changes to the proposal would be
appropriate, including but not limited to
any changes to the proposed definitions
of 100 percent liquidity coverage,
eligible ABCP conduit, intermediate
SPV, majority-owned OS affiliate,
originator-seller, and regulated liquidity
provider? 32(c). Do ABCP conduits
typically have 100 percent liquidity
coverage as defined in the proposal?
32(d). What percentage of ABCP
conduits and what percentage of ABCP
currently outstanding was issued by
such conduits?
33(a). Do ABCP conduits typically
only purchase assets directly from
intermediate SPVs (i.e., that meet the
requirements of the proposal? 33(b).
What percentage of ABCP currently
outstanding was issued by such
conduits?
34(a). Do ABCP conduits typically
purchase receivables directly from
customers, rather than purchasing ABS
interests from SPVs sponsored by
customers? 34(b). What percentage of
ABCP currently outstanding was issued
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by such conduits? 34(c). Is the
requirement that an ABCP conduit
relying on this option may not purchase
receivables directly from the originator
appropriate? 34(d). Why or why not?
35(a). Is the requirement that an ABCP
conduit relying on this option may not
purchase ABS interests in the secondary
market appropriate? 35(b). Why or why
not? 35(c). Does the proposed ABCP
option appropriately capture assets that
are acquired through business
combinations?
36(a). Do ABCP conduits typically
purchase corporate debt securities on a
regular or occasional basis? 36(b). What
percentage of ABCP currently
outstanding was issued by such
conduits?
37(a). Do ABCP conduits typically
purchase ABS in the secondary market
on a regular or occasional basis? 37(b).
What percentage of ABCP currently
outstanding was issued by such
conduits?
38. With respect to ABCP conduits
that purchase assets that do not meet the
requirements of the proposal, what
percentage of those ABCP conduits’
assets do not meet the requirements?
39(a). Should the agencies allow
multiple eligible liquidity providers for
purposes of the ABCP risk retention
options? 39(b). If so, should this be
limited to special circumstances? 39(c).
Should the agencies allow a liquidity
provider to provide liquidity coverage
with respect to a specific ABS interest?
40(a). Does the definition of majorityowned OS affiliate appropriately
capture companies that are affiliated
with an originator-seller? 40(b). Why or
why not?
41. Should the rule require disclosure
of the originator seller in the case of
noncompliance by the originator seller?
42(a). Should the rule also require
disclosure to investors in ABCP in all
cases of violation of this section? 42(b).
Why or why not? 42(c). If so, should the
rule prescribe how such disclosure be
made available to investors?
43. Are there other changes that
should be made to disclosure
provisions?
44. Should the rule provide further
clarity as to who will be deemed a
sponsor of ABCP issued by an ABCP
conduit?
45(a). Should there be a supplemental
phase-in period (beyond the delayed
effective dates in 15 U.S.C. 78o-11(i)) for
existing ABCP conduits that do not meet
the proposed definition of eligible ABCP
conduit? 45(b). Why or why not? 45(c).
If so, what would be the appropriate
limit (e.g., up to 10 percent of the assets
in the ABCP conduit could be
nonconforming), and what would be the
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appropriate time period(s) for
conformance (e.g., up to two years)?
5. Commercial Mortgage-Backed
Securities
a. Overview of the Original Proposal
and Public Comments
Section 15G(c)(1)(E) of the Exchange
Act (15 U.S.C. 78o-11(c)(1)(E)) provides
that, with respect to CMBS, the
regulations prescribed by the agencies
may provide for retention of the firstloss 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. In light of this provision
and the historical market practice of
third-party purchasers acquiring firstloss positions in CMBS transactions, the
agencies originally proposed to permit a
sponsor of ABS that is collateralized by
commercial real estate loans to meet its
risk retention requirements if a thirdparty purchaser acquired an eligible
horizontal residual interest in the
issuing entity.73 The acquired interest
would have had to take the same form,
amount, and manner as the sponsor
would have been required to retain
under the horizontal risk retention
option. The CMBS risk retention option
would have been available only for
securitization transactions where
commercial real estate loans constituted
at least 95 percent of the unpaid
principal balance of the assets being
securitized and where six proposed
requirements were met:
(1) The third-party purchaser retained
an eligible 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;
(2) The third-party purchaser paid 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;
(3) The third-party purchaser
performed a review of the credit risk of
73 Such third-party purchasers are commonly
referred to in the CMBS market as ‘‘B-piece buyers’’
and the eligible horizontal residual interest is
commonly referred to as the ‘‘B-piece.’’
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each asset in the pool prior to the sale
of the asset-backed securities;
(4) The third-party purchaser could
not be affiliated with any other party to
the securitization transaction (other
than investors) or have control rights in
the securitization (including, but not
limited to acting as servicer or special
servicer) that were not collectively
shared by all other investors in the
securitization;
(5) The sponsor provided, or caused
to be provided, to potential purchasers
certain information concerning the
third-party purchaser and other
information concerning the transaction;
and
(6) Any third-party purchaser
acquiring an eligible horizontal residual
interest under the CMBS option
complied with the hedging, transfer and
other restrictions applicable to such
interest under the proposed rules as if
the third-party purchaser was a sponsor
who had acquired the interest under the
horizontal risk retention option.
As stated in the original proposal,
these requirements were designed to
help ensure that the form, amount and
manner of the third-party purchaser’s
risk retention would be consistent with
the purposes of section 15G of the
Exchange Act.
Generally, commenters supported the
ability of sponsors to transfer credit risk
to third-party purchasers. One
commenter stated that the CMBS option
acknowledged the mandate of section
941 of the Dodd-Frank Act and the
recommendations of the Federal Reserve
Board by providing much need
flexibility to the risk retention rules and
recognized the impact and importance
of the third-party purchaser in the
CMBS market. Some commenters,
however, believed the proposed criteria
for the option would discourage the use
of the option or render the option
unworkable. In particular, one
commenter raised concerns with the
restrictions on financing and hedging of
the B-piece, the restrictions on the
transfer of such interest for the life of
the transaction, restrictions on servicing
and control rights including the
introduction of an operating advisor,
and requirements related to the
disclosure of the B-piece purchase price
would likely discourage the use of the
CMBS option.
In response to the agencies’ question
in the original proposal as to whether a
third-party risk retention option should
be available to other asset classes,
commenters’ views were mixed. Some
commenters expressed support for
allowing third parties to retain the risk
in other asset classes, with other
commenters supporting a third-party
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option for RMBS and another
commenter suggesting the option be
made available to any transaction in
which individual assets may be
significant enough in size to merit the
individual review required of a thirdparty purchaser.
The agencies believe that a third-party
purchaser that specifically negotiates for
the purchase of a first-loss position is a
common feature of commercial
mortgage securitizations that is
generally not found in other asset
classes. For this reason, section
15G(c)(1)(E)(ii) of the Exchange Act
specifically permits the agencies to
create third-party risk retention for
commercial mortgage securitizations.
However, the agencies believe there is
insufficient benefit to market liquidity
to justify an expansion of third-party
risk retention to other asset classes, and
propose to maintain the more direct
alignment of incentives achieved by
requiring the sponsor to retain risk for
the other asset classes not covered by
section 15G(c)(1)(E)(ii).
The agencies also received many
comments with respect to the specific
conditions of the CMBS option in the
original proposal. In this proposed rule,
the CMBS option is similar to that of the
original proposal, but incorporates a
number of key changes the agencies
believe are appropriate in response to
concerns raised by commenters. These
are discussed below.
b. Proposed CMBS Option
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i. Number of Third-Party Purchasers and
Retention of Eligible Interest
Under the original proposal, only one
third-party purchaser could retain the
required risk retention interest.
Additionally, the third-party purchaser
would have been required to retain an
eligible horizontal residual interest in
the securitization in the same form,
amount and manner as would be
required of the sponsor under the
horizontal retention option. The
proposed CMBS option was not
designed to permit a third-party
purchaser to share the required risk
retention with the sponsor.
Many commenters on the original
proposal requested flexibility in
satisfying the CMBS option through the
sharing of risk retention between
sponsors and third-party purchasers, as
well as among multiple third-party
purchasers. In particular, some
commenters noted that allowing such
flexibility would be consistent with how
the proposed rule would allow a
sponsor to choose to retain a vertical
and horizontal retention piece to share
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the risk retention obligation with an
originator.
The agencies considered the
comments on the original proposal
carefully and believe that some
additional flexibility for the CMBS risk
retention option would be appropriate.
Accordingly, under the proposed rule,
the agencies would allow two (but no
more than two) third-party purchasers
to satisfy the risk retention requirement
through the purchase of an eligible
horizontal residual interest (as defined
under the proposed rule). Each thirdparty purchaser’s interest would be
required to be pari passu with the other
third-party purchaser’s interest, so that
neither third-party purchaser’s losses
are subordinate to the other’s losses.
The agencies do not believe it would be
appropriate to allow more than two
third-party purchasers to satisfy the risk
retention requirement for a single
transaction, because it could dilute too
much the incentives generated by the
risk retention requirement to monitor
the credit quality of the commercial
mortgages in the pool.
The agencies are also revising the
CMBS option to clarify that, when read
together with the revisions that have
been made to the standard risk retention
requirements, the eligible horizontal
residual interest held by the third-party
purchasers can be used to satisfy the
standard risk retention requirements,
either by itself as the sole credit risk
retained or in combination with a
vertical interest held by the sponsor.
The agencies believe this flexibility
increases the likelihood that third-party
purchasers will assume risk retention
obligations. The agencies further believe
that the interests of the third-party
purchaser and other investors are
aligned through other provisions of the
proposed CMBS option, namely the
Operating Advisor provisions and
disclosure provisions discussed below.
ii. Third-Party Purchaser Qualifying
Criteria
In the original proposal, the agencies
did not propose qualifying criteria for
third-party purchasers related to the
third-party purchaser’s experience or
financial capabilities.
One commenter proposed that only
‘‘qualified’’ third-party purchasers be
permitted to retain the risk under the
CMBS option, with such qualifications
based on certain pre-determined criteria
of experience, financial analysis
capability, capability to direct the
special servicer and certain financial
capabilities to sustain losses. Another
commenter requested that the final rule
require third-party purchasers to be
independent from special servicers.
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Consistent with the original proposal,
the agencies are not proposing to add
specific qualifying criteria for thirdparty purchasers. The agencies believe
that investors in the business of
purchasing B-piece interests in CMBS
transactions, who are typically
interested in acquiring special servicing
rights in such transactions, likely have
the requisite experience and capabilities
to make an informed decision regarding
their purchases. Furthermore, the
agencies continue to propose disclosure
requirements with respect to the
identity and experience of third-party
purchasers in the transaction, which
will alert investors in a CMBS
transaction as to the experience of thirdparty purchasers and other material
information necessary to make an
informed investment decision.
Additionally, based generally on
comments the agencies have received,
the agencies have not added a
requirement that third-party purchasers
be independent from special servicers
since the acquisition of special servicing
rights is a primary reason why thirdparty purchasers are willing to purchase
the B-piece in the CMBS transactions.
Such an independence requirement
would adversely affect the willingness
of third-party purchasers to assume the
risk retention obligations in CMBS
transactions.
iii. Composition of Collateral
Consistent with the original proposal,
the agencies are restricting the thirdparty purchaser option to securitization
transactions collateralized by
commercial real estate loans. However,
the original proposal allowed up to 5
percent of the collateral to be other
types of assets, in order to accommodate
assets other than loans that are typically
needed to administer a securitization.
Since then, the agencies have added the
servicing assets definition to the
proposed rule, to accommodate these
kinds of assets.74 Accordingly, the
agencies are eliminating the 95 percent
test and revising the collateral
restriction to cover securitization
transactions collateralized by
commercial real estate loans and
servicing assets.
iv. Source of Funds
The original proposal would have
required that the third-party purchaser
pay for its eligible horizontal residual
interest in cash, and would have
prohibited the third-party purchaser
from obtaining financing, directly or
74 The definition of ‘‘servicing assets’’ is
discussed in Part II.B of this Supplementary
Information.
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indirectly, for the purchase of such
interest from any party to the
securitization transaction other than an
investor.
A few commenters supported the
proposed limitation on financing, while
another commenter recommended that
no distinction be made between the
sponsor’s ability to finance its risk
retention interest compared to thirdparty purchasers. Several commenters
requested clarification on what
‘‘indirect’’ financing means under the
proposal and requested that the final
rule not prohibit the third-party
purchaser from obtaining financing from
a party for an unrelated transaction.
The agencies are re-proposing this
condition consistent with the original
proposal. The limitation on obtaining
financing would apply only to
financings for the purchase of the Bpiece in a specific CMBS transaction
and only where the financing provider
is another party to that same CMBS
transaction. The agencies are clarifying
that the financing provider restriction
would include affiliates of the other
parties to the CMBS transaction. This
limitation would not restrict third-party
purchasers from obtaining financing
from a transaction party for a purpose
other than purchasing the B-piece in the
transaction; provided that none of such
financing is later used to purchase the
B-piece, which would be an indirect
financing of the B-piece. Nor would
third-party purchasers be restricted from
obtaining financing from a person that
is not a party to the specific transaction,
unless that person had some indirect
relationship with a party to the
transaction, such as a parent-subsidiary
relationship or a subsidiary-subsidiary
relationship under a parent company
(subject to the required holding period
and applicable hedging restrictions).
The use of the term indirect financing
is meant to ensure that these types of
indirect relationships are prohibited
under the financing limitations of the
rule.
v. Review of Assets by Third-Party
Purchaser
Under the original proposal, a thirdparty purchaser would have been
required to conduct a review of the
credit risk of each securitized asset prior
to the sale of the ABS that includes, at
a minimum, a review of the
underwriting standards, collateral, and
expected cash flows of each loan in the
pool. Most commenters addressing this
issue generally supported the proposed
condition that a third-party purchaser
must separately examine each asset in
the pool. Specifically, one commenter
noted that this level of review is
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currently the industry standard and is a
clear indication of the strength of the
credit review process for CMBS
transactions.
The agencies are proposing this
condition again with only minor
changes to indicate, in the event there
is more than one third-party purchaser
in a transaction, that each third-party
purchaser would be required to conduct
an independent review of the credit risk
of each CMBS asset.
vi. Operating Advisor
(1) Affiliation and Control Rights
The original proposal included a
condition of the CMBS option 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 have
prohibited a third-party purchaser from
(1) being affiliated with any other party
to the securitization transaction (other
than investors); or (2) having control
rights in the securitization (including,
but not limited to acting as servicer or
special servicer) that are not collectively
shared by all other investors in the
securitization. The proposed prohibition
of control rights related to servicing
would have been subject to an exception
from this condition, however, only if the
underlying securitization transaction
documents provided for the
appointment of an independent
operating advisor (‘‘Operating Advisor’’)
with certain powers and responsibilities
that met certain criteria. The proposed
criteria were: (1) The Operating Advisor
is not affiliated with any other party to
the securitization, (2) the Operating
Advisor does not directly or indirectly
have any financial interest in the
securitization other than in fees from its
role as Operating Advisor, and (3) the
Operating Advisor is required to act in
the best interest of, and for the benefit
of, investors as a collective whole. The
original proposal would have required
that an independent Operating Advisor
be appointed if the third-party
purchaser was acting as, or was
affiliated with, a servicer for any of the
securitized assets and had control rights
related to such servicing.
(2) Operating Advisor Criteria and
Responsibilities
The agencies received many
comments with respect to the criteria in
the original proposal for the Operating
Advisor, as well as with respect to the
Operating Advisor’s required
responsibilities.
Commenters had mixed views
concerning when the rule should
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require an Operating Advisor and
whether the Operating Advisor should
play an active role while the third-party
purchaser is the ‘‘controlling class.’’
There was a comment supporting the
proposed requirement that an Operating
Advisor be included when the thirdparty purchaser is affiliated with and
controls the special servicing function
of the transaction. Some commenters
supported the inclusion of an Operating
Advisor in all CMBS transactions. Other
commenters supported a dormant role
for the Operating Advisor while the
third-party purchaser was the
‘‘controlling class,’’ and the Operating
Advisor’s power would be triggered
when such purchaser was no longer the
controlling class (typically when the
third-party purchaser’s interest is
reduced to less than 25 percent of its
original principal balance after taking
into account appraisal reductions).
Some of these commenters asserted that
the introduction of an Operating
Advisor may support the interests of the
senior investors at the expense of the
third-party purchaser, thereby adversely
affecting the willingness of third-party
purchasers to assume the risk retention
obligations. Further, commenters stated
that the Operating Advisor would add
layers of administrative burden on an
already highly structured CMBS
framework and make servicing and
workouts for the underlying loans more
difficult and expensive, thereby
reducing returns. Finally, some
commenters stated that oversight is
unnecessary while the third-party
purchaser continues to have an
economic stake in the transaction
because third-party purchasers are
highly incentivized to discharge their
servicing duties in a manner that
maximizes recoveries. One of these
commenters noted that this is its current
approach and is working to the
satisfaction of both investment grade
investors and third-party purchasers.
Some commenters recommended a
framework whereby the Operating
Advisor would be involved immediately
but its role would depend on whether
the third-party purchaser was the
controlling class.
Additionally, some commenters
specifically requested that the Operating
Advisor’s authority apply only to the
special servicer (instead of all servicers
as originally proposed) for three
reasons. First, the special servicer has
authority or consent rights with respect
to all material servicing actions and
defaulted loans, whereas the master
servicer has very little discretion
because its servicing duties are typically
set forth in detail in the pooling and
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servicing agreement and its authority to
modify loans is limited. Moreover, any
control right held by a third-party
purchaser with respect to servicing is
typically exercised through the special
servicer and the third-party purchaser
does not generally provide any direct
input into master servicer decisions.
Second, the B-piece termination right
is another structural feature of CMBS
transactions that applies to special
servicers but not to master servicers.
The third-party purchaser’s right to
terminate and replace the special
servicer without cause is one method of
control by the third-party purchaser
over special servicing. The master
servicer, however, is not subject to this
termination without cause. The master
servicer typically can be terminated by
the trustee only upon the occurrence of
one of the negotiated events of default
with respect to the master servicer. In
the event of such a default, holders of
ABS evidencing a specified percentage
of voting rights (25 percent in many
deals) of all certificates can direct the
trustee to take such termination action.
Third, an Operating Advisor’s right to
remove the master servicer may be
problematic for the master servicer’s
servicing rights assets. Master servicers
usually purchase their servicing rights
from the sponsors in the securitization
and these rights retain an ongoing value.
Therefore, any termination rights
beyond those based on negotiated
events of default jeopardize the value of
the master servicer’s servicing asset.
Based on comments received, the
agencies acknowledge that third-party
purchasers often are, or are affiliated
with, the special servicers in CMBS
transactions. Because of this strong
connection between third-party
purchasers and the special servicing
rights in CMBS transactions, the
agencies are proposing to limit
application of the Operating Advisor
provisions to special servicers, rather
than any affiliated servicers as originally
proposed in the original proposal.
Consequently, the agencies are also
proposing a revised CMBS option to
require as a separate condition the
appointment of an Operating Advisor in
all CMBS transactions that rely on the
CMBS risk retention option.
As stated in the original proposal, the
agencies believe that the introduction of
an independent Operating Advisor
provides a check on third-party
purchasers by limiting the ability of
third-party purchasers to manipulate
cash flows through special servicing. In
approving loans for inclusion in the
securitization, third-party purchasers
ideally will be mindful of the limits on
their ability to offset the consequences
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of poor underwriting through servicing
tactics if loans become troubled, thereby
providing a stronger incentive for thirdparty purchasers to be diligent in
assessing the credit quality of pool
assets at the time of securitization.
Because the agencies are proposing that
an Operating Advisor be required for all
CMBS transactions relying on the CMBS
option, the prohibition on third-party
purchasers having control rights related
to servicing is no longer necessary and
has been removed.
(3) Operating Advisor Independence
The original proposal would have
prohibited the Operating Advisor from
being affiliated with any party to the
transaction and from having, directly or
indirectly, any financial interest in the
transaction other than its fees from its
role as Operating Advisor.
An investor commenter supported
complete independence for the
Operating Advisor, reasoning that the
Operating Advisor should not in any
way be conflicted when representing all
holders of ABS. Other commenters did
not support the independence criteria,
instead proposing to rectify any
conflicts of interest through disclosure.
One of these commenters commented
that it would be counter-productive to
preclude current Operating Advisors
from serving in that capacity in the
future, as such a framework would leave
only smaller firms with little or no
experience as the only eligible
candidates and could result in
diminution of available investment
capital. Independence concerns should
instead be addressed by the Operating
Advisor’s disclosure at the time it
initiates proceedings to replace a special
servicer, of whether the Operating
Advisor has any conflicts of interest.
Consistent with the original proposal,
the CMBS option in the proposed rule
would require that the Operating
Advisor not be affiliated with other
parties to the securitization transaction.
Also consistent with the original
proposal, the Operating Advisor would
be prohibited from having, directly or
indirectly, any financial interest in the
securitization transaction other than
fees from its role as Operating Advisor
and would be required to act in the best
interest of, and for the benefit of,
investors as a collective whole. As
stated above, the agencies believe that
an independent Operating Advisor is a
key factor in providing a check on thirdparty purchasers and special servicers,
thereby protecting investors’ interests.
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(4) Qualifications of the Operating
Advisor
In the original proposal, the agencies
did not propose qualifications for the
Operating Advisor other than
independence from other parties to the
securitization transaction.
One commenter recommended that
the final rule include eligibility
requirements for Operating Advisors,
such as requiring an Operating Advisor
to have an existing servicing platform
(not necessarily rated); have at least 25
full time employees; have at least $25
million in capital; and have some metric
for assuring that the Operating Advisor
will have an ongoing real estate market
presence and the in-house expertise
necessary to effectively carry out their
responsibilities. Another commenter
requested clarification regarding the
qualifications of an Operating Advisor
but did not expressly advocate for or
against particular qualifications.
Based in part on comments received,
the agencies are proposing certain
general qualifications for the Operating
Advisor. Under the proposed rule, the
underlying transaction documents must
provide for standards with respect to the
Operating Advisor’s experience,
expertise and financial strength to fulfill
its duties and responsibilities under the
applicable transaction documents over
the life of the securitization transaction.
Additionally, the transaction documents
must describe the terms of the Operating
Advisor’s compensation with respect to
the securitization transaction.
The agencies do not believe it is
necessary to mandate specific minimum
levels of experience, expertise and
financial strength for Operating
Advisors in CMBS transactions relying
on the CMBS option. Rather, the
agencies believe that CMBS transaction
parties should be permitted to establish
Operating Advisor qualification
standards and compensation in each
transaction. By requiring disclosure to
investors of such qualification
standards, how an Operating Advisor
satisfies such standards, and the
Operating Advisor’s related
compensation, the proposed rule
provides investors with an opportunity
to evaluate the Operating Advisor’s
qualifications and compensation in the
relevant transaction.
(5) Role of the Operating Advisor
Under the original proposal, the
duties of the Operating Advisor were
generally to (1) act in the best interest
of investors as a collective whole, (2)
require the servicer for the securitized
assets to consult with the Operating
Advisor in connection with, and prior
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to, any major decision in connection
with servicing, which would include
any material loan modification and
foreclosures and acquisitions of
properties, and (3) review the actions of
the affiliated servicer and report to
investors and the issuing entity on a
periodic basis.
With respect to the role of the
Operating Advisor in the original
proposal, comments were mixed.
Investor commenters generally
supported the consultative role given to
Operating Advisors under the original
proposal. Issuers and industry
association commenters did not support
such role and believed that the powers
granted to the Operating Advisor under
the original proposal were too broad. In
particular, these commenters generally
did not support the proposed
requirement that the servicer consult
with the Operating Advisor prior to any
major servicing decision.
Another commenter recommended a
framework such that after the change-incontrol event (that is, when the B-piece
position is reduced to less than 25
percent of its original principle
balance), the Operating Advisor’s role
would be that of a monitoring role and
investigate claims of special servicer
noncompliance when initiated by a
specified percentage of investors, and
provide its findings on a regular basis to
CMBS investors, the sponsor and the
servicers.
A trade association commenter,
supported by two other commenters,
preferred an approach in which the
Operating Advisor’s role would be
reactive while the third-party purchaser
is the controlling class, and become
proactive when the third-party
purchaser is no longer the controlling
class. Under this commenter’s approach,
the rule would provide that the thirdparty purchaser is no longer in control
if the sum of principal payments,
appraisal reductions and realized losses
have reduced the third-party
purchaser’s initial positions to less than
25 percent of its original face amount.
Consistent with the original proposal,
the proposed rule would require
consultation with the Operating Advisor
in connection with, and prior to, any
major investing decision in connection
with the servicing of the securitized
assets. However, based on comments
received, the consultation requirement
only applies to special servicers and
only takes effect once the eligible
horizontal residual interest held by
third-party purchasers in the transaction
has a principal balance of 25 percent or
less of its initial principal balance.
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(6) Operating Advisor’s Evaluation of
Servicing Standards
The original proposal would have
included a requirement that the
Operating Advisor be responsible for
reviewing the actions of any affiliated
servicer and issue a report evaluating
whether the servicer is operating in
compliance with any standard required
of the servicer, as provided in the
applicable transaction documents.
One trade association commenter
recommended that the rule establish the
standard by which the Operating
Advisor evaluates the special servicer. It
stated that one such standard would be
to include language in the pooling and
servicing agreement or similar
transaction document that would
require the special servicer to maximize
the net present value of the loan without
consideration of the impact of such
action on any specific class of ABS.
However, as this trade association was
unsupportive of requiring the servicer to
consult with the Operating Advisor
prior to any material workout, it also
stated that an alternative to actually
including the servicing standard would
be for the Operating Advisor to monitor
all loan workouts and, if the special
servicer is not meeting the stated
standard, the Operating Advisor could
then take the appropriate action.
The agencies are proposing that the
CMBS option require the Operating
Advisor to have adequate and timely
access to information and reports
necessary to fulfill its duties under the
transaction documents. Further, the
proposed rule would require the
Operating Advisor to be responsible for
reviewing the actions of the special
servicer, reviewing all reports made by
the special servicer to the issuing entity,
reviewing for accuracy and consistency
calculations made by the special
servicer within the transaction
documents, and issuing a report to
investors and the issuing entity on
special servicer’s performance.
(7) Servicer Removal Provisions
Under the original proposal, the
Operating Advisor would have had the
authority to recommend that a servicer
be replaced if it determined that the
servicer was not in compliance with the
servicing standards outlined in the
transaction documents. This
recommendation would be submitted to
investors and would be approved unless
a majority of each class of investors
voted to retain the servicer.
Many commenters were of the view
that the rule granted too much authority
to the Operating Advisor in regards to
the removal of a servicer. As discussed
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above, many commenters believed that
the Operating Advisor’s authority
should only apply to special servicers.
Following on this point, many
commenters commented that the special
servicer should be removed only upon
the affirmative vote of ABS holders
(instead of a negative vote as originally
proposed).
One commenter suggested that the
special servicer removal process should
be negotiated among the CMBS
transaction parties and specified in the
pooling and servicing agreement or
similar transaction document. In this
scenario, the special servicer would
have the opportunity to explain its
conduct, the Operating Advisor would
be required to publicly explain its
rationale for recommending special
servicer removal, and investors in noncontrolling classes would vote in the
affirmative for special servicer removal.
Another commenter proposed that an
Operating Advisor’s recommendation to
remove a special servicer would have to
be approved by two-thirds of all ABS
holders voting as a whole, or through an
arbitration mechanism. Another
commenter proposed that a minimum of
5 percent of all ABS holders based on
par dollar value of holdings be required
for quorum, and decisions would be
adopted with the support of a simple
majority of the dollar value of par of
quorum. Another commenter advocated
removal only after the third-party
purchaser is no longer the controlling
class.
After considering comments that the
servicer removal provision should only
apply to special servicers, the agencies
are proposing that the Operating
Advisor’s authority to recommend
removal and replacement would be
limited to special servicers.
Additionally, based on comments
received, the agencies are proposing that
the actual removal of the special
servicer would require the affirmative
vote of a majority of the outstanding
principal balance of all ABS interests
voting on the matter, and require a
quorum of 5 percent of the outstanding
principal balance of all ABS interests.
Because of the agencies’ belief that the
introduction of an independent
Operating Advisor provides a check on
third-party purchasers by limiting the
ability of third-party purchasers to
manipulate cash flows through special
servicing, the agencies believe that the
removal of the special servicer should
be independent of whether the thirdparty purchaser is the controlling class
in the securitization transaction or
similar considerations. The proposed
affirmative majority vote and quorum
requirements are designed to provide
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additional protections to investors in
this regard.
c. Disclosures
Under the original proposal, the
sponsor would have been required to
provide, or cause to be provided, to
potential purchasers and federal
supervisors certain information
concerning the third-party purchaser
and other information concerning the
CMBS transaction, such as the thirdparty purchaser’s name, the purchaser’s
experience investing in CMBS, and any
other material information about the
third-party purchaser deemed material
to investors in light of the particular
securitization transaction.
Additionally, a sponsor would have
been required to disclose to investors
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 the fair value of all ABS
interests issued in the securitization
transaction and the dollar amount of the
fair value of such ABS interests); the
purchase price paid for such interest;
the material terms of such interest; the
amount of the interest that the sponsor
would have been required to retain if
the sponsor had retained an interest in
the transaction; the material
assumptions and methodology used in
determining the aggregate amount of
ABS interests of the issuing entity; and
certain information about the
representations and warranties
concerning the securitized assets.
While commenters generally
supported the proposed disclosure
requirements, many commenters raised
concerns about specific portions of
these requirements.
Under the original proposal, the
sponsor would have been required to
disclose to investors the name and form
of organization of the third-party
purchaser as well as a description of the
third-party purchaser’s experience in
investing in CMBS. The original
proposal also solicited comment as to
whether disclosure concerning the
financial resources of the third-party
purchaser would be 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. Some commenters
supported these proposed requirements,
while others did not.
Under the original proposal, a thirdparty purchaser would have been
required to disclose the actual purchase
price paid for the retained residual
interest. Several commenters did not
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support requiring purchase price
disclosure. These commenters noted
that price disclosure raises
confidentiality concerns and could
reveal the purchaser’s price parameters
to its competitors. These commenters
provided suggestions for maintaining
the confidentiality of such information
or alternatives to actual disclosure of
prices paid.
Under the original proposal, sponsors
would have been required to disclose to
investors the material assumptions and
methodology used in determining the
aggregate amount of ABS interests
issued by the issuing entity, including
those pertaining to any estimated cash
flows and the discount rate used. One
commenter did not support requiring
this disclosure and believed that such
disclosure would be irrelevant in CMBS
transactions in that the principal
balance of the certificates sold to
investors would equal the aggregate
initial principal balance of the mortgage
loans, and CMBS transactions did not
utilize overcollateralization (as is the
case with covered bonds and other
structures).
Under the original proposal, the
sponsor would have been required to
disclose the representations and
warranties concerning the assets, a
schedule of exceptions to these
representations and warranties, and
what factors were used to make the
determination that such exceptions
should be included in the pool even
though they did not meet the
representations and warranties.
One commenter agreed that loan-byloan exceptions should be disclosed but
did not comment on whether the
disclosure of subjective factors
disclosure should be required. This
commenter also advocated for a
standardized format of disclosure of
representations and warranties. Another
commenter noted that in recent CMBS
transactions, all representations and
warranties and all exceptions thereto are
fully disclosed. Two commenters were
unsupportive of requiring disclosure of
why exceptions were allowed into the
pool because they stated that such
determinations are often qualitative and
the benefit of such disclosure would be
outweighed by the burden imposed on
the issuer. The original proposal also
requested comment on whether the rule
should require that a blackline of the
representations and 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. One commenter noted
that it was unnecessary to require that
investors be provided with a blackline
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57957
so long as the representations and
warranties are themselves disclosed.
The original proposal requested
comment on whether the rule should
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 thirdparty purchaser that is material to
investors in light of the circumstances of
the particular securitization transaction.
One investor commenter generally
supported requiring disclosure of any
other information regarding the
purchaser that is material to investors in
light of the circumstances. A few
commenters were unsupportive of this
disclosure requirement. One commenter
stated that there should be a safe harbor
for the types of information about the
third-party purchaser and that requiring
this material information disclosure is
too broad. Another commenter stated
that disclosure of ‘‘material
information’’ is already required under
existing disclosure rules.
The agencies are proposing disclosure
requirements for the CMBS option
substantially consistent with the
original proposal. The agencies have
carefully considered the concerns raised
by commenters, but believe that the
importance of the proposed disclosures
to investors with respect to third-party
purchasers, the retained residual
interest (including the purchase price),
the material terms of the eligible
horizontal residual interest retained by
each third-party purchaser (including
the key inputs and assumptions used in
measuring the total fair value of all
classes of ABS interests, and the fair
value of the eligible horizontal residual
interest), and the representations and
warranties concerning the securitized
assets, outweigh any issues associated
with the sponsor or third-party
purchaser to making such information
available.
The agencies are also proposing again
to require disclosure of the material
terms of the applicable transaction
documents with respect to the
Operating Advisor, including without
limitation, the name and form of
organization of the Operating Advisor,
the qualification standards applicable to
the Operating Advisor and how the
Operating Advisor satisfies these
standards, and the terms of the
Operating Advisor’s compensation.
d. Transfer of B-Piece
As discussed above, consistent with
the original proposal, the proposed rule
would allow a sponsor of a CMBS
transaction to meet its risk retention
requirement where a third-party
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purchaser acquires the B-piece, and all
other criteria and conditions of the
proposed requirements for this option as
described are met.
Under the original proposal, the
sponsor or, if an eligible third-party
purchaser purchased the B-piece, the
third-party purchaser, would have been
required to retain the required eligible
horizontal residual interest for the full
duration of the securitization
transaction. Numerous commenters
urged that this proposal be changed to
allow transfer of the B-piece prior to the
end of the securitization transaction.
Some of the commenters making this
recommendation requested a specified
termination point (or ‘‘sunset’’) for the
CMBS risk retention requirement. Other
commenters recommended that thirdparty purchasers be permitted to
transfer the retained interest to other
third-party purchasers, either
immediately or after a maximum
waiting period of one year. Some
commenters proposed that there be both
an overall sunset period for any risk
retention requirement and that, prior to
the end of that period, transfers between
qualified third-party purchasers be
permitted.
Several commenters asserted that
permitting transfers by third-party
purchasers was critical to the
continuation of the third-party
purchaser structure for CMBS
transactions. Another commenter, a
securitization sponsor, stated that the
transfer restrictions included in the
original proposal would undermine the
effectiveness of the CMBS option
because some investors could not (due
to fiduciary or contractual obligations)
or did not desire to invest where such
restrictions would be imposed. A
broker-dealer commenter stated that it
was crucial for the rules to give thirdparty purchasers some ability to sell the
B-piece to qualified transferees because
third-party purchasers or their investors
would not be able to agree to a
prohibition on the sale of the B-piece
investment for the entire life of the
transaction.
Commenters that advocated a sunset
for CMBS risk retention generally
requested that it occur after two-to-five
years. Commenters that requested
permitted transfers to a qualified thirdparty purchaser by the original B-piece
holder prior to the end of the risk
retention requirement advocated that
there be no minimum retention period
by the original B-piece holder, while
one commenter suggested a one-year
initial retention period.
Certain commenters contended that
the restrictions of the original proposal
were not necessary to promote good
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underwriting and that permitting
transfer of the B-piece prior to the end
of the securitization transaction would
be warranted because after a certain
amount of time, performance of the
underlying commercial mortgages is
dependent more on economic
conditions rather than an underwriting
requirement. One industry group stated
that three years would be sufficient to
provide all securitization participants
the opportunity to determine the quality
of underwriting, arguing that after a
three-year period, deficient
underwriting or other performance
factors would be reflected in the sale
price of the retained interest.
Some of the commenters that
recommended permitting transfers to
qualified third-party purchasers
suggested additional conditions, such as
that the third-party purchaser also be a
qualified institutional buyer or
accredited investor for purposes of the
Securities Act of 1933, or that the
transferee certify that it had performed
the same due diligence and had the
same access to information as the
original third-party purchaser. One
commenter suggested that qualified
institutional buyer or accredited
investor status alone should cause an
entity to qualify as a qualified transferee
of a third-party purchaser.
The agencies have considered the
points raised by commenters on the
original proposal with respect to
transferability of the B-piece and
believe, for the reasons discussed
further below, that limited transfers
prior to the end of the securitization
transaction are warranted. The agencies
are therefore proposing, as an exception
to the transfer and hedging restrictions
of the proposed rule and section 15G of
the Exchange Act, to permit the transfer
of the retained interest by any initial
third-party purchaser to another thirdparty purchaser at any time after five
years after the date of the closing of the
securitization transaction, provided that
the transferee satisfies each of the
conditions applicable to the initial
third-party purchaser under the CMBS
option (as described above) in
connection with such purchase. The
proposed rule also would permit
transfers by any such subsequent thirdparty purchaser to any other purchaser
satisfying the criteria applicable to
initial third-party purchasers. In
addition, in the event that the sponsor
retained the B-piece at closing, the
proposed rule would permit the sponsor
to transfer such interest to a purchaser
satisfying the criteria applicable to
third-party purchasers after a five-year
period following the closing of the
securitization transaction has expired.
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The proposed rule would require that
any transferring third-party purchaser
provide the sponsor with complete
identifying information as to the
transferee third-party purchaser.
In considering the comments and
formulating the revised proposed rule,
the agencies attempted to balance two
overriding goals: (1) Not disrupting the
existing CMBS third-party purchaser
structure, and (2) ensuring that risk
retention promotes good underwriting.
The agencies followed the analysis of
the commenters who asserted that, after
a five year period, the quality of the
underwriting would be sufficiently
evident that the initial third-party
purchaser or, if there was no initial
third-party purchaser, the sponsor
would suffer the consequences of poor
underwriting in the form of a reduced
sales price for such interest. The
agencies also believe that the initial
holder of the B-piece, whether a thirdparty purchaser or the sponsor, would
need to assume that retention for a fiveyear period would result in such holder
bearing the consequences of poor
underwriting and, thus, that by
permitting transfer after the five year
period the agencies would not be
creating a structure which resulted in
the initial holder being less demanding
of the underwriting than if it was
required to retain the B-piece until the
full sunset period applicable to CMBS
securitizations had expired. In
connection with this, the requirement
(among other conditions) that a
subsequent purchaser, like the initial
third-party purchaser, conduct an
independent review of the credit risk of
each securitized asset was important to
the agencies, as this requirement would
emphasize to the initial B-piece holder
that the performance of the securitized
assets would be scrutinized by any
potential purchaser, thus exposing the
initial purchaser to the full risks of poor
underwriting.
The standards for the Federal banking
agencies to provide exemptions to the
risk requirements and prohibition on
hedging are outlined in section 941(e) of
the Dodd-Frank Act. The exemption
described above would allow thirdparty purchasers and sponsors to
transfer a horizontal risk retention
interest after a five year period to
sponsors or third-party purchasers that
meet the same standards. The agencies
believe that under 15 U.S.C. 78o–
11(e)(2), a five-year retention duration
helps ensure high underwriting
standards for the securitizers and
originators of assets that are securitized
or available for securitization by forcing
sponsors or initial third-party
purchasers to absorb a significant
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portion of losses related to underwriting
deficiencies. Furthermore, the agencies
believe that this exemption would meet
the statute’s requirement that the
exemption 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 is in the public
interest and for the protection of
investors. By limiting the risk retention
requirement for CMBS to five years
rather than the entire duration of the
underlying assets, the agencies are
responding to commenters’ concerns
that lifetime retention requirements
would eliminate B-piece buyers’ ability
to participate in the CMBS market, and
without their participation, market
liquidity for commercial mortgages
would be severely impacted. The
proposed approach of requiring the
third-party purchaser to hold for at least
five years accommodates continuing
participation of B-piece buyers in the
market, in a way that still requires
meaningful risk retention as an
incentive to good risk management
practices by securitizers in selecting
assets, and addressing specific concerns
about maintaining consumers’ and
businesses’ access to commercial
mortgage credit.
The agencies have not adopted the
recommendations made by several
commenters that transfers to qualified
third-party purchasers be permitted
with no minimum holding period or
after a one year holding period. The
agencies decided that unless there was
a holding period that was sufficiently
long to enable underwriting defects to
manifest themselves, the original thirdparty purchaser might not be
incentivized to insist on effective
underwriting of the securitized assets.
This, in turn, would be in violation of
section 941(e)’s requirement that any
exemption continue to help ensure high
quality underwriting standards. The
agencies are therefore proposing a
period of five years based on the more
conservative comments received as to
duration of the CMBS retention period.
The agencies believe that permitting
transfers to qualifying third-party
purchasers after five years should not
diminish in any respect the pressure on
the sponsor to use proper underwriting
methods.
Request for Comment
46. Should the period for B-piece
transfer be any longer or shorter than
five years? Please provide any relevant
data analysis to support your
conclusion.
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47(a). Should the agencies only allow
one third-party purchaser to satisfy the
risk retention requirement? 47(b).
Should the agencies consider allowing
for more than two third-party
purchasers to satisfy the risk retention
requirement?
48(a). Are the third-party qualifying
criteria the agencies are proposing
appropriate? 48(b). Why or why not?
48(c). Would a sponsor be able to track
the source of funding for other purposes
to determine if funds are used for the
purchase of the B-piece?
49(a). Are the Operating Advisor
criteria and responsibilities the agencies
are proposing appropriate? 49(b). Why
or why not?
e. Duty To Comply
The original proposal would have
required the sponsor of a CMBS
transaction to maintain and adhere to
policies and procedures to monitor the
third-party purchaser’s compliance with
the CMBS option and to notify investors
if the sponsor learns that the third-party
purchaser no longer complies with such
requirements.
Several commenters criticized the
proposed monitoring obligations
because they believed that such
monitoring would not be feasible for a
sponsor, especially the restriction on
hedging. Some commenters proposed
alternatives, such as making the
Operating Advisor responsible for
compliance by the third-party purchaser
or using contractual representations and
warranties and covenants to ensure
compliance.
Another commenter suggested that
the pooling and servicing agreement or
similar transaction document set forth a
dispute resolution mechanism for
investors, including the ability of
investors to demand an investigation of
possible noncompliance by the special
servicer upon request from a specified
percentage of ABS and how the costs of
resulting investigations would be borne
and that independent parties would
perform such investigations.
The agencies have considered these
comments but continue to believe that
it is important for the sponsor to
monitor third-party purchasers. A
transfer of risk to a third-party
purchaser is not, under the agencies’
view of the risk retention requirement,
a transfer of the sponsor’s general
obligation to satisfy the requirement.
Although the proposal allows thirdparty purchasers to retain the required
eligible horizontal residual interest, the
agencies believe that the sponsor of the
CMBS transaction should ultimately be
responsible for compliance with the
requirements of the CMBS option, rather
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57959
than shifting the obligation to the thirdparty purchaser or Operating Advisor,
as some commenters on the original
proposal suggested, by requiring
certifications or representations and
warranties. Additionally, the agencies
are not proposing a specific requirement
that the pooling and servicing
agreement or similar transaction
document include dispute resolution
provisions because the agencies believe
that most investor disputes, particularly
disputes related to possible
noncompliance by the special servicer,
will be resolved through the proposed
Operating Advisor process. However,
this is not intended to limit investors
and other transaction parties from
continuing to include negotiated rights
and remedies in CMBS transaction
documents, including dispute
resolution provisions in addition to the
proposed Operating Advisor provisions.
Accordingly, the agencies are
proposing the same monitoring and
notification requirements as under the
original proposal with no modifications.
The sponsor would be required to
maintain policies and procedures to
actively monitor the third-party
purchaser’s compliance with the
requirements of the rule and to notify
(or cause to be notified) ABS holders in
the event of any noncompliance with
the rule.
6. Government-Sponsored Enterprises
a. Overview of Original Proposal and
Public Comment
In the original proposal, the agencies
proposed that the guarantee (for timely
payment of principal and interest) by
the Enterprises while they operate
under the conservatorship or
receivership of FHFA with capital
support from the United States would
satisfy the risk retention requirements of
section 15G of the Exchange Act with
respect to the mortgage-backed
securities issued by the Enterprises.
Similarly, an equivalent guarantee
provided by a limited-life regulated
entity that has succeeded to the charter
of an Enterprise, and that is operating
under the authority and oversight of
FHFA under section 1367(i) of the
Federal Housing Enterprises Financial
Safety and Soundness Act of 1992,
would satisfy the risk retention
requirements, provided that the entity is
operating with capital support from the
United States. The original proposal
also provided that the hedging and
finance provisions would not apply to
an Enterprise while operating under
conservatorship or receivership with
capital support from the United States,
or to a limited-life regulated entity that
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has succeeded to the charter of an
Enterprise and is operating under the
authority and oversight of FHFA with
capital support from the United States.
Under the original proposal, a sponsor
(that is, the Enterprises) utilizing this
option would have been required to
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 met the credit
risk retention requirements.
As the agencies explained in the
original proposal, if either an Enterprise
or a successor limited-life regulated
entity began to operate other than as
described, the Enterprise or successor
entity would no longer be able to avail
itself of the credit risk retention option
provided to the Enterprises and would
have become subject to the related
requirements and prohibitions set forth
elsewhere in the proposal.
In the original proposal, the agencies
explained what factors they took into
account regarding the treatment of the
Enterprises while they were in
conservatorship or receivership with
capital support from the United States.75
First, the agencies observed that because
the Enterprise fully guaranteed the
timely payment of principal and interest
on the mortgage-backed securities they
issued, the Enterprises were exposed to
the entire credit risk of the mortgages
that collateralize those securities. The
agencies also highlighted that the
Enterprises had been operating under
the conservatorship of FHFA since
September 6, 2008, and that as
conservator, FHFA had assumed all
powers formerly held by each
Enterprise’s officers, directors, and
shareholders and was directing its
efforts as conservator toward
minimizing losses, limiting risk
exposure, and ensuring that the
Enterprises priced their services to
adequately address their costs and risk.
Finally, the agencies described how
each Enterprise, concurrent with being
placed in conservatorship, entered into
a Senior Preferred Stock Purchase
Agreement (PSPA) with the United
States Department of the Treasury
(Treasury) and that the PSPAs provided
capital support to the relevant
Enterprise if the Enterprise’s liabilities
had exceeded its assets under GAAP.76
75 See
Original Proposal, 76 FR at 24111–24112.
each PSPA as amended, Treasury
purchased senior preferred stock of each Enterprise.
In exchange for this cash contribution, the
liquidation preference of the senior preferred stock
that Treasury purchased from the Enterprise under
the respective PSPA increases in an equivalent
amount. The senior preferred stock of each
Enterprise purchased by Treasury is senior to all
76 Under
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The agencies received a number of
comments on the original proposal with
respect to the Enterprises, including
comments from banks and other
financial businesses, trade
organizations, public interest and public
policy groups, members of Congress and
individuals. A majority of the
commenters supported allowing the
Enterprises’ guarantee to be an
acceptable form of risk retention in
accordance with the original proposal.
Many of the comments that supported
the original proposal noted that the
capital support by the United States
government, coupled with the
Enterprises’ guarantee, equated to 100
percent risk retention by the
Enterprises. Others believed the
treatment of the Enterprises in the
original proposal was important to
support the mortgage market and to
ensure adequate credit in the mortgage
markets, especially for low down
payment loans. One commenter
representing community banks stated
that, without the provision for the
Enterprises in the original proposal,
many community banks would have
difficulty allocating capital to support
risk retention and, by extension,
continued mortgage activity. A few
commenters specifically supported the
original proposal’s exception for the
Enterprises from the prohibitions on
hedging. These commenters asserted
that preventing the Enterprise from
hedging would be unduly burdensome,
taking into consideration the 100
percent guarantee of the Enterprises,
while other sponsors would only be
required to meet a 5 percent risk
retention requirement. At least one
commenter noted that applying the
hedging prohibition to the Enterprises
could have negative consequences for
taxpayers, given the capital support
from the United States.
A number of the commenters said
that, even though they supported the
original proposal, they believed that it
could create an advantage for the
other preferred stock, common stock or other
capital stock issued by the Enterprise.
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. Under amendments to each
PSPA signed in August 2012, the fixed-rate
quarterly dividend that each Enterprise had been
required to pay to Treasury was replaced, beginning
on January 1, 2013, with a variable dividend based
on each Enterprise’s net worth, helping to ensure
the continued adequacy of the financial
commitment made under the PSPA and eliminating
the need for an Enterprise to borrow additional
amounts to pay quarterly dividends to Treasury.
The PSPAs also require the Enterprises to reduce
their retained mortgage portfolios over time.
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Enterprises over private lenders. These
commenters recommended that the
agencies adopt a broader definition for
QRM to address any potential
disadvantages for private lenders, rather
than change the risk retention option
proposed for the Enterprises.77
Those commenters that opposed the
treatment of the Enterprises in the
original proposal generally believed that
it would provide the Enterprises with an
unfair advantage over private capital,
and asserted that it would be
inconsistent with the intent of section
15G of the Exchange Act. Many of these
commenters stated that this aspect of
the original proposal, if adopted, would
prevent private capital from returning to
the mortgage markets and would
otherwise make it difficult to institute
reform of the Enterprises. One
commenter believed the original
proposal interfered with free market
competition and placed U.S.
government proprietary interests ahead
of the broader economic interests of the
American people. Other comments
suggested that the original proposal’s
treatment of the Enterprises could have
negative consequences for taxpayers.
b. Proposed Treatment
The agencies have carefully
considered the comments received with
respect to the original proposal’s
provision for the Enterprises. While the
agencies understand the issues involved
with the Enterprises’ participation in
the mortgage market, the agencies
continue to believe that it is
appropriate, from a public policy
perspective, to recognize the guarantee
of the Enterprises as fulfilling their risk
retention requirement under section
15G of the Exchange Act, while in
conservatorship or receivership with the
capital support of the United States. The
authority and oversight of the FHFA
over the operations of the Enterprises or
any successor limited-life regulated
entity during a conservatorship or
receivership,78 the full guarantee
provided by these entities on the timely
payment of principal and interest on the
mortgage-backed securities that they
issue, and the capital support provided
77 The comments that relate to the QRM
definition are addressed in Part VI of this
Supplementary Information, which discusses the
proposed QRM definition.
78 In this regard, FHFA is engaged in several
initiatives to contract the Enterprises presence in
the mortgage markets, including increasing and
changing the structure of the guarantee fees charged
by the Enterprises and requiring the Enterprises to
develop risk-sharing transactions to transfer credit
risk to the private sector. See, e.g., FHFA 2012
Annual Report to Congress, at 7–11 (June 2013),
available at https://www.FHFA.gov (FHFA 2012
Report).
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by Treasury under the PSPAs 79 provide
a reasonable basis consistent with the
goals and intent of section 15G for
recognizing the Enterprise guarantee as
meeting the Enterprises’ risk retention
requirement.
Accordingly, the agencies are now
proposing the same treatment for the
Enterprises as under the original
proposal, without modification.
Consistent with the original proposal, if
any of the conditions in the proposed
rule cease to apply, the Enterprises or
any successor organization would no
longer be able to rely on its guarantee
to meet the risk retention requirement
under section 15G of the Exchange Act
and would need to retain risk in
accordance with one of the other
applicable sections of this risk retention
proposal.
For similar reasons, the restrictions
and prohibitions on hedging and
transfers of retained interests in the
proposal (like the original proposal)
would not apply to the Enterprises or
any successor limited-life regulated
entities, as long as the Enterprise (or, as
applicable, successor entity) is operating
consistent with the conditions set out in
the rule. In the past, the Enterprises
have sometimes acquired pool
insurance to cover a percentage of losses
on the mortgage loans comprising the
pool.80 FHFA also has made risk-sharing
through a variety of alternative
mechanisms to be a major goal of its
Strategic Plan for the Enterprise
Conservatorships.81 Because the
proposed rule would require each
Enterprise, while in conservatorship or
receivership, to hold 100 percent of the
credit risk on mortgage-backed
securities that it issues, the prohibition
on hedging in the proposal 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 or take other
reasonable actions to limit losses that
would otherwise arise from the
Enterprises’ 100 percent exposure to the
credit risk of the securities that they
issue. Because the proposal would
apply only so long as the relevant
Enterprise operates under the authority
and control of FHFA and with capital
support from the United States, the
agencies continue to believe that the
proposed treatment of the Enterprises as
79 By its terms, a PSPA with an Enterprise may
not be assigned, transferred, inure to the benefit of,
any limited-life, regulated entity established with
respect to the Enterprise without the prior written
consistent of Treasury.
80 Typically, insurers would pay the first losses
on a pool of loans, up to 1 or 2 percent of the
aggregate unpaid principal balance of the pool.
81 See, e.g., FHFA 2012 Report at 7–11.
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meeting the risk retention requirement
of section 15G of the Exchange Act
should be consistent with the
maintenance of quality underwriting
standards, in the public interest, and
consistent with the protection of
investors.82
As explained in the original proposal
and noted above, the agencies recognize
both the need for, and importance of,
reform of the Enterprises, and expect to
revisit and, if appropriate, modify the
proposed rule after the future of the
Enterprises and of the statutory and
regulatory framework for the Enterprises
becomes clearer.
7. Open Market Collateralized Loan
Obligations
a. Overview of Original Proposal and
Public Comment
In the original proposal, the agencies
observed that, in the context of CLOs,
the CLO manager generally acts as the
sponsor by selecting the commercial
loans to be purchased by the CLO
issuing entity (the special purpose
vehicle that holds the CLO’s collateral
assets and issues the CLO’s securities)
and then manages the securitized assets
once deposited in the CLO structure.83
Accordingly, the original proposal
required the CLO manager to satisfy the
minimum risk retention requirement for
each CLO securitization transaction that
it manages. The original proposal did
not include a form of risk retention
designed specifically for CLO
securitizations. Accordingly, CLO
managers generally would have been
required to satisfy the minimum risk
retention requirement by holding a
sufficient amount of standard risk
retention in horizontal, vertical, or Lshaped form.
Many commenters, including several
participants in CLOs, raised concerns
regarding the impact of the proposal on
certain types of CLO securitizations,
particularly CLOs that are
securitizations of commercial loans
originated and syndicated by third
parties and selected for purchase on the
open market by asset managers
unaffiliated with the originators of the
loans (open market CLOs). Some
commenters asserted that most asset
management firms currently serving as
open market CLO managers do not have
the balance sheet capacity to fund 5
percent horizontal or vertical slices of
the CLO. Thus, they argued, imposing
standard risk retention requirements on
these managers could cause
independent CLO managers to exit the
market or be acquired by larger firms,
82 See
83 See
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id. at 24098 n. 42.
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thereby limiting the number of
participants in the market and raising
barriers to entry. According to these
commenters, the resulting erosion in
market competition could increase the
cost of credit for large, non-investment
grade companies represented in CLO
portfolios above the level that would be
consistent with the credit quality of
these companies.
Certain commenters also asserted that
open market CLO managers are not
‘‘securitizers’’ under section 15G of the
Exchange Act. These commenters
argued that because the CLO managers
themselves would never legally own,
sell, or transfer the loans that comprised
the CLO’s collateral pool, but only
direct which assets would be purchased
by the CLO issuing entity, they should
not be ‘‘securitizers’’ as defined in
section 15G. Thus, these commenters
argued that the agencies’ proposal to
impose a sponsor’s risk retention
requirement on open market CLO
managers is contrary to the statute.84
One commenter argued that CLO
underwriters (typically investment
banks) are ‘‘securitizers’’ for risk
retention purposes and agent banks of
the underlying loans are ‘‘originators.’’
This commenter noted that the CLO
underwriter typically finances the
accumulation of most of the initial loan
assets until the CLO securities are
issued. According to this commenter,
the CLO manager selects the loans, but
the CLO underwriter legally transfers
them and takes the market value risk of
the accumulating loan portfolio should
the CLO transaction fail to close.
However, other commenters argued that
no party within the open market CLO
structure constitutes a ‘‘securitizer’’
under section 15G. These commenters
stated that they did not view the
underwriter as a ‘‘securitizer’’ because it
does not select or manage the loans
securitized in a CLO transaction or
transfer them to the issuer. These
commenters requested that the agencies
establish an exemption from the risk
retention requirement for certain open
market CLOs.
In addition to the above comments, a
commenter proposed that subordinated
collateral management fees and
incentive fees tied to the internal rate of
return received by investors in the
CLO’s equity tranche be counted
towards the CLO manager’s risk
retention requirement, as receipt of
these fees is contingent upon the
satisfactory performance of the CLO and
84 See Part II.A.2 of this Supplementary
Information for a discussion of the definition of
‘‘securitizer’’ under section 15G of the Exchange
Act.
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timely payment of interest to CLO
bondholders, thereby aligning the
interest of CLO managers and investors.
b. Proposed Requirement
The agencies have considered the
concerns raised by commenters with
respect to the original proposal and
CLOs. As explained in the original
proposal, the agencies believe that the
CLO manager is a ‘‘securitizer’’ under
section 15G of the Exchange Act
because it selects the commercial loans
to be purchased by the CLO issuing
entity for inclusion in the CLO collateral
pool, and then manages the securitized
assets once deposited in the CLO
structure. The agencies believe this is
consistent with part (B) of the definition
of securitizer which includes ‘‘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.’’ 85 The CLO
manager typically organizes and
initiates the transaction as it has control
over the formation of the CLO collateral
pool, the essential aspect of the
securitization transaction. It also
indirectly transfers the underlying
assets to the CLO issuing entity
typically by selecting the assets and
directing the CLO issuing entity to
purchase and sell those assets.
The agencies believe that reading the
definition of ‘‘securitizer’’ to include a
typical CLO manager or other collateral
asset manager that performs such
functions is consistent with the
purposes of the statute and principles of
statutory interpretation. The agencies
believe that the text itself supports the
interpretation that a CLO manager is a
securitizer because, as explained above,
the agencies believe that the CLO
manager organizes and initiates a
securitization transaction by indirectly
transferring assets to the issuing entity.
However, in the case that any ambiguity
exists regarding the statutory meaning of
‘‘transfer’’ and whether or not it means
a legal sale or purchase, the agencies
may look to the rest of the statute,
including the context, when interpreting
its meaning. Furthermore, as stated by
the Supreme Court, ‘‘a statute should be
construed so that effect is given to all its
provisions, so that no part will be
inoperative or superfluous, void or
insignificant.’’ 86
It is clear from the statutory text and
legislative history of section 15G of the
Exchange Act that Congress intended for
risk retention to be held by collateral
85 See
15 U.S.C. 78o-11(a)(3)(B).
e.g. Corley v. United States, 556 U.S. 303,
129 S.Ct 1558, 1566, 173 L.Ed.2d 443 (2009).
asset managers (such as CLO or CDO
managers), who are the parties who
determine the credit risk profile of
securitized assets in many types of
securitization transactions and therefore
should be subject to a regulatory
incentive to monitor the quality of the
assets they cause to be transferred to an
issuing entity.87 Additionally, the
agencies believe a narrow reading could
enable market participants to evade the
operation of the statute by employing an
agent to select assets to be purchased
and securitized. This could potentially
render section 15G of the Exchange Act
practically inoperative for any
transaction where this structuring could
be achieved, and would have an adverse
impact on competition and efficiency by
permitting market participants to do
indirectly what they are prohibited from
doing directly.
The agencies also recognize that the
standard forms of risk retention in the
original proposal could, if applied to
open market CLO managers, result in
fewer CLO issuances and less
competition in this sector. The agencies
therefore have developed a revised
proposal that is designed to allow
meaningful risk retention to be held by
a party that has significant control over
the underwriting of assets that are
typically securitized in CLOs, without
causing significant disruption to the
CLO market. The agencies’ goal in
proposing this alternative risk retention
option is to avoid having the general
risk retention requirements create
unnecessary barriers to potential open
market CLO managers sponsoring CLO
securitizations. The agencies believe
that this alternate risk retention option
could benefit commercial borrowers by
making additional credit available in the
syndicated loan market.
Under the proposal, an open market
CLO would be defined as a CLO whose
assets consist of senior, secured
syndicated loans acquired by such CLO
directly from sellers in open market
transactions and servicing assets, and
that holds less than 50 percent of its
assets by aggregate outstanding
principal amount in loans syndicated by
lead arrangers that are affiliates of the
CLO or originated by originators that are
affiliates of the CLO. Accordingly, this
definition would not include CLOs
(often referred to as ‘‘balance sheet’’
CLOs) where the CLO obtains a majority
of its assets from entities that control or
influence its portfolio selection.
Sponsors of balance sheet CLOs, would
be subject to the standard risk retention
options in the proposed rule because the
particular considerations for risk
86 See,
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retention relevant to an open market
CLO (as discussed above) should not
affect sponsors of balance sheet CLOs in
the same manner. Furthermore, as
commenters on the original proposal
indicated, sponsors of balance sheet
CLOs should be able to obtain sufficient
support to meet any risk retention
requirement from the affiliate that is the
originator of the securitized loans in a
balance sheet CLO.
Under the proposal, in addition to the
standard options for vertical or
horizontal risk retention, an open
market CLO could satisfy the risk
retention requirement if the firm serving
as lead arranger for each loan purchased
by the CLO were to retain at the
origination of the syndicated loan at
least 5 percent of the face amount of the
term loan tranche purchased by the
CLO. The lead arranger would be
required to retain this portion of the
loan tranche until the repayment,
maturity, involuntary and unscheduled
acceleration, payment default, or
bankruptcy default of the loan. This
requirement would apply regardless of
whether the loan tranche was purchased
on the primary or secondary market, or
was held at any particular time by an
open market CLO issuing entity.
The sponsor of an open market CLO
could presumably negotiate that the
lead arranger of each loan tranche
purchased for the CLO portfolio retain
a portion of the relevant loan tranche at
origination. However, the sponsors of
open market CLOs have frequently
arranged for the purchase of loans in the
secondary market as well as from
originators. For purchases on the
secondary market, negotiation of risk
retention in connection with such
purchases would likely be impractical.
Accordingly, the proposal contemplates
that specific senior, secured term loan
tranches within a broader syndicated
credit facility would be designated as
‘‘CLO-eligible’’ at the time of origination
if the lead arranger committed to retain
5 percent of each such CLO-eligible
tranche, beginning on the closing date of
the syndicated credit facility.
A CLO-eligible tranche could be
identical in its terms to a tranche not so
designated, and could be sized based on
anticipated demand by open market
CLOs. For the life of the facility, loans
that are part of the CLO-eligible tranche
could then trade in the secondary
market among both open market CLOs
and other investors. The agencies
acknowledge that this approach may
result in the retention by loan
originators of risk associated with assets
that are no longer held in
securitizations, but have narrowly
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tailored this option to eliminate that
result as much as possible.
In order to ensure that a lead arranger
retaining risk had a meaningful level of
influence on loan underwriting terms,
the lead arranger would be required to
have taken an initial allocation of at
least 20 percent of the face amount of
the broader syndicated credit facility,
with no other member of the syndicate
assuming a larger allocation or
commitment. Additionally, a retaining
lead arranger would be required to
comply with the same sales and hedging
restrictions as sponsors of other
securitizations until the repayment,
maturity, involuntary and unscheduled
acceleration, payment default, or
bankruptcy default of the loan tranche.
Under the proposal, a lead arranger
retaining a ‘‘CLO-eligible’’ loan tranche
must be identified at the time of the
syndication of the broader credit
facility, and legal documents governing
the origination of the syndicated credit
facility must include covenants by the
lead arranger with respect to satisfaction
of requirements described above.
Voting rights within the broader
syndicated credit facility must also be
defined in such a way that holders of
the ‘‘CLO-eligible’’ loan tranche had, at
a minimum, consent rights with respect
to any waivers and amendments of the
legal documents governing the
underlying CLO-eligible loan tranche
that can adversely affect the
fundamental terms of that tranche. This
is intended to prevent the possible
erosion of the economic terms, maturity,
priority of payment, security, voting
provisions or other terms affecting the
desirability of the CLO-eligible loan
tranche by subsequent modifications to
loan documents. Additionally, the pro
rata provisions, voting provisions and
security associated with the CLOeligible loan tranche could not be
materially less advantageous to the
holders of that tranche than the terms of
other tranches of comparable seniority
in the broader syndicated credit facility.
Under the proposal, the sponsor of an
open market CLO could avail itself of
the option for open market CLOs only
if: (1) The CLO does not hold or acquire
any assets other than CLO-eligible loan
tranches (discussed above) and
servicing assets (as defined in the
proposed rule); (2) the CLO does not
invest in ABS interests or credit
derivatives (other than permitted hedges
of interest rate or currency risk); and (3)
all purchases of assets by the CLO
issuing entity (directly or through a
warehouse facility used to accumulate
the loans prior to the issuance of the
CLO’s liabilities) are made in open
market transactions. The governing
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documents of the open market CLO
would require, at all times, that the
assets of the open market CLO consist
only of CLO-eligible loan tranches and
servicing assets.
The proposed option for open market
CLOs is intended to allocate risk
retention to the parties that originate the
underlying loans and that likely exert
the greatest influence on how the loans
are underwritten, which is an integral
component of ensuring the quality of
assets that are securitized. In developing
the proposed risk retention option for
open market CLOs, the agencies have
considered the factors set forth in
section 15G(d)(2) of the Exchange Act.88
Section 15G permits the agencies to
allow an originator (rather than a
sponsor) to retain the required amount
of credit risk and to reduce the amount
of credit risk required of the sponsor by
the amount retained by the originator.89
The terms of the proposed option for
eligible open market CLOs include
conditions designed to provide
incentive to lead arrangers to monitor
the underwriting of loans they syndicate
that may be sold to an eligible open
market CLO by requiring that lead
arrangers retain risk on these leveraged
loans that could be securitized through
CLOs. The agencies believe that this
proposed risk retention option for open
market CLOs would meaningfully align
the incentives of the party most
involved with the credit quality of these
loans—the lead arranger—with the
interests of investors. Alternatively,
incentive would be placed on the CLO
manager to monitor the credit quality of
loans it securitizes if it retains risk
under the standard risk retention
option.
In response to commenter requests
that the agencies recognize incentive
fees as risk retention, the agencies
recognize that management fees
incorporate credit risk sensitivity and
contribute to aligning the interests of the
CLO manager and investors with respect
to the quality of the securitized loans.
However, these fees do not appear to
provide an adequate substitute for risk
retention because they typically have
88 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 risk retention obligations on the
access of consumers and business to credit on
reasonable terms, which may not include the
transfer of credit risk to a third party.
89 See id. at Section 78o–11(c)(G)(iv) and (d)
(permitting the Commission and Federal banking
agencies to allow the allocation of risk retention
from a sponsor to an originator).
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small expected value (estimated as
equivalent to a horizontal tranche of less
than 1 percent), especially given that
CLOs securitize leveraged loans, which
carry higher risk than many other
securitized assets. Additionally, these
fees are not funded in cash at closing
and therefore may not be available to
absorb losses as expected. Generally, the
agencies have declined to recognize
unfunded forms of risk retention for
purposes of the proposal (such as fees
or guarantees), except in the case of the
Enterprises under the conditions
specified with regard to their
guarantees.
Under the option for open market
CLOs, the sponsor relying on the option
would be required to provide, or cause
to be provided, certain disclosures to
potential investors. The sponsor would
be required to disclose this information
a reasonable period of time prior to the
sale of the asset-backed securities in the
securitization transaction (and at least
annually with respect to information
regarding the assets held by the CLO)
and, upon request, to the Commission
and its appropriate Federal banking
agency, if any. First, a sponsor relying
on the CLO option would need to
disclose a complete list of every asset
held by an open market CLO (or before
the CLO’s closing, in a warehouse
facility in anticipation of transfer into
the CLO at closing). This list would
need to include the following
information (i) the full legal name and
Standard Industrial Classification
category code of the obligor of the loan
or asset; (ii) the full name of the specific
loan tranche held by the CLO; (iii) the
face amount of the loan tranche held by
the CLO; (iv) the price at which the loan
tranche was acquired by the CLO; and
(v) for each loan tranche, the full legal
name of the lead arranger subject to the
sales and hedging restrictions of § __.12
of the proposed rule. Second, the
sponsor would need to disclose the full
legal name and form of organization of
the CLO manager.
Request for Comment
50(a). Does the proposed CLO risk
retention option present a reasonable
allocation of risk retention among the
parties that originate, purchase, and sell
assets in a CLO securitization? 50(b).
Are there any changes that should be
made in order to better align the
interests of CLO sponsors and CLO
investors?
51. Are there technical changes to the
proposed CLO option that would be
needed or desirable in order for lead
arrangers to be able to retain the risk as
proposed, and for CLO sponsors to be
able to rely on this option?
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52(a). Who should assume
responsibility for ensuring that lead
arrangers comply with requirement to
retain an interest in CLO-eligible
tranches? 52(b). Would some sort of
ongoing reporting or periodic
certification by the lead arranger to
holders of the CLO-eligible tranche be
feasible? 52(c). Why or why not?
53(a). The agencies would welcome
suggestions for alternate or additional
criteria for identifying lead arrangers.
53(b). Do loan syndications typically
have more than one lead arranger who
has significant influence over the
underwriting and documentation of the
loan? 53(c). If so, should the risk
retention requirement be permitted to be
shared among more than one lead
arranger? 53(d). What practical
difficulties would this present,
including for the monitoring of
compliance with the retention
requirement? 53(e). How could the rule
assure that each lead arranger’s retained
interest is significant enough to
influence its underwriting of the loan?
54(a). Is the requirement for the lead
arranger to take an initial allocation of
20 percent of the broader syndicated
credit facility sufficiently large to ensure
that the lead arranger can exert a
meaningful level of influence on loan
underwriting terms? 54(b). Could a
smaller required allocation accomplish
the same purpose?
55(a). The proposal permits lead
arrangers to sell or hedge their retained
interest in a CLO-eligible loan tranche if
those loans experience a payment or
bankruptcy default or are accelerated.
Would the knowledge that it could sell
or hedge a defaulted loan in those
circumstances unduly diminish the lead
arranger’s incentive to underwrite and
structure the loan prudently at
origination? 55(b). Should the agencies
restrict the ability of lead arrangers to
sell or hedge their retained interest
under these circumstances? 55(c). Why
or why not?
56(a). Should the lead arranger role
for ‘‘CLO-eligible’’ loan tranches be
limited to federally supervised lending
institutions, which are subject to
regulatory guidance on leveraged
lending? 56(b). Why or why not?
57(a). Should additional qualitative
criteria be placed on CLO-eligible loan
tranches to ensure that they have lower
credit risk relative to the broader
leveraged loan market? 57(b). What such
criteria would be appropriate?
58(a). Should managers of open
market CLOs be required to invest
principal in some minimal percentage of
the CLO’s first loss piece in addition to
meeting other requirements for open
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market CLOs proposed herein? 58(b).
Why or why not?
59(a). Is the requirement that all assets
(other than servicing assets) consist of
CLO-eligible loan tranches appropriate?
59(b). To what extent could this
requirement impede the ability of a CLO
sponsor to diversify its assets or its
ability to rely on this option? 59(c). Does
this requirement present any practical
difficulties with reliance on this option,
particularly the ability of CLO sponsors
to accumulate a sufficient number of
assets from CLO-eligible loan tranches
to meet this requirement? 59(d). If so,
what are they? 59(e). Would it be
appropriate for the agencies to provide
a transition period (for example, two
years) after the effective date of the rule
to allow some investment in corporate
or other obligations other than CLOeligible loan tranches or servicing assets
while the market adjusts to the new
standards? 59(f). What transition would
be appropriate? 59(g). Would allowing a
relatively high percentage of investment
in such other assets in the early years
following the effective date (such as 10
percent), followed by a gradual
reduction, facilitate the ability of the
market to utilize the proposed option?
59(h). Why or why not? 59(i). What
other transition arrangements might be
appropriate?
60(a). Should an open market CLO be
allowed permanently to hold some de
minimis percentage of its collateral
assets in corporate obligations other
than CLO-eligible loan tranches under
the option? 60(b). If so, how much?
61(a). Is the requirement that
permitted hedging transactions be
limited to interest rate and currency
risks appropriate? 61(b). Are there other
derivative transactions that CLO issuing
entities engage in to hedge particular
risks arising from the loans they hold
and not as means of gaining synthetic
exposures?
62(a). Is the requirement that the
holders of a CLO-eligible loan tranche
have consent rights with respect to any
material waivers and amendments of the
underlying legal documents affecting
their tranche appropriate? 62(b). How
should waivers and amendments that
affect all tranches (such as waivers of
defaults or amendments to covenants)
be treated for this purpose? 62(c).
Should holders of CLO-eligible loan
tranches be required to receive special
rights with respect those matters, or are
their interests sufficiently aligned with
other lenders?
63. How would the proposed option
facilitate (or not facilitate) the
continuance of open market CLO
issuances?
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64(a). What percentage of currently
outstanding CLOs, if any, have
securitized assets that consist entirely of
syndicated loans? 64(b). What
percentage of securitized assets of
currently outstanding CLOs consist of
syndicated loans?
65(a). Should unfunded portions of
revolving credit facilities be allowed in
open market CLO collateral portfolios,
subject to some limit, as is current
market practice? 65(b). If yes, what form
should risk retention take? 65(c). Would
the retention of 5 percent of an
unfunded revolving commitment to
lend (plus 5 percent of any outstanding
funded amounts) provide the originator
with incentives similar to those
provided by retention of 5 percent of a
funded term loan? 65(d). Why or why
not?
66(a). Would a requirement for the
CLO manager to retain risk in the form
of unfunded notes and equity securities,
as proposed by an industry commenter,
be a reasonable alternative for the above
proposal? 66(b). How would this meet
the requirements and purposes of
section 15G of the Exchange Act?
8. Municipal Bond ‘‘Repackaging’’
Securitizations
Several commenters on the original
proposal requested that the agencies
exempt municipal bond repackagings
securitizations from risk retention
requirements, the most common form of
which are often referred to as ‘‘tender
option bonds’’ (TOBs).90 These
commenters argued that these
transactions should be exempt from risk
retention for the following reasons:
• Securities issued by municipal
entities are exempt, so securitizations
involving these securities should also be
exempt;
• Municipal bond repackagings are
not the type of securitizations that
prompted Congress to enact section 15G
of the Exchange Act, but rather are
90 As described by one commenter, a typical
TOBs transaction consists of the deposit of a single
issue of highly rated, long-term municipal bonds in
a trust and the issuance by the trust of two classes
of securities: A floating rate, puttable security (the
‘‘floaters’’), and an inverse floating rate security (the
‘‘residual’’). No tranching is involved. The holders
of floaters have the right, generally on a daily or
weekly basis, to put the floaters for purchase at par,
which put right is supported by a liquidity facility
delivered by a highly rated provider and causes the
floaters to be a short-term security. The floaters are
in large part purchased and held by money market
mutual funds. The residual is held by a longer term
investor (bank, insurance company, mutual fund,
hedge fund, etc.). The residual investors take all of
the market and structural risk related to the TOBs
structure, with the floaters investors only taking
limited, well-defined insolvency and default risks
associated with the underlying municipal bonds,
which risks are equivalent to those associated with
investing in such municipal bonds directly.
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securitizations caught in the net cast by
the broad definition of ABS. In fact, the
underlying collateral of TOBs has very
lower credit risk and is structured to
meet the credit quality requirements of
Rule 2a–7 under the Investment
Company Act of 1940; 91
• Imposing risk retention in the TOBs
market would reduce the liquidity of
municipal bonds, which would lead to
an increase in borrowing costs for
municipalities and other issuers of
municipal bonds, as well a decrease the
short-term investments available for taxexempt money market funds; and
• TOB programs are financing
vehicles that are used because more
traditional forms of securities financing
are inefficient in the municipal
securities market; TOB programs are not
intended to, and do not, transfer
material investment risk from the
securitizer to investors. The securitizer
in a TOB program (whether the TOB
program sponsor or a third-party
investor) has ‘‘skin in the game’’ by
virtue of (i) the nature of the TOB
inverse floater interest it owns, which
represents ownership of the underlying
municipal securities and is not
analogous to other types of ABS
programs, or (ii) its provision of
liquidity coverage or credit
enhancement, or its obligation to
reimburse the provider of liquidity
coverage or credit enhancement for any
losses.
Another commenter asserted that TOBs
and other types of municipal
repackaging transactions continue to
offer an important financing option for
municipal issuers by providing access to
a more diverse investor base, a more
liquid market and the potential for
lower interest rates. According to this
commenter, if TOBs were subject to the
risk retention requirements of the
proposal, the cost of such financing
would increase significantly, sponsor
banks would likely scale back the
issuance of TOBs, and as a result the
availability of tax-exempt investments
in the market would decrease.
In order to reflect and incorporate the
risk retention mechanisms currently
implemented by the market, the
agencies are proposing to provide two
additional risk retention options for
certain municipal bond repackagings.
The proposed rule closely tracks certain
requirements for these repackagings,
outlined in IRS Revenue Procedure
2003–84, that are relevant to risk
retention.92 Specifically, the reproposed rule proposes additional risk
91 17
CFR 270.2a–7.
Procedure 2003–84, 2003–48 I.R.B.
92 Revenue
1159.
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retention options for certain municipal
bond repackagings in which:
• Only two classes of securities are
issued: A tender option bond and a
residual interest;
• The tender option bond qualifies for
purchase by money market funds under
Rule 2a–7 under the Investment
Company Act of 1940;
• The holder of a tender option bond
must have the right to tender such
bonds to the issuing entity for purchase
at any time upon no more than 30 days’
notice;
• The collateral consists solely of
servicing assets and municipal
securities as defined in Section 3(a)(29)
of the Securities Exchange Act of 1934
and all of those securities have the same
municipal issuer and the same
underlying obligor or source of
payment;
• Each of the tender option bond, the
residual interest and the underlying
municipal security are issued in
compliance with the Internal Revenue
Code of 1986, as amended (the ‘‘IRS
Code’’), such that the interest payments
made on those securities are excludable
from the gross income of the owners;
• The issuing entity has a legally
binding commitment from a regulated
liquidity provider to provide 100
percent guarantee or liquidity coverage
with respect to all of the issuing entity’s
outstanding tender option bonds; 93 and
• The issuing entity qualifies for
monthly closing elections pursuant to
IRS Revenue Procedure 2003–84, as
amended or supplemented from time to
time.
An issuing entity that meets these
qualifications would be a Qualified
Tender Option Bond Entity.
The sponsor of a Qualified Tender
Option Bond Entity may satisfy its risk
retention requirements under section 10
of the proposed rule if it retains an
interest that upon issuance meets the
requirements of an eligible horizontal
93 The agencies received very few comments with
respect to the definition of regulated liquidity
provider included in the original proposal with
respect to the proposed ABCP option. The proposed
rule includes the same definition and 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.
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residual interest but that upon the
occurrence of a ‘‘tender option
termination event’’ as defined in section
4.01(5) of IRS Revenue Procedure 2003–
84, as amended or supplemented from
time to time, will meet requirements of
an eligible vertical interest.94 The
agencies believe that the proposed
requirements for both an eligible
horizontal residual interest and an
eligible vertical interest adequately align
the incentives of sponsors and investors.
The sponsor of a Qualified Tender
Option Bond Entity may also satisfy its
risk retention requirements under this
Section if it holds municipal securities
from the same issuance of municipal
securities deposited in the Qualified
Tender Option Bond Entity, the face
value of which retained municipal
securities is equal to 5 percent of the
face value of the municipal securities
deposited in the Qualified Tender
Option Bond Entity. The prohibitions
on transfer and hedging set forth in
section 12 of the proposed rule would
apply to any municipal securities
retained by the sponsor of a Qualified
Tender Option Bond Entity in
satisfactions of its risk retention
requirements under this section.
The sponsor of a Qualified Tender
Option Bond Entity could also satisfy its
risk retention requirements under
subpart B of the proposed rule using any
of the other risk retention options in this
proposal, provided the sponsor meets
the requirements of that option.
Request for Comment
67(a). Do each of the additional
options proposed with respect to
repackagings of municipal securities
accommodate existing market practice
for issuers and sponsors of tender
option bonds? 67(b). If not, are there any
technical adjustments that need to be
made in order to accommodate existing
market practice?
68(a). Do each of the additional
options proposed with respect to
repackagings of municipal securities
adequately align the incentives of
sponsors and investors? 68(b). If not, are
94 Section 4.01(5) of IRS Revenue Procedure
2003–84 defines a tender option termination event
as: (1) A bankruptcy filing by or against a taxexempt bond issuer; (2) a downgrade in the creditrating of a tax-exempt bond and a downgrade in the
credit rating of any guarantor of the tax-exempt
bond, if applicable, below investment grade; (3) a
payment default on a tax-exempt bond; (4) a final
judicial determination or a final IRS administrative
determination of taxability of a tax-exempt bond for
Federal default on the underlying municipal
securities and credit enhancement, where
applicable; (5) a credit rating downgrade below
investment grade; (6) the bankruptcy of the issuer
and, when applicable, the credit enhancer; or (7)
the determination that the municipal securities are
taxable.
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there any additional requirements that
should be added in order to better align
those incentives?
9. Premium Capture Cash Reserve
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a. Overview of Original Proposal and
Public Comment
In the original proposal, the agencies
were concerned with two different
forms of evasive behavior by sponsors to
reduce the effectiveness of risk
retention. First, in the context of
horizontal risk retention, it could have
been difficult to measure how much risk
a sponsor was retaining where the risk
retention requirement was measured
using the ‘‘par value’’ of the transaction.
In particular, a first loss piece could be
structured with a face value of 5
percent, but might have a market value
of only cents on the dollar. As the
sponsor might not have to put
significant amounts of its own funds at
risk to acquire the horizontal interest,
there was concern that the sponsor
could structure around its risk retention
requirements and thereby evade a
purpose of section 15G.
Second, 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 and diminish the value, relative to
par value, of the most subordinated
credit tranche. 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
unsound underwriting practices.
In order to achieve the goals of risk
retention, the original proposal would
have increased the required amount of
risk retention by the amount of proceeds
in excess of 95 percent of the par value
of ABS interests, or otherwise required
the sponsor to deposit the difference
into a first-loss premium capture cash
reserve account. The amount placed
into the premium capture cash reserve
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account would have been separate from
and in addition to the sponsor’s base
risk retention requirement, and would
have been used to cover losses on the
underlying assets before such losses
were allocated to any other interest or
account. As a likely consequence to
those proposed requirements, the
agencies expected that few, if any,
securitizations would require the
establishment of a premium capture
cash reserve account, as sponsors would
simply adjust by holding more risk
retention.
The agencies requested comment on
the effectiveness and appropriateness of
the premium capture cash reserve
account and sought input on any
alternative methods. Several
commenters were supportive of the
concept behind the premium capture
cash reserve account to prevent
sponsors from structuring around the
risk retention requirement. However,
most commenters generally objected to
the premium capture cash reserve
account. Many commenters expressed
concern that the premium capture cash
reserve account would prevent sponsors
and originators from recouping the costs
of origination and hedging activities,
give sponsors an incentive to earn
compensation in the form of fees from
the borrower instead of cash from deal
proceeds, and potentially cause the
sponsor to consolidate the entire
securitization vehicle for accounting
purposes.
Commenters stated that these
potential negative effects would
ultimately make securitizations
uneconomical for many sponsors, and
therefore would have a significant
adverse impact on the cost and
availability of credit. Some commenters
also argued that the premium capture
cash reserve account exceeded the
statutory mandate and legislative intent
of the Dodd-Frank Act.
b. Proposed Treatment
After careful consideration of all the
comments regarding the premium
capture cash reserve account, and in
consideration of the use of fair value in
the measurement of the standard risk
retention amount in the proposed rule
(as opposed to the par value
measurement in the original proposal),
the agencies have decided not to
include a premium capture cash reserve
account provision in the proposed rule.
The agencies still consider it important
to ensure that there is meaningful risk
retention and that sponsors cannot
effectively negate or reduce the
economic exposure they are required to
retain under the proposed rule.
However, the proposal to use fair value
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to measure the amount of risk retention
should meaningfully mitigate the ability
of a sponsor to evade the risk retention
requirement through the use of deal
structures. The agencies also took into
consideration the potential negative
unintended consequences the premium
capture cash reserve account might
cause for securitizations and lending
markets. The elimination of the
premium capture cash reserve account
should reduce the potential for the
proposed rule to negatively affect the
availability and cost of credit to
consumers and businesses.
Request for Comment
69(a). Should the proposed rule
require a sponsor to fund all or part of
its risk retention requirement with own
funds, instead of using proceeds from
the sale of ABS interests to investors?
69(b). Would risk retention be more
effective if sponsors had to fund it
entirely with their own funds? 69(c).
Why or why not?
70(a). Should the agencies require a
higher amount of risk retention
specifically for transaction structures
which rely on premium proceeds, or for
assets classes like RMBS and CMBS
which have relied historically on the
use of premium proceeds? 70(b). If so,
how should this additional risk
requirement be sized in order to ensure
risk retention achieves the right balance
of cost versus effectiveness?
C. Allocation to the Originator
1. Overview of Original Proposal and
Public Comment
As a general matter, the original
proposal was structured so that the
sponsor of a securitization transaction
would be solely responsible for
complying with the risk retention
requirements established under section
15G of the Exchange Act and the
proposed implementing regulations,
consistent with that statutory provision.
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.95
Accordingly, subject to conditions and
restrictions discussed below, the
original proposal would have permitted
a sponsor to reduce its required risk
retention obligations in a securitization
transaction by the portion of risk
95 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).
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retention obligations assumed by the
originators 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 and businesses to credit on
reasonable terms, which may not
include the transfer of credit risk to a
third party.96
In the original proposal, the agencies
proposed a framework that would have
permitted a sponsor of a securitization
to allocate a portion of its risk retention
obligation to an originator that
contributed a significant amount of
assets to the underlying asset pool. The
agencies endeavored to create
appropriate incentives for both the
securitization sponsor and the
originator(s) to maintain and monitor
appropriate underwriting standards
without creating undue complexity,
which potentially could mislead
investors and confound supervisory
efforts to monitor compliance.
Importantly, the original proposal did
not require allocation to an originator.
Therefore, it did 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 fulfill a
sponsor’s risk retention requirement.
The allocation to originator option in
the original proposal was designed to
work in tandem with the base vertical
or horizontal risk retention options that
were set forth in that proposal. The
provision would have made the
allocation to originator option available
to a sponsor that held all of the retained
interest under the vertical option or all
of the retained interest under the
horizontal option, but would not have
made the option available to a sponsor
that satisfied the risk retention
requirement by retaining a combination
of vertical and horizontal interests.
96 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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Additionally, the original proposal
would have permitted a securitization
sponsor to allocate a portion of its risk
retention obligation 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 was
allocated credit risk in accordance with
the proposal was required to be at least
20 percent, but not in excess of the
percentage of the securitized assets it
originated. The originator would have
been required to hold its allocated share
of the risk retention obligation in the
same manner as would have been
required of the sponsor, and subject to
the same restrictions on transferring,
hedging, and financing the retained
interest. Thus, for example, if the
sponsor satisfied its risk retention
requirements by acquiring an eligible
horizontal residual interest, an
originator allocated risk would have
been required 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 have been reduced
by the amount allocated to the
originator. Finally, the original proposal
would have made the sponsor
responsible for any failure of an
originator to abide by the transfer and
hedging restrictions included in the
proposed rule.
Several commenters opposed the
original proposal on allocation to
originators in its entirety for a variety of
reasons. A common reason stated was
that originators would be placed in an
unequal bargaining position with
sponsors. Other commenters supported
the proposed provision, but many urged
that it be revised. Several commenters
stated that requiring that the originator
use the same form of risk retention as
the sponsor should be removed, while
one commenter proposed that if a
sponsor desired to allocate a portion of
risk retention to an originator, only the
horizontal retention option should be
used. Many commenters stated that the
proposed 20 percent origination
threshold required in order for the
option to be used was too high. One
commenter urged that an originator that
originated more than 50 percent of the
securitized assets be required to retain
at least 50 percent of the required
retention. Another commenter suggested
that an originator retaining a portion of
the required interest be allocated only a
percentage of the loans it originated,
rather than an allocation of the entire
pool, as proposed. The agencies also
received comments that the definition of
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‘‘originator’’ ought to include parties
that purchase assets from entities that
create the assets and that allocation to
originators should be permitted where
the L-shaped option or horizontal cash
reserve account option was used as a
form of risk retention.
2. Proposed Treatment
The agencies have carefully
considered the concerns raised by
commenters with respect to the original
proposal on allocation to originators.
The agencies do not believe, however,
that a significant expansion of the
allocation to originator option would be
appropriate and that allocation limits on
originators are necessary to realize the
agencies’ goal of better aligning
securitizers’ and investors’ interests.
Therefore, the agencies are proposing
an allocation to originator provision that
is substantially similar to the provision
in the original proposal. The only
modifications to this option would be
technical changes that reflect the
proposed flexible standard risk
retention (discussed above in Part III.B.1
of this SUPPLEMENTARY INFORMATION).
The rule, like the original proposal,
would require that an originator to
which a portion of the sponsor’s risk
retention obligation is allocated acquire
and retain ABS interests or eligible
horizontal residual interests in the same
manner as would have been retained by
the sponsor. Under the proposed rule,
this condition would require an
originator to acquire horizontal and
vertical interests in the securitization
transaction in the same proportion as
the interests originally established by
the sponsor. This requirement helps to
align the interests of originators and
sponsors, as both face the same
likelihood and degree of losses if the
collateralized assets begin to default.
In addition, the proposed rule would
permit a sponsor that uses a horizontal
cash reserve account to use this option.
Finally, consistent with the change in
the general risk retention from par value
to fair value (discussed above in Part
III.B.1 of this Supplementary
Information) in determining the
maximum amount of risk retention that
could be allocated to an originator, the
current NPR refers to the fair value,
rather than the dollar amount (or
corresponding amount in the foreign
currency in which the ABS are issued,
as applicable), of the retained interests.
As explained in the original proposal,
by limiting this option to originators
that originate at least 20 percent of the
asset pool, the agencies seek to ensure
that the originator retains risk in an
amount significant enough to function
as an actual incentive for the originator
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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 have been seeking to
acquire a speculative investment. These
requirements are also intended to
reduce the proposal’s potential
complexity and facilitate investor and
regulatory monitoring.
The re-proposal again requires that an
originator hold retained interests in the
same manner as the sponsor. As noted,
the proposed rule provides the sponsor
with significant flexibility in
determining the mix of vertical and
horizontal interests that it would hold to
meet its risk retention requirement. In
addition, unlike the original proposal,
the proposed rule would permit a
sponsor that holds a combination of
vertical and horizontal interests to
utilize the allocation to originator
option. If originators were permitted to
retain their share of the sponsor’s risk
retention obligation in a proportion that
is different from the sponsor’s mix of
the vertical and horizontal interests,
investor and regulatory monitoring
could become very complex.
The re-proposal does not incorporate
commenters’ suggestion that an
originator be allocated retention in only
the loans that it originated. The
operational burden on both
securitization sponsors and federal
supervisors to ensure that retention is
held by originators on the correct
individual loans would be exceedingly
high. Therefore, the proposal continues
to require that originators allocated a
portion of the risk retention requirement
be allocated a share of the entire
securitization pool.
The agencies are not proposing a
definition of originator modified from
the original proposal and are not
proposing to include persons that
acquire loans and transfer them to a
sponsor. The agencies continue to
believe that the definition of the term
originator in section 15G 97 does not
provide the agencies with flexibility to
make this change. This definition limits
an originator to a person that ‘‘through
the extension of credit or otherwise,
creates a financial asset.’’ A person that
acquires an asset created by another
person would not be the ‘‘creator’’ of
such asset.
97 15
U.S.C. 78o–11(a)(4).
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The agencies are not proposing to
eliminate the allocation to originator
provision, as some commenters
suggested. Although the agencies are
sensitive to concerns that smaller
originators might be forced to accept
allocations from sponsors due to
unequal bargaining power, the 20
percent threshold would make the
allocation option available only for
entities whose assets form a significant
portion of a pool and who, thus,
ordinarily could be expected to have
some bargaining power with a sponsor.
Finally, the agencies do not believe
that it is necessary, as some commenters
suggested, to require retention by a nonsponsor originator which provides more
than half of the securitized asset pool.
In most circumstances, such an
originator would be a sponsor. In any
circumstance where such an originator
was not the sponsor, the agencies
believe that risk retention goals would
be adequately served by retention by the
sponsor, if allocation to the originator
did not otherwise occur.
Request for Comment
71(a). If originators were allocated risk
only as to the loans they originate,
would it be operationally feasible to
allocate losses on a loan-by-loan basis?
71(b). What would be the degree of
burden to implement such a system and
accurately track and allocate losses?
D. Hedging, Transfer, and Financing
Restrictions
1. Overview of the Original Proposal
and Public Comment
Section 15G(c)(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 with
respect to an asset. Consistent with this
statutory directive, the original proposal
prohibited a sponsor from transferring
any interest or assets that it was
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). An issuing
entity, however, would not be deemed
a consolidated affiliate of the sponsor
for the securitization even if its financial
statements were consolidated with those
of the sponsor under applicable
accounting standards.
In addition to the transfer restrictions,
the original proposal prohibited a
sponsor or any consolidated affiliate
from hedging the credit risk the sponsor
was required to retain under the rule.
However, hedge positions that are not
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materially related to the credit risk of
the particular ABS interests or
exposures required to be retained by the
sponsor or its affiliate would not have
been prohibited under the original
proposal. The original proposal also
prohibited a sponsor and a consolidated
affiliate from pledging as collateral for
any obligation any interest or asset that
the sponsor was required to retain
unless the obligation was with full
recourse to the sponsor or consolidated
affiliate.
Commenters generally expressed
support for the proposed restrictions in
the original proposal as they felt that the
restrictions were appropriately
structured. However, several
commenters recommended that
sponsors only be required to maintain a
fixed percentage of exposure to a
securitization over time rather than a
fixed amount of exposure. Some
commenters also recommended that the
transfer restriction be modified so that
not only could sponsors transfer
retained interests or assets to
consolidated affiliates, but consolidated
affiliates could hold the risk retention
initially as well.
2. Proposed Treatment
The agencies have carefully
considered the comments received with
respect to the original proposal’s
hedging, transfer, and financing
restrictions, and the agencies do not
believe that any significant changes to
these restrictions would be appropriate
(other than the exemptions provided for
CMBS and duration of the hedging and
transfer restrictions, as described in Part
IV.F of this Supplementary
Information).
The agencies are, however, proposing
changes in connection with the
consolidated affiliate treatment. As
noted above, the ‘‘consolidated affiliate’’
definition would be operative in two
respects. First, the original proposal
would have permitted transfers of the
risk retention interest to a consolidated
affiliate. The agencies proposed this
treatment under the rationale that
financial losses are shared equally
within a group of consolidated entities;
therefore, a sponsor would not ‘‘avoid’’
losses by transferring the required risk
retention asset to an affiliate. Upon
further consideration, the agencies are
concerned that, under current
accounting standards, consolidation of
an entity can occur under circumstances
in which a significant portion of the
economic losses of one entity will not,
in economic terms, be suffered by its
consolidated affiliate.
To avoid this outcome, the current
proposal introduces the concept of a
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‘‘majority-owned affiliate,’’ which
would be defined under the proposal as
an entity that, directly or indirectly,
majority controls, is majority controlled
by, or is under common majority control
with, another entity For purposes of this
definition, majority control would mean
ownership of more than 50 percent of
the equity of an entity or ownership of
any other controlling financial interest
in the entity (as determined under
GAAP). The agencies are also, in
response to commenters, revising the
proposal to allow risk retention to be
retained as an initial matter by a
majority-owned affiliate; in other words,
it would not be necessary for the
sponsor to go through the steps of
holding the required retention interest
for a moment in time before moving it
to the affiliate.
Second, the original proposal
prohibited a consolidated affiliate of the
sponsor from hedging a risk retention
interest required to be retained under
the rule. Again, the rationale was that
the sponsor’s consolidated affiliate
would obtain the benefits of the hedging
transaction and they would offset any
losses sustained by the sponsor. In the
current proposal, the agencies are
eliminating the concept of the
‘‘consolidated’’ affiliate and instead
applying the hedging prohibition to any
affiliate of the sponsor.
In all other respects, the agencies are
again proposing the same hedging,
transfer, and financing restrictions as
under the original proposal, without
modification. The proposal would
prohibit a sponsor or any affiliate from
hedging the credit risk the sponsor is
required to retain under the rule or 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 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
or one or more of the particular
securitized assets that collateralize the
asset-backed securities.
Similar to the original proposal, under
the proposed rule holding a security
tied to the return of an index (such as
the subprime ABX.HE index) would not
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be considered a prohibited hedge by the
retaining sponsor so long as: (1) 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
(2) 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.
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 assetbacked 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).
Consistent with the original proposal,
the proposed rule would prohibit a
sponsor and any affiliate from pledging
as collateral for any obligation
(including a loan, repurchase
agreement, or other financing
transaction) any ABS interest that the
sponsor is required to retain unless the
obligation is with full recourse to the
sponsor or a pledging affiliate (as
applicable). 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
affiliate pledged the interest or asset to
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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.
Similar to the original proposal, the
proposed rule would not prohibit an
issuing entity from engaging in hedging
activities itself when such activities
would be for the benefit of all investors
in the asset-backed securities. However,
any credit protection by or hedging
protection obtained by an issuing entity
could not cover any ABS interest or
asset that the sponsor is required to
retain under the proposed rule. For
example, if the sponsor retained a 5
percent eligible vertical interest, an
issuing entity may purchase (or benefit
from) a credit insurance wrap that
covers up to 95 percent of the tranches,
but not the 5 percent of such tranches
required to be retained by the sponsor.
Request for Comment
72(a). Is the scope of the proposed
restriction relating to majority-owned
affiliates, and affiliates generally,
appropriate to prevent sponsors from
avoiding losses arising from a risk
retention asset? 72(b). Should the
agencies, instead of the majority-owned
affiliate approach, increase the 50
percent ownership requirement to a 100
percent ownership threshold under a
wholly-owned approach?
IV. 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.98 In
addition, section 15G(e)(1) permits the
agencies 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
98 15
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interest and for the protection of
investors.
Consistent with these provisions, the
original proposal would have exempted
certain types of ABS or securitization
transactions from the credit risk
retention requirements of the rule, each
as discussed below, along with the
comments and the new or revised
proposals of the proposed rule.
A. Exemption for Federally Insured or
Guaranteed Residential, Multifamily,
and Health Care Mortgage Loan Assets
The original proposal would have
implemented section 15G(e)(3)(B) of the
Exchange Act by exempting from the
risk retention requirements any
securitization transaction that is
collateralized solely 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.99 Also, the original proposal
would have exempted 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 by
residential, multifamily, or health care
facility mortgage loan assets, or interests
in such assets.
Commenters on the original proposal
generally believed the agencies had
appropriately proposed to implement
this statutory exemption from the risk
retention requirement. Some
commenters remarked that the broad
exemptions granted to government
institutions and programs, which are
unrelated to prudent underwriting, are
another reason that transactions
securitizing loans with private mortgage
insurance should be exempted because,
without including private mortgage
insurance, the rule may encourage
excessive reliance on such exemption
and undermine the effectiveness of risk
retention.
Commenters also generally believed
that the agencies were correct in
believing the federal department or
agency issuing, insuring or guaranteeing
the ABS or collateral would monitor the
quality of the assets securitized. One
commenter noted that, in its experience,
federal programs are sufficiently
monitored to ensure the safety and
consistency of the securitization and
public interest. One commenter said
that it would seem that any U.S.
guarantee or insurance program should
be exempt if it provides at least the
99 Id.
at section 78o–11(e)(3)(B).
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same amount of coverage as the risk
retention requirement, and another
commenter said that the exemption
should be broad enough to cover all
federal insurance and guarantee
programs. One commenter noted that
the exemption seemed to prevent the
mixing of U.S. direct obligations and
U.S. insured or guaranteed obligations
because the proposed rule would only
allow an exemption for transactions
collateralized either solely by U.S.
direct obligations or solely by assets that
are fully insured or guaranteed as to the
payment of principal and interest by the
U.S. Certain commenters urged the
agencies to extend the governmentbacked exemptions to ABS backed by
foreign governments, similar to the
European Union’s risk retention regime
which includes a general exemption for
transactions backed by ‘‘central
government’’ claims without restriction.
Several commenters urged the
agencies to revise the government
institutions and programs exemption to
include an exemption for securitizations
consisting of student loans made under
the Federal Family Education Loan
Program (‘‘FFELP’’). In particular, these
commenters believe an exemption is
warranted because FFELP loans have a
U.S.-backed guarantee on 97 percent to
100 percent of defaulted principal and
interest under the FFELP guarantee
programs administered by the
Department of Education. These
commenters noted that FFELP loans
benefit from a higher level of federal
government support than Veterans
Administration loans (25 percent to 50
percent) and Department of Agriculture
Rural Development loans (up to 90
percent). These commenters also noted
that risk retention would have no effect
on the underwriting standards since
these loans have been funded already
and the program is no longer
underwriting new loans. A securitizer of
student loans also noted that the
Department of Education set the
standards by which FFELP loans were
originated and serviced. Some
commenters said that, if the agencies do
not entirely exclude FFELP loan
securitizations from the risk retention
requirement, at a minimum the agencies
should only require risk retention on the
non-FFELP portion of the ABS
portfolio.100
Two commenters on the original
proposal urged the agencies to include
an exemption for ABS collateralized by
any credit instrument extended under
100 One commenter requested an exemption for
the sponsor of short-term notes issued by StraightA Funding, LLC. As Straight-A Funding, LLC will
not have ABS interests outstanding after January 19,
2014, such an exemption is not necessary.
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the federal guarantee program for bonds
and notes issued for eligible community
or economic development purposes
established under the Community
Development Financial Institutions
(‘‘CDFI’’) bond program. Therefore,
because credit risk retention was
addressed and tailored specifically for
the CDFI program, it was this
commenter’s view that the CDFI
program transactions were designed to
be exempt from the final credit risk
retention requirements of section 15G of
the Exchange Act in accordance with
section 94l(b) of the Dodd-Frank Act.
The agencies are again proposing,
without changes from the original
proposal, the exemption from the risk
retention requirements for any
securitization transaction that is
collateralized solely by residential,
multifamily, or health care facility
mortgage loan assets if the assets are
insured or guaranteed in whole or in
part as to the payment of principal and
interest by the United States or an
agency of the United States. The
agencies are also proposing, without
changes from the original proposal, the
exemption from the risk retention
requirements for 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 by
residential, multifamily, or health care
facility mortgage loan assets, or interests
in such assets.
In addition, taking into consideration
comments received on the original
proposal, the agencies are proposing a
separate provision for securitization
transactions that are collateralized by
FFELP loans. Under the proposed rule,
a securitization transaction that is
collateralized (excluding servicing
assets) solely by FFELP loans that are
guaranteed as to 100 percent of
defaulted principal and accrued interest
(i.e., FFELP loans with first
disbursement prior to October 1993 or
pursuant to certain limited
circumstances where a full guarantee
was required) would be exempt from the
risk retention requirements. A
securitization transaction that is
collateralized solely (excluding
servicing assets) by FFELP loans that are
guaranteed as to at least 98 percent of
defaulted principal and accrued interest
would have its risk retention
requirement reduced to 2 percent.101
This means that if the lowest guaranteed
101 The definition of ‘‘servicing assets’’ is
discussed in Part II.B of this SUPPLEMENTARY
INFORMATION.
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amount for any FFELP loan in the pool
is 98 percent (i.e., a FFELP loan with
first disbursement between October
1993 and June 2006), the risk retention
requirement for the entire transaction
would be 2 percent. Similarly, under the
proposed rule, a securitization
transaction that is collateralized solely
(excluding servicing assets) by FFELP
loans that are guaranteed as to at least
97 percent of defaulted principal and
accrued interest (in other words, all
other securitizations collateralized
solely by FFELP loans) would have its
risk retention requirement reduced to 3
percent. Accordingly, if the lowest
guaranteed amount for any FFELP loan
in the pool is 97 percent (i.e., a FFELP
loan with first disbursement of July
2006 or later), the risk retention
requirement for the entire transaction
would be 3 percent.
The agencies believe this reduction in
the risk retention requirement is
appropriate because FFELP loans have a
guarantee on 97 percent to 100 percent
of defaulted principal and interest
under the FFELP guarantee programs
backed by the U.S. Department of
Education. Further, fairly extensive
post-default servicing must be properly
performed under FFELP rules as a
prerequisite to guarantee payment.
Sponsors would therefore be
encouraged to select assets for
securitization with high quality
underwriting standards. Furthermore,
appropriate risk management practices
would be encouraged as such proper
post-default servicing will be required
to restore the loan to payment status or
successfully collect upon the guarantee.
The agencies generally are not
proposing to expand general exemptions
from risk retention for other types of
assets, as described in commenters’
requests above. The agencies are not
creating an exemption for short-term
promissory notes issued by the StraightA Funding program. The agencies do
not believe such an exemption is
appropriate because of the termination
of the FFELP program and the presence
in the market of other sources of
funding for student lending.
Additionally, the agencies are not
proposing to exempt securitization
transactions that employ a mix of
government-guaranteed and direct
government obligations from risk
retention requirements, because the
agencies have not found evidence that
such securitization transactions
currently exist in the market and the
agencies have concerns about the
development of such transactions for
regulatory arbitrage purposes.
The agencies are not proposing an
exemption from risk retention for
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securitizations of assets issued,
guaranteed or insured by foreign
government entities. The agencies do
not believe it would be appropriate to
exempt such transactions from risk
retention if they were offered in the
United States to U.S. investors.
Finally, the agencies are not
proposing an exemption for the CDFI
program, because the agencies do not
believe such an exemption is necessary.
It does not appear that CDFI program
bonds are ABS. Although the proceeds
of the bonds flow to CDFIs for use in
funding community development
lending, and the community
development loans are ultimately the
source of repayment on the bond, they
do not collateralize the bonds.
Furthermore, even if the bonds were
ABS, the bonds are fully guaranteed by
the U.S. government and therefore
would qualify for other exemptions
from risk retention contemplated by
section 15G of the Exchange Act,
discussed below.
B. Exemption for Securitizations of
Assets Issued, Insured, or Guaranteed
by the United States or Any Agency of
the United States and Other Exemptions
Section 15G(c)(1)(G)(ii) of the
Exchange Act requires that the agencies,
in implementing risk retention
regulations, provide for a total or partial
exemption from risk retention for
securitizations of assets that are issued
or guaranteed by the United States or an
agency of the United States, as the
agencies jointly determine appropriate
in the public interest and the protection
of investors.102 The original proposal
would have contained full exemptions
from risk retention for any securitization
transaction if the ABS issued in the
transaction were (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 residential,
multifamily, or health care facility
mortgage loan securitizations discussed
above); or (3) fully guaranteed as to the
timely payment of principal and interest
by the United States or any agency of
the United States.
Consistent with section 15G(e)(3)(A)
of the Exchange Act, the original
proposal also would have provided an
exemption from risk retention 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.103 Additionally, the
original proposal provided an
exemption from risk retention,
consistent with section 15G(c)(1)(G)(iii)
of the Exchange Act,104 for securities (1)
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 or (2)
defined as a qualified scholarship
funding bond in section 150(d)(2) of the
Internal Revenue Code of 1986.
Commenters on the original proposal
generally believed that the proposed
exemptions would appropriately
implement the relevant provisions of
the Exchange Act. Two commenters
requested that the final rule clarify that
this exemption extends to securities
issued on a federally taxable as well as
on a federal tax-exempt basis. Similarly,
another commenter requested that the
agencies make it clear that, in order to
satisfy the qualified scholarship funding
bond exemption, it is sufficient that the
issuer be the type of entity described in
the definition of qualified scholarship
funding bond. One commenter did not
support the broad exemption for
municipal and government entities
because it believed the exemption
would provide an unfair advantage to
public mortgage insurance that is not
otherwise available to private mortgage
insurance. Three commenters requested
that the municipal exemption be
broadened to include special purpose
entities created by municipal entities
because such special purpose entities
are fully accountable to the public and
are generally created to accomplish
purposes consistent with the mission of
the municipal entity.
Another commenter said that the
exemption should be broadened to
cover securities issued by entities on
behalf of municipal sponsors because
the Commission has historically,
through no-action letters, deemed such
securities to be exempt under section
3(a)(2) of the Securities Act. This
commenter also asked that the final rule
or adopting release clarify that any
‘‘separate security’’ under Rule 131
under the Securities Act would also be
exempt under the risk retention rule.
103 Id.
102 Id.
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One commenter stated that an
exemption was appropriate in this
circumstance because state and
municipal issuers are required by state
constitutions to carry out a ‘‘public
purpose,’’ which excludes a profit
motive.
Several commenters recommended
the agencies broaden the exemption so
that all state agency and nonprofit
student lenders (regardless of section
150(d) qualification) would be exempt
from the rule. In general, these
commenters stated that an exemption
would be appropriate because requiring
risk retention by these entities would be
unnecessary and will cause them
financial distress, thus impairing their
ability to carry out their public-interest
mission. One commenter said that the
original proposal would make an
erroneous distinction between nonprofit
lenders that use section 150(d) and
those who do not because both types of
nonprofit student lenders offer the same
level of retained risk. Also, the group
noted that nonprofit and state agency
student lenders are chartered to perform
a specific public purpose—to provide
financing to prospective students who
want to enroll in higher education
institutions. However, one commenter
did not support a broad exemption for
nonprofit student lenders because there
did not appear to be anything inherent
in a nonprofit structure that would
protect investors in securitizations.
Further, this commenter noted that
there have been nonprofit private
education lenders whose business
model differs little from for-profit
lenders.
After considering the comments
received, the agencies are again
proposing the exemptions under section
15G(c)(1)(G)(ii) of the Exchange Act
without substantive modifications from
the original proposal. The agencies
believe that broadening the scope of the
exemption to cover private entities that
are affiliated with municipal entities,
but that are not themselves municipal
entities, would go beyond the statutory
scope of section 15G(c)(1)(G)(iii) of the
Exchange Act. Similarly, the agencies
are not expanding the originally
proposed exemptions to cover nonprofit
student loan lenders. The agencies
believe that nonprofit student loan
lending differs little from for-profit
student loan lending and that there does
not appear to be anything inherent in
the underwriting practices of nonprofit
student loan lending to suggest that
these securitizations align interests of
securitizers with interests of investors
so that an exemption would be
appropriate under section 15G(c)(1)(G)
or section 15G(e) of the Exchange Act.
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C. Exemption for Certain
Resecuritization Transactions
Under the original proposal, certain
ABS issued in resecuritization
transactions 105 (resecuritization ABS)
would have been exempted from the
credit risk retention requirements if they
met two conditions. First, the
transaction had to be collateralized
solely by existing ABS issued in a
securitization transaction for which
credit risk was retained as required
under the original proposal, or which
was otherwise exempted from credit
risk retention requirements (compliant
ABS). Second, the transaction had to be
structured so that it involved the
issuance of only a single class of ABS
interests and provided for a 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 of
ABS. Because the holder of a
resecuritization ABS structured as a
single-class pass-through security would
have a fractional undivided interest in
the pool of underlying ABS and in the
distributions of principal and interest
(including prepayments) from these
underlying ABS, the agencies reasoned
that a resecuritization ABS meeting
these requirements would not alter the
level or allocation of credit and interest
rate risk on the underlying ABS.
In the original proposal, the agencies
proposed to adopt this exemption under
the general exemption provisions of
section 15G(e)(1) of the Exchange
Act.106 The agencies noted that a
resecuritization transaction that created
a single-class pass-through would
neither increase nor reallocate the credit
risk inherent in that underlying
compliant ABS, and that the transaction
could allow for the combination of ABS
backed by smaller pools, and 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 a result,
the exemption for this type of
resecuritization could improve the
105 In a resecuritization transaction, the asset pool
underlying the ABS issued in the transaction
comprises one or more asset-backed securities.
106 As discussed above in Part IV of this
SUPPLEMENTARY INFORMATION, 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.
15 U.S.C. 78o–11(e)(1).
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access of consumers and businesses to
credit on reasonable terms.107
Under the original proposal, sponsors
of resecuritizations that were not
structured purely as single-class passthrough transactions would have been
required to meet the credit risk retention
requirements with respect to such
resecuritizations unless another
exemption for the resecuritization was
available. Thus, the originally proposed
rule would subject resecuritizations to
separate risk retention requirements that
separate the credit or pre-payment risk
of the underlying ABS into new
tranches.108
The agencies received a number of
comments on the resecuritization
exemption in the original proposal,
principally but not exclusively from
financial entities and financial trade
organizations. The commenters,
including investor members of one trade
organization, generally favored
expanding the resecuritization
exemption and allowing greater
flexibility in these transactions,
although individual commenters
differed in how broad a new exemption
should be. Further, while many
commenters generally supported the
first criterion for the proposed
exemption that the ABS used in the
resecuritization must be compliant with,
or exempt from, the risk retention rules,
they did not support the second
criterion that only a single class passthrough be issued in the resecuritization
transaction for the proposed exemption
to apply. In particular, they did not
believe that this condition would
107 See
Original Proposal, 76 FR at 24138.
example, under the proposed rules, the
sponsor of a 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
compliant 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.
Similarly, with regard to ABS structured to
protect against pre-payment risk or that are
structured to achieve sequential paydown of
tranches, the agencies reasoned that 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 exposed to a higher level
of credit risk than holders of shorter duration
classes. See Original Proposal, 76 FR at 24138
n.193.
108 For
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further the goal of improving
underwriting of the underlying assets,
although they believed that it would
unnecessarily restrict a source of
liquidity in the market place.
A few commenters asserted that
applying risk retention to
resecuritization of ABS that are already
in the market place, whether or not the
interests are compliant ABS, cannot
alter the incentives for the original ABS
sponsor to create high-quality assets.
Some commenters also stated that
resecuritizations allowed the creation of
specific tranches of ABS interests, such
as planned asset class securities, or
principal or interest only strips, that are
structured to meet specific demands of
investors, so that subjecting such
transactions to additional risk retention
(possibly discouraging the issuance of
such securities) could prevent markets
from efficiently fulfilling investor needs.
Commenters also noted that
resecuritization transactions allow
investors to sell ABS interests that they
may no longer want by creating assets
that are more highly valued by other
investors, thereby improving the
liquidity of these assets. Another
commenter advised that the rule should
encourage resecuritizations that
provided additional collateral or
enhancements such as insurance
policies for the resecuritization ABS.
Another commenter noted that
resecuritizations of mortgage backed
securities were an important technical
factor in the recent run up in prices and
that requiring additional risk retention
would chill the market unnecessarily.
Some comments suggested that the
agencies should expand the exemption
to some common types of
resecuritizations, but not apply it to
CDOs. To distinguish which should be
subject to the exemption, commenters
suggested not extending the exemption
to transactions with managed pools of
collateral, or limiting the types or
classes of ABS that could be
resecuritized, and the derivatives an
issuing entity could use. A few
commenters specifically stated that the
resecuritization exemption should be
extended to include sequential pay
resecuritizations or resecuritizations
structured to address prepayment risk, if
they were collateralized by compliant
ABS. Another commenter recommended
that the exemption include any
tranched resecuritizations (such as
typical collateralized mortgage
obligations) of ABS issued or guaranteed
by the U.S. government, the
Government National Mortgage
Associations or the Enterprises, as these
instruments were an important source of
liquidity for the underlying assets.
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Finally, one commenter requested
clarification as to whether the
resecuritizations of Enterprise ABS,
guaranteed by the Enterprises, would be
covered by the provision for Enterprises
in the original proposal. The agencies
are clarifying that to the extent the
Enterprises act as sponsor for a
resecuritization of their ABS, fully
guarantee the resulting securities as to
principal and interest, and meet the
other conditions the agencies are again
proposing, that provision would apply
to the Enterprise securitization
transaction.109
The agencies continue to believe that
the resecuritization exemption from the
original proposal is appropriate for the
reasons discussed in that proposal, and
above. Accordingly, the agencies are
again proposing this provision without
substantive change. Additionally, the
agencies have carefully considered
comments asking for expansion of the
resecuritization exemption. In this
respect, the agencies have considered
that sponsors of resecuritization
transactions would have considerable
flexibility in choosing what ABS
interests to include in an underlying
pool as well as in creating the specific
structures. This choice of securities is
essentially the underwriting of those
securities for selection in the underlying
pool. The agencies consider it
appropriate, therefore, to propose rules
that would provide sponsors with
sufficient incentive to choose ABS that
have lower levels of credit risk and to
not use a resecuritization to obscure
what might have been sub-par credit
performance of certain ABS. It is also
appropriate to apply the risk retention
requirements in resecuritization
transactions because resecuritization
transactions can result in re-allocating
the credit risk of the underlying ABS
interest. Taking into account these
considerations, the agencies believe that
requiring additional risk retention as the
standard for most resecuritization
transactions is consistent with the intent
of section 15G of the Exchange Act, both
in light of recent history and the specific
statutory requirement that the agencies
adopt risk retention standards for CDOs,
and similar instruments collateralized
by ABS.110
The agencies note that to qualify for
the proposed resecuritization
exemptions, the ABS that are
resecuritized would have to be
109 See proposed rule at § __.8. The wording of the
provision as proposed is not limited to just initial
Enterprise-sponsored securitization transactions but
would also apply to ABS created by Enterprisesponsored resecuritizations, as long as all the
proposed conditions are met.
110 See 15 U.S.C. 78o–11(c)(1)(F).
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compliant ABS. As the agencies noted
in the original proposal, section 15G of
the Exchange Act would not apply to
ABS issued before the effective date of
the agencies’ final rules,111 and that as
a practical matter, private-label ABS
issued before the effective date of the
final rules would typically not be
compliant ABS. ABS issued before the
effective date that meet the terms of an
exemption from the proposed rule or
that are guaranteed by the Enterprises,
however, could qualify as compliant
ABS.
The agencies also do not believe that
many of the commenters’ suggestions
for distinguishing ‘‘typical’’
resecuritizations from CDOs or other
higher risk transactions could be
applied consistently across transactions.
The agencies, however, are proposing a
modification to the original proposal in
an effort to address comments about
liquidity provision to the underlying
markets and access to credit on
reasonable terms while remaining
consistent with the purpose of the
statute. Certain RMBS resecuritizations
are designed to address pre-payment
risk for RMBS, because RMBS tend to
have longer maturities than other types
of ABS and high pre-payment risk. In
this market, investors often seek
securities structured to protect against
pre-payment risk and have greater
certainty as to expected life. At the same
time, these resecuritizations do not
divide again the credit risk of the
underlying ABS with new tranches of
differing subordination and therefore do
not give rise to the same concerns as
CDOs and similar resecuritizations that
involve a subsequent tranching of credit
risk.
Accordingly, the agencies are
proposing a limited expansion of the
resecuritization exemption to include
certain resecuritizations of RMBS that
are structured to address pre-payment
risk, but that do not re-allocate credit
risk by tranching and subordination
structures. To qualify for this
exemption, the transaction would be
required to meet all of the conditions set
out in the proposed rule. First, the
transaction must be a resecuritization of
first-pay classes of ABS, which are
themselves collateralized by first-lien
residential mortgage located in a state of
the United States or its territories.112
111 See id. at section 78o–11(i) (regulations
become effective with respect to residential
mortgage-backed ABS one year after publication of
the final rules in the Federal Register, and two
years for all other ABS).
112 Section 2 of the proposed rule defines ‘‘state’’
as having the same meaning as in section 3(a)(16)
of the Securities Exchange Act of 1934 (15 U.S.C.
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The proposal would define ‘‘first-pay
class’’ as a class of ABS interests for
which all interests in the class are
entitled to the same priority of principal
payment and that, at the time of closing
of the transaction, are entitled to
repayments of principal and payments
of interest prior to or pro-rata, except for
principal-only and interest only
tranches that are prior in payment, with
all other classes of securities
collateralized by the same pool of firstlien residential mortgages until such
class has no principal or notional
balance remaining.113 The proposed
rule also would allow a pool
collateralizing an exempted
resecuritization to contain servicing
assets.114
In addition, the proposed rule would
require that the first-pay classes of ABS
used in the resecuritization transaction
consist of compliant ABS. Further, to
qualify for the exemption any ABS
interest issued in the resecuritization
would be required to share pro rata in
any realized principal losses with all
other ABS holders of ABS interests
issued in the resecuritization based on
the unpaid principal balance of such
interest at the time the loss is realized.
The proposed rule would also require
the transaction to be structured to
reallocate pre-payment risk and
specifically would prohibit any
structure which re-allocates credit risk
(other than credit risk reallocated only
as a collateral consequence of
reallocating pre-payment risk). It would
also prohibit the issuance of an inverse
floater or any similarly structured class
of ABS as part of the exempt
resecuritization transaction. The
proposal would define ‘‘inverse floater’’
as an ABS interest issued as part of a
securitization transaction for which
interest or other income is payable to
the holder based on a rate or formula
that varies inversely to a reference rate
of interest.
The exclusion from the proposed
exemption of transactions involving the
issuance of an inverse floater class
would address the high risk of loss that
78c(a)(16)). Thus, the mortgages underlying the
ABS interest that would be re-securitized in a
transaction exempted under this provision must be
on property located in a state of the United States,
the District of Columbia, Puerto Rico, the Virgin
Islands, or any other possession of the United
States.
113 A single class pass-through ABS under which
an investor would have a fractional, undivided
interest in the pool of mortgages collateralizing the
ABS would qualify as a ‘‘first pay class’’ under this
definition.
114 The proposed definition of ‘‘servicing assets’’
is discussed in Part II of this Supplementary
Information.
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has been associated with these
instruments.
The agencies are proposing the
expanded exemptions from risk
retention for resecuritizations of firstpay classes of RMBS under the general
exemption provisions of section
15G(e)(1) of the Exchange Act, and
believe that the provision is consistent
with the requirements of this section.
The provisions that would limit the
exemption to resecuritizations of firstpay classes of RMBS, and the specific
prohibitions on structures that reallocate credit risk, would also help
minimize credit risk associated with the
resecuritization ABS and prevent the
transaction from reallocating existing
credit risk.
Request for Comment
73(a). Would the issuance of an
inverse floater class of ABS be necessary
to properly structure other classes of
ABS to provide adequate pre-payment
protection for investors as part of the
resecuritization transaction? 73(b).
Would this prohibition frustrate the
goals of the proposed exemption?
D. Other Exemptions From Risk
Retention Requirements
In the original proposal, the agencies’
requested comment about whether there
were other securitization transactions
not covered by the exemptions in the
original proposal that should be
exempted from risk retention. The
agencies received requests from
commenters for exemptions from risk
retention for some types of assets, as
discussed below. After carefully
considering the comments, the agencies
are proposing some additional
exemptions from risk retention that
were not included in the original
proposal.
1. Utility Legislative Securitizations
Some commenters on the original
proposal requested that the agencies
exempt ABS issued by regulated electric
utilities that are backed by stranded
costs, transition property, system
restoration property and other types of
property specifically created or defined
for regulated utility-related
securitizations by state legislatures
(utility legislative securitizations).
These commenters asserted that risk
retention for these transactions would
not encourage better underwriting or
otherwise promote the purposes of the
risk retention requirement, because a
utility legislative securitization can
generally only occur after findings by a
state legislature and a public service
commission that it is desirable in the
interest of utility consumers and after
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utility executives representing the
utility’s investors seek such financing.
According to commenters, the structure
is used to minimize the costs of
financing significant utility-related
costs, and the increase in the cost of
such financing that would result from
risk retention would not be warranted,
because it would not affect credit
quality of the underlying assets. Further,
commenters asserted that this type of
financing avoids the risk of poor
underwriting standards, adverse
selection and minimizes credit risk,
because the utility sponsor does not
choose among its customers for
inclusion or exclusion from the
transaction and because the financing
order mechanism, or choose order of
repayment.
The agencies have considered these
comments and are proposing to provide
an exemption from risk retention for
utility legislative securitizations.
Specifically, the re-proposed rule would
exempt any securitization transaction
where the ABS are issued by an entity
that is wholly owned, directly or
indirectly, by an investor-owned utility
company that is subject to the regulatory
authority of a state public utility
commission or other appropriate state
agency. Additionally, ABS issued in an
exempted transaction would be required
to be secured by the intangible property
right to collect charges for the recovery
of specified costs and such other assets
of the issuing entity. The proposed rule
would define ‘‘specified cost’’ to mean
any cost identified by a state legislature
as appropriate for recovery through
securitization pursuant to ‘‘specified
cost recovery legislation,’’ which is
legislation enacted by a state that:
• Authorizes the investor-owned
utility company to apply for, and
authorized the public utility
commission or other appropriate state
agency to issue, a financing order
determining the amount of specified
costs the utility will be allowed to
recover;
• Provides that pursuant to a
financing order, the utility acquires an
intangible property right to charge,
collect, and receive amounts necessary
to provide for the full recovery of the
specified costs determined to be
recoverable, and assures that the charges
are non-bypassable and will be paid by
customers within the utility’s historic
service territory who receive utility
goods or services through the utility’s
transmission and distribution system,
even if those customers elect to
purchase these goods or services from a
third party; and
• Guarantees that neither the state nor
any of its agencies has the authority to
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rescind or amend the financing order, to
revise the amount of specified costs, or
in any way to reduce or impair the value
of the intangible property right, except
as may be contemplated by periodic
adjustments authorized by the specified
cost recovery legislation.115
As a general matter, the agencies
believe that, although it falls somewhat
short of being an explicit state
guarantee, the financing order
mechanism typical in utility legislative
securitizations (by which, under state
law, the state periodically adjusts the
amount the utility is authorized to
collect from users of its distribution
network) would ensure to a sufficient
degree that adequate funds are available
to repay investors.
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2. Seasoned Loans
Some commenters on the original
proposal urged the agencies to create an
exemption for securitizations of loans
that were originated a significant period
of time prior to securitization (seasoned
loans) and that had remained current,
because underwriting quality would no
longer be as relevant to the credit
performance of such loans. Commenters
representing different groups provided
different suggestions on the length of
time required for a loan to be seasoned:
sponsors representing issuers suggested
a two-year seasoning period for all
loans, whereas commenters representing
investors suggested fully amortizing
fixed-rate loans should be outstanding
and performing for three years and for
adjustable-rate loans the time period
should depend on the reset date of the
loan.
The agencies believe that risk
retention as a regulatory tool to promote
sound underwriting is less relevant after
loans have been performing for an
extended period of time. Accordingly,
for reasons similar to the sunset
provisions in section 12(f) of the
proposed rule (as discussed in Part IV.F
of this Supplementary Information), the
agencies are proposing an exemption
from risk retention for securitizations of
seasoned loans that is similar to the
sunset provisions. The proposed rule
would exempt any securitization
transaction that is collateralized solely
(excluding servicing assets) by seasoned
loans that (1) have not been modified
since origination and (2) have never
115 The eligibility standards for the exemption are
similar to certain requirements for these
securitizations outlined in IRS Revenue Procedure
2005–62, 2005–2 C.B. 507, that are relevant to risk
retention. This Revenue Procedure outlines the
Internal Revenue Service’s requirements in order to
treat the securities issued in these securitizations as
debt for tax purposes, which is the primary
motivation for states and public utilities to engage
in such securitizations.
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been delinquent for 30 days or more.116
With respect to residential mortgages,
the proposed rule would define
‘‘seasoned loan’’ to mean a residential
mortgage loan that either (1) has been
outstanding and performing for the
longer of (i) five years or (ii) the period
until the outstanding principal balance
of the loan has been reduced to 25
percent of the original principal
balance; or (2) has been outstanding and
performing for at least seven years. For
all other asset classes, the proposed rule
would define ‘‘seasoned loan’’ to mean
a loan that has been outstanding and
performing for the longer of (1) two
years, or (2) the period until the
outstanding principal balance of the
loan has been reduced to 33 percent of
the original principal balance.
3. Legacy Loan Securitizations
Some commenters on the original
proposal recommended an exemption
from risk retention for securitizations
and resecuritizations of loans made
before the effectiveness of the final rule,
or legacy loans, arguing that risk
retention would not affect the
underwriting standards used to create
those loans.
The agencies are not proposing to
provide an exemption from risk
retention for securitizations of loans
originated before the effective date of
the rule (legacy loans). The agencies do
not believe that such securitizations
should be exempt from risk retention
because underwriting occurred before
the effective date of the rule. The
agencies believe that requiring risk
retention does affect the quality of the
loans that are selected for a
securitization transaction, as the risk
retention requirements are designed to
incentivize securitizers to select wellunderwritten loans, regardless of when
those loans were underwritten.
Furthermore, the agencies do not
believe that exempting securitizations of
legacy loans from risk retention would
satisfy the statutory criteria for an
exemption under 15G(e) of the
Exchange Act.117
4. Corporate Debt Repackagings
Several commenters urged the
agencies to adopt an exemption from
risk retention for ‘‘corporate debt
repackaging’’ 118 securitization
116 The definition of ‘‘servicing assets’’ is
discussed in Part II.B of this SUPPLEMENTARY
INFORMATION.
117 See 15 U.S.C. 78o–11(e).
118 According to commenters, corporate debt
repackagings are created by the deposit of corporate
debt securities purchased by the sponsoring
institution in the secondary market into a trust
which issues certificates backed by cash flows on
the underlying corporate bonds.
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transactions. One commenter asserted
that currently in corporate debt
repackaging transactions, depositors and
sponsors do not hold any interest in the
repackaging vehicle. These commenters
asserted that sponsors would not pursue
corporate debt repackagings if they were
required to retain risk, because it would
fundamentally change the dynamics of
these transactions and could raise
accounting and other issues. Another
commenter observed that corporate debt
obligations are, generally, full recourse
obligations of the issuing company and
the issuer of the corporate bonds bears
100 percent of the credit risk. The
commenters stated that adding an
additional layer of risk retention to a
repackaging of obligations that are
themselves the subject of 100 percent
risk retention by requiring the sponsor
of the repackaging transaction to retain
an additional 5 percent of the credit risk
would serve no regulatory purpose.
Another commenter asserted that not
granting an exemption for corporate
debt repackagings would reduce the
ability of investors to invest in tailored
repackaged securities and likewise
reduce funding and liquidity to the
detriment of access of businesses to
credit on reasonable terms.
The agencies are not proposing an
exemption from risk retention for
corporate debt repackagings. The
agencies do not believe an exemption is
warranted because the underlying assets
(the corporate bonds) are not ABS.
Regardless of the level of credit risk a
corporate debt issuer believes it holds
on its underlying corporate bonds, the
risk retention requirement would apply
at the securitization level, and the
sponsor of the securitization should be
required to hold 5 percent of the credit
risk of the securitization transaction.
Risk retention at the securitization level
for corporate debt repackagings aligns
the sponsor’s interests in selecting the
bonds in the pool with investors in the
securitization, who are often retail
investors.
5. ‘‘Non-Conduit’’ CMBS Transactions
Some commenters on the original
proposal requested that the agencies
include an exemption or special
treatment for ‘‘non-conduit’’ CMBS
transactions. Examples of ‘‘nonconduit’’ CMBS transactions include
single-asset transactions; singleborrower transactions; large loan
transactions (fixed and floating) with
pools of one to 10 loans; and large loan
transactions having only an investmentgrade component. Commenters asserted
that, because such transactions involve
very small pools of loans (or a single
loan), a prospective investor is able to
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scrutinize each loan and risk retention
would be unnecessary for investor
protection. In particular, commenters
noted that the CMBS menu option
would work only for ‘‘conduit’’ CMBS
securitizations in which originators of
commercial mortgage loans aggregate
loan pools of 10 to 100 loans.
Suggestions for the treatment of ‘‘nonconduit’’ CMBS transactions included:
• Providing a complete exemption for
single-asset transactions; singleborrower transactions; large loan
transactions (fixed and floating) with
pools of one to 10 loans; and large loan
transactions having only an investmentgrade component;
• Allowing mezzanine loans in single
borrower and floating rate CMBS
transactions to satisfy the risk retention
requirement and any PCCRA
requirements; and
• Exempting single borrower and
large loan transactions with less than a
certain number of loans.
The agencies are not proposing an
exemption from risk retention for ‘‘nonconduit’’ CMBS securitizations. While
the agencies do not dispute that the
smaller pools of loans in these
transaction allow for fuller asset-level
disclosure in offering documents and
could allow prospective investors the
opportunity to review each loan in the
pool, the agencies do not believe that
this fact alone is sufficient grounds to
satisfy the exemption standards of
section 15G of the Exchange Act.
Furthermore, the agencies do not
believe that there are significant
differences between ‘‘conduit’’ and
‘‘non-conduit’’ CMBS to warrant a
special exemption for ‘‘non-conduit’’
CMBS.
6. Tax Lien-Backed Securities
Sponsored by a Municipal Entity
One commenter on the original
proposal asserted that tax lien-backed
securitizations are not ABS under the
Exchange Act and should not be subject
to risk retention requirement. According
to this commenter, under state and
municipal law, all property taxes,
assessment and sewer and water charges
become liens on the day they become
due and payable if unpaid. These taxes,
assessments and charges, and any
related tax liens, arise by operation of
law and do not involve an extension of
credit by any party or any underwriting
decision on the party of the city. If the
agencies disagreed with the position
that tax lien securitizations are not ABS,
this commenter requested that the
agencies provide a narrowly tailored
exemption for any tax lien-backed
securitization transactions sponsored by
a municipality. In this regard, the
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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
limited involvement by persons in the
United States with respect to both assets
being securitized and the ABS sold in
connection with the transaction.
Finally, as originally proposed, the safe
harbor would not have been available
for any transaction or series of
transactions that, although in technical
compliance with the conditions of the
safe harbor, was part of a plan or
scheme to evade the requirements of
section 15G Exchange Act and the
proposed rules.
As set forth in the original proposal,
the risk retention requirement would
not apply to a securitization transaction
if: (1) The securitization transaction is
not required to be and is not registered
under the Securities Act; (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.
7. Rental Car Securitizations
persons; (3) neither the sponsor of the
One commenter on the original
securitization transaction nor the
proposal requested that the agencies
issuing entity is (i) chartered,
exempt rental car securitizations
incorporated, or organized under the
because of the extensive
overcollateralization required to support laws of the United States, or a U.S. state
or territory or (ii) the unincorporated
a rental car securitization, the on-going
branch or office located in the United
structural protections with respect to
collateral valuation, and the importance States of an entity not chartered,
incorporated, or organized under the
of the vehicles to the business
laws of the United States, or a U.S. state
operations of the car rental operating
or territory (collectively, a U.S.-located
company.
entity); (4) no more than 25 percent of
The agencies are not proposing an
exemption from risk retention for rental the assets collateralizing the ABS sold
in the securitization transaction were
car securitizations. Risk retention is
required of other sponsors that similarly acquired by the sponsor, directly or
indirectly, from a consolidated affiliate
rely on securitization for funding and
that sponsor securitizations with similar of the sponsor or issuing entity that is
a U.S.-located entity.119
overcollateralization protections and
Commenters on the original proposal
structural features. The agencies do not
believe that there are particular features generally favored the creation of a safe
harbor for certain foreign
of this type of securitization that would
securitizations. Several commenters,
warrant an exemption under the factors
however, requested that the exemption
that the agencies must consider in
be broadened. Specifically, several
section 15G(e) of the Exchange Act.
commenters noted that the U.S. risk
E. Safe Harbor for Foreign Securitization retention rules may be incompatible
Transactions
with foreign risk retention requirements,
The original proposal included a ‘‘safe such as the European Union risk
retention requirements, and requested
harbor’’ provision for certain
that the safe harbor be modified to more
securitization transactions based on the
readily facilitate cross-border
limited nature of the transactions’
compliance with varied foreign risk
connections with the United States and
retention requirements.
U.S. investors (foreign securitization
transactions). The safe harbor was
119 See infra note 112 for the definition of ‘‘state.’’
intended to exclude from the proposed
commenter argued that such
securitizations do not involve any of the
public policy concerns underlying the
risk retention requirement because the
tax liens arise by operation of law and
do not involve an extension of credit or
underwriting decisions on the part of
the city. As a result, this commenter
stated that applying the credit risk
retention rules would not further the
agencies’ stated goals of encouraging
prudent underwriting standards and
ensuring the quality of the assets
underlying a securitization transaction.
The agencies are not proposing an
exemption from risk retention for
securitizations of tax lien-backed
securities sponsored by municipal
entities. The agencies believe that there
is insufficient data to justify granting a
specific exemption. Furthermore, the
agencies are concerned that this type of
exemption could end up being overly
broad in its application and be used to
exempt sponsors of securitizations of
securities from programs, such as
Property Assessed Clean Energy
programs, that use a securitized ‘‘tax
lien’’ structure to fund and collect
consensual financing for property
improvements desired by private
property owners.
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Several commenters supported a
mutual recognition system for some
cross-border offerings. For example,
commenters recommended various
methodologies for establishing a mutual
recognition framework that would
permit non-U.S. securitizers to either
satisfy or be exempt from U.S. risk
retention requirements if a sufficient
minimum amount of a foreign
securitization complies with foreign risk
retention requirements that would be
recognized under such a framework. A
few commenters recommended that in
the absence of a mutual recognition
framework, a higher proceeds limit
threshold of 30 percent, or as much as
33 percent, would be more appropriate
to preserve cross-border market
liquidity, in at least some
circumstances. A few commenters also
requested clarification of how the
percentage value of ABS sold to U.S.
investors under the 10 percent proceeds
limit should be calculated.
The agencies are proposing a foreign
safe harbor that is similar to the original
proposal but modified to address some
commenter concerns. The proposal
makes a revision to the safe harbor
eligibility calculation to clarify that
interests retained by the sponsor may be
included in calculating the percentage
of ABS interests sold in the
securitization transaction that are sold
to U.S. persons or for the account or
benefit of U.S. persons. The proposed
safe harbor eligibility calculation also
would clarify that any ABS transferred
to U.S. persons or for the account or
benefit of U.S. persons, including U.S.
affiliates of non-U.S. sponsors, must be
included in calculating eligibility for the
safe harbor.
The agencies are again proposing a 10
percent limit on the value of classes of
ABS sold to U.S. persons for safe harbor
eligibility, similar to the original
proposal. The agencies continue to
believe that the proposed 10 percent
limit appropriately aligns the safe
harbor with the objective of the rule,
which is to exclude only those
transactions with limited effect on U.S.
interests, underwriting standards, risk
management practices, or U.S. investors.
In addition, the agencies are
concerned that expansion of the 10
percent limit would not effectively
address the concerns of foreign
securitization sponsors, some of whom
rely extensively on U.S. investors for
liquidity. However, the agencies also
believe that the proposed rule
incorporates sufficient flexibility for
sponsors with respect to forms of
eligible risk retention to permit foreign
sponsors seeking a significant U.S.
investor base to retain risk in a format
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that satisfies home country and U.S.
regulatory requirements. For example,
in response to comments from mortgage
securitizers in the United Kingdom who
use revolving trust structures, the
agencies are proposing to permit seller’s
interest to qualify as risk retention for
revolving master trusts securitized by
non-revolving assets. The agencies’
revisions to the original proposal that
are designed to provide flexibility to
foreign securitization sponsors that use
the revolving master trust structure are
discussed in detail in Part III.B.2 of this
SUPPLEMENTARY INFORMATION.
The agencies considered the
comments requesting a mutual
recognition framework and observe that
such a framework has not been
generally adopted in non-U.S.
jurisdictions with risk retention
requirements. The agencies believe that
given the many differences between
jurisdictions, finding comparability
among securitization frameworks that
place the obligation to comply with risk
retention requirements upon different
parties in the securitization transaction,
have different requirements for hedging,
risk transfer, or unfunded risk retention,
or otherwise vary materially, it likely
would not be practicable to construct
such a ‘‘mutual recognition’’ system that
would meet all the requirements of
section 15G of the Exchange Act.
Moreover, in several such jurisdictions,
the risk retention framework recognizes
unfunded forms of risk retention, such
as standby letters of credit, which the
agencies do not believe provide
sufficient alignment of incentives and
have rejected as eligible forms of risk
retention under the U.S. framework.
Request for Comment
74. Are there any extra or special
considerations relating to these
circumstances that the agencies should
take into account?
75(a). Should the more than 10
percent proceeds trigger be higher or
lower (e.g., 0 percent, 5 percent, 15
percent, or 20 percent)? 75(b). If so,
what should the trigger be and why?
75(c). Are the eligibility calculations
appropriate? 75(d). If not, how should
they be modified?
F. Sunset on Hedging and Transfer
Restrictions
As discussed in Part III.D of this
SUPPLEMENTARY INFORMATION, Section
15G(c)(1)(A) of the Exchange Act
provides that sponsors may not hedge or
transfer the risk retention interest they
are required to hold.120
120 15
U.S.C. 78o–11(c)(1)(A). As with other
provisions of risk retention, the agencies could
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The agencies originally proposed that
sponsors generally would have to hold
risk retention for the duration of a
securitization transaction. The proposal
did not provide any sunset provisions
after which the prohibitions on sale and
hedging of retained interests would
expire, though the proposal did
specifically include a question related to
including a sunset provision in the final
rule and requested commenter feedback.
While a few commenters representing
the investor community expressed
support for risk retention for the life of
the security, the majority of commenters
who discussed this topic in their letters
opposed risk retention lasting for the
duration of the transaction. Generally,
these commenters argued that credit
losses on underlying assets due to poor
underwriting tend to occur in the first
few years of the securitization and that
defaults occur less frequently as the
assets are seasoned. Additionally, they
asserted that the risk retention
requirement as proposed would reduce
liquidity in the financial system and
increase the amount of capital banks
would be required to hold, thereby
reducing credit availability and raising
borrowing costs for consumers and
businesses. Thus, they argued, a sunset
provision should be included in the
final rule to help offset the costs and
burden created by the retention
requirement. After the mandated risk
retention period, sponsors or their
consolidated affiliates would be allowed
to hedge or transfer to an unaffiliated
third party the retained interest or
assets.
Commenters proposed a variety of
suggestions for incorporating a sunset
provision in the final rule. Some favored
a blanket risk retention provision,
whereby retention of the interest would
no longer be required after a certain
period of time, regardless of the asset
class. They stated that a blanket sunset
requirement would be the easiest to
implement and dovetails with the
agencies’ stated goal of reducing
regulatory complexity. Among those
commenters advocating for a blanket
sunset, most stated that a three year
sunset provision would be ideal. A
subset of these commenters
acknowledged that three years could be
too long for some asset classes (such as
automobile ABS), however they
maintained that historical loss rates
show that this duration would be
appropriate for some of the largest asset
classes, in particular CMBS and RMBS.
They stated that, after three years, losses
provide an exemption under section 15G(e) of the
Exchange Act if certain findings were met. See id.
at section 78o–11(e).
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related to underwriting defects have
already occurred and any future credit
losses are typically attributed to
financial events or, in the case of RMBS,
life events such as illness or
unemployment, unrelated to the
underwriting quality. One commenter
estimated that a three-year sunset would
reduce the costs associated with risk
retention by 50 percent.
Other commenters suggested that the
sunset provision should vary by asset
class. While this might be more
operationally complex to implement
than a blanket sunset provision, they
stated it would be more risk sensitive as
it would take into account the fact that
different asset classes have varying
default rates and underlying exposure
durations (for example, 30 years for a
standard residential mortgage versus
five years for a typical automobile loan).
For example, commenters suggested a
range of risk retention durations for
RMBS, stating that anywhere from two
to five years would be appropriate.
Another commenter advocated that the
risk retention requirement for RMBS
should end at the later of five years or
when the pool is reduced to 25 percent
of its original balance. Similarly for
CMBS, some commenters suggested
requiring risk retention for only two or
three years in the final rule. A few
commenters stated that a sunset
provision should be based upon the
duration of the asset in question. For
instance, one commenter stated that
automobile ABS should have a sunset
provision of less than five years since
automobile loans are of such a short
duration, while another commenter
advocated using the average pool
duration to determine the length of
required risk retention.
The agencies have carefully
considered the comments, as well as
other information on credit defaults for
various asset classes in contemplating
whether a limit on the duration of the
risk retention requirement would be
appropriate. The agencies have
concluded that the primary purpose of
risk retention—sound underwriting—is
less likely to be effectively promoted by
risk retention requirements after a
certain period of time has passed and a
peak number of delinquencies for an
asset class has occurred.
Accordingly, the agencies are
proposing two categories of duration for
the transfer and hedging restrictions
under the proposed rule—one for RMBS
and one for other types of ABS. For all
ABS other than RMBS, the transfer and
hedging restrictions under the rule
would expire on or after the date that is
the latest of (1) the date on which the
total unpaid principal balance of the
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securitized assets that collateralize the
securitization is reduced to 33 percent
of the original unpaid principal balance
as of the date of the closing of the
securitization, (2) the date on which the
total unpaid principal obligations under
the ABS interests issued in the
securitization is reduced to 33 percent
of the original unpaid principal
obligations at the closing of the
securitization transaction, or (3) two
years after the date of the closing of the
securitization transaction.
Similarly, the agencies are proposing,
as an exception to the transfer and
hedging restrictions of the proposed rule
and section 15G of the Exchange Act, to
permit the transfer of the retained Bpiece interest from a CMBS transaction
by the sponsor or initial third-party
purchaser to another third-party
purchaser five years after the date of the
closing of the securitization transaction,
provided that the transferee satisfies
each of the conditions applicable to the
initial third-party purchaser under the
CMBS option (as described above in
Part III.B.5 of this SUPPLEMENTARY
INFORMATION).
The agencies believe the exemptions
to the prohibitions on transfer and
hedging for both non-residential
mortgage ABS and CMBS would help
ensure high quality underwriting
standards for the securitizers and
originators of non-residential mortgage
ABS and CMBS, would improve the
access of consumers and businesses to
credit on reasonable terms, and are in
the public interest and for the protection
of investors—and thus satisfy the
conditions for exceptions to the rule.121
After losses due to underwriting quality
occur in the initial years following a
securitization transaction, risk retention
does little to improve the underwriting
quality of ABS as most subsequent
losses are related to financial events or,
in the case of RMBS, life events not
captured in the underwriting process. In
addition, these exemptions would
improve access to credit for consumer
and business borrowers by increasing
potential liquidity in the non-residential
mortgage ABS and CMBS markets.
Because residential mortgages
typically have a longer duration than
other assets, weaknesses in
underwriting may show up later than in
other asset classes and can be masked
by strong housing markets. Moreover,
residential mortgage pools are uniquely
sensitive to adverse selection through
prepayments: If market interest rates
fall, borrowers refinance their mortgages
and prepay their existing mortgages, but
refinancing is not available to borrowers
121 15
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whose credit has deteriorated, so the
weaker credits become concentrated in
the RMBS pool in later years.
Accordingly, the agencies are proposing
a different sunset provision for RMBS
backed by residential mortgages that are
subject to risk retention. Under the rule,
risk retention requirements with respect
to RMBS would end on or after the date
that is the later of (1) five years after the
date of the closing of the securitization
transaction or (2) the date on which the
total unpaid principal balance of the
residential mortgages that collateralize
the securitization is reduced to 25
percent of the original unpaid principal
balance as of the date of the closing of
the securitization. In any event, risk
retention requirements for RMBS would
expire no later than seven years after the
date of the closing of the securitizations
transaction.
The proposal also makes clear that the
proposed rule’s restrictions on transfer
and hedging end if a conservator or
receiver of a sponsor or other holder of
risk retention is appointed pursuant to
federal or state law.
Request for Comment
76(a). Are the sunset provisions
appropriately calibrated for RMBS (i.e.,
later of five years or 25 percent, but no
later than seven years) and all other
asset classes (i.e., later of two years or
33 percent)? 76(b). If not, please provide
alternative sunset provision calibrations
and any relevant analysis to support
your assertions.
77(a). Is it appropriate to provide a
sunset provision for all RMBS, as
opposed to only amortizing RMBS?
77(b). Why or why not? 77(c). What
effects might this have on securitization
market practices?
G. Federal Deposit Insurance
Corporation Securitizations
The agencies are proposing an
additional exemption from risk
retention for securitization transactions
that are sponsored by the FDIC acting as
conservator or receiver under any
provision of the Federal Deposit
Insurance Act or Title II of the DoddFrank Act. This new exemption is being
proposed because such exemption
would help ensure high quality
underwriting and is in the public
interest and for the protection of
investors.122 These receivers and
conservators perform a function that
benefits creditors in liquidating and
maximizing the value of assets of failed
financial institutions for the benefit of
creditors and, accordingly, their actions
are guided by sound underwriting
122 See
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practices. Such receivers and
conservators do not originate loans or
other assets and thus are not engaged in
‘‘originate to distribute’’ activities that
led to poorly underwritten loans and
that were a significant reason for the
passage of section 941 of the DoddFrank Act. The quality of the assets
securitized by these receivers and
conservators and the ABS collateralized
by those assets will be carefully
monitored and structured so as to be
consistent with the relevant statutory
authority. Moreover, this exemption is
in the public interest because it would,
for example, allow the FDIC to
maximize the value of assets of a
conservatorship or receivership and
thereby reduce the potential costs of
financial institution failures to creditors.
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V. Reduced Risk Retention
Requirements and Underwriting
Standards for ABS Backed by
Qualifying Commercial, Commercial
Real Estate, or Automobile Loans
As contemplated by section 15G of
the Exchange Act, the original proposal
included a zero risk retention
requirement, or exemption, for
securitizations of commercial loans,
commercial real estate loans, and
automobile loans that met specific
proposed underwriting standards.123 All
three categories of proposed
underwriting standards contained two
identical requirements. First, a
securitization exempt from risk
retention under these proposed
provisions could be backed only by a
pool consisting entirely of assets that
met the underwriting standards.
Second, sponsors would be required to
repurchase any assets that were found
not to have met the underwriting
criteria at origination.
The agencies note the concern
expressed by some commenters with
respect to all three of these asset classes
that, for the residential mortgage asset
class and QRM, a significant portion of
the existing market would qualify for an
exemption from risk retention, whereas
in proposing the underwriting standards
for qualifying commercial loans,
commercial real estate loans, and
automobile loans, the agencies have
proposed conservative underwriting
criteria that will not capture an
equivalent portion of the respective
123 Pursuant to section 15G, only the Federal
banking agencies are proposing the underwriting
definitions in § __.14 (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 exemption and underwriting
standards in §§ __.15 through __.18 of the proposed
rules.
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markets. The agencies believe this is
appropriate because the homogeneity in
the securitized residential mortgage loan
market is dissimilar to the securitization
market for commercial loan or
commercial real estate loan asset
classes. Commercial loans and
commercial real estate loans typically
focus on a common set of borrower and
collateral metrics, but they are
individually underwritten and tailored
to a specific borrower or property, and
often certain terms developed in view
not only of the borrower’s financial
position but also the general business
cycle, industry business cycle, and
standards for appropriate leverage in
that industry sub-sector. The agencies
believe the additional complexity
needed to create underwriting standards
for every major type of business in every
economic cycle would be so great that
originators would almost certainly be
dissuaded from attempting to
implement them or attempting to stay
abreast of the numerous regulatory
revisions the agencies would be
required to issue from time to time.
Moreover, the proposed underwriting
standards establish clear requirements,
which are necessary to enable
originators, sponsors, and investors to
be certain as to whether any particular
loan meets the rule’s requirements for
an exemption. For the agencies to
expand the underwriting criteria in the
fashion suggested by some commenters,
the rules would need to accommodate
numerous relative standards. The
resulting uncertainty on behalf of
market participants whether any
particular loan was actually correctly
designated on a particular point of those
relative standards to qualify for an
exemption would be expected to
eliminate the market’s willingness to
rely on the exemption.
While there may be more
homogeneity in the securitized
automobile loan class, the agencies are
concerned that attempting to
accommodate a significantly large share
of the current automobile loan
securitization market would require
weakening the underwriting standards
to the point where the agencies are
skeptical that they would consistently
reflect loans of a low credit risk. For
example, the agencies note that current
automobile lending often involves no or
small down payments, financing in
excess of the value of the automobile
(which is itself a quickly depreciating
asset) to accommodate taxes and fees,
and a credit score in lieu of an analysis
of the borrower’s ability to repay. These
concerns as to credit quality are
evidenced by the high levels of credit
support automobile securitization
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sponsors build into their ABS, even for
so-called ‘‘prime’’ automobile loans.
Moreover, securitizers from the
automobile sector explicitly disavowed
any interest in using any underwritingbased exemptive approach unless the
agencies incorporated the industry’s
current model, which relies almost
exclusively on matrices of credit scores
(like FICO) and LTV. As is discussed in
the agencies’ original proposal, the
agencies are not persuaded that it would
be appropriate for the underwritingbased exemptions under the rule to
incorporate a credit score metric.
Request for Comment
78(a). In light of the significant
expansion of the proposed definition of
QRM, should the agencies similarly
significantly expand the type of loans
that would meet the qualifying
commercial, commercial real estate and
automobile loan exemptions? 78(b). If
so, please provide sufficient detailed
data regarding loan underwriting
criteria for each type of loan.
A. Qualifying Commercial Loans
The original proposal included
definitions and underwriting standards
for qualifying commercial loans (QCL),
that, when securitized in a pool of
solely QCLs, would have been exempt
from the risk retention requirements.
The proposed definition of commercial
loan generally would have included any
business loan that did not fit the
definition of a commercial real estate
loan or 1–4 family residential real estate
loan.
The proposed criteria for a QCL
included reviewing two years of past
data; forecasting two years of future
data; a total liabilities ratio less than or
equal to 50 percent; a leverage ratio of
less than or equal to 3.0 percent; a debt
service coverage ratio of greater than or
equal to 1.5 percent; a straight-line
amortizing payment; fixed interest rates;
a maximum five-year, fully amortizing
loan term; and representations and
warranties against the borrower taking
on additional debt. Additional
standards were proposed for QCLs that
are backed by collateral, including lien
perfection and collateral inspection.
Commenters generally asserted the
proposed criteria were too strict in one
or more areas. These commenters
proposed a general loosening of the QCL
standards to incorporate more loans,
and suggested the agencies develop
underwriting standards that would
encompass 20 to 30 percent of loans
currently issued. One commenter
asserted that if the criteria were not
loosened, the small chance a loan might
qualify as a QCL would not incentivize
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lenders to go through all the initial tests
and perform burdensome monitoring
after origination.
Comments on the specific
underwriting criteria included an
observation that some commercial loans
are offered with 15- or 20-year terms,
with adjustable interest rates that reset
every five years, and that such loans
should qualify for the exemption.
Another commenter suggested allowing
second lien loans to qualify if they met
all other underwriting criteria. A third
commenter suggested requiring
qualifying appraisals for all tangible or
intangible assets collateralizing a
qualified commercial loan.
In developing the underwriting
standards for the original proposal, the
agencies intended for the standards to
be reflective of very high-quality loans
because the loans would be completely
exempt from risk retention. The
agencies have carefully considered the
comments on the original proposal, and
generally believe that the high standards
proposed are appropriate for an
exemption from risk retention for
commercial loans. In addition, while
commercial loans do exist with longer
terms, the agencies do not believe such
long-term commercial loans are
necessarily as safe as shorter-term
commercial loans, as longer loans
involve more uncertainty about
continued repayment ability.
Accordingly, the agencies are proposing
underwriting standards for QCLs similar
to those in the original proposal.
However, as discussed below, the
agencies are proposing to allow blended
pools to facilitate the origination and
securitization of QCLs.
The agencies are proposing some
modifications to the standards in the
original proposal for QCLs. Under the
proposal, junior liens may collateralize
a QCL. However, if the purpose of the
commercial loan is to finance the
acquisition of tangible or intangible
property, or to refinance such a loan, the
lender would be required to obtain a
first lien on the property for the loan to
qualify as a QCL. While a commercial
lender should consider the appropriate
value of the collateral to the extent it is
a factor in the repayment of the
obligation, the agencies are declining to
propose a requirement of a qualifying
appraisal, so as not to increase the
burden associated with underwriting a
QCL.
Request for Comment
79(a). Are the revisions to the
qualifying commercial loan exemption
appropriate? 79(b). Should other
revisions be made?
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80(a). In evaluating the amortization
term for qualifying commercial loans, is
full amortization appropriate? 80(b). If
not, what would be an appropriate
amortization period or amount for highquality commercial loans?
B. Qualifying Commercial Real Estate
Loans
The original proposal included
underwriting standards for CRE loans
that would have been exempt from risk
retention (qualifying CRE loans, or
QCRE loans). The proposed standards
focused predominately on the following
criteria: The borrower’s capacity to
repay the loan; the value of, and the
originator’s security interest in, the
collateral; the loan-to-value (LTV) ratio;
and, whether the loan documentation
includes the appropriate covenants to
protect the value of the collateral.
Commenters generally supported the
exemption from risk retention in the
original proposal for QCRE loans.
However, many questioned whether the
QCRE loan exemption would be
practicable, due to the stringency of the
qualifying criteria proposed by the
agencies. Some commenters asserted
that less than 0.4 percent of conduit
loans that have been securitized since
the beginning of the CMBS market
would meet the criteria. Most
commenters requested that the agencies
loosen the QCRE loan criteria to allow
more loans to qualify for the exemption.
In the original proposal, a commercial
real estate (CRE) loan would have been
defined as any loan secured by a
property of five or more residential
units or by non-residential real
property, where the primary source of
repayment would come from the
proceeds of sale or refinancing of the
property or rental income from entities
not affiliated with the borrower. In
addition, the definition would have
specifically excluded land loans and
loans to real estate investment trusts
(REITs).
Three main concerns were expressed
by commenters with respect to the
definition of CRE loans in the original
proposal. First, some commenters
questioned why CRE loans must be
repaid from funds that do not include
rental income from an affiliate of the
borrower. These commenters said that
in numerous commercial settings,
particularly hotels and hospitals,
entities often rent commercial
properties from affiliated borrowers, and
those rental proceeds are used to repay
the underlying loans. These commenters
strongly encouraged the agencies to
remove the affiliate rent prohibition.
Second, some commenters questioned
the exclusion of certain land loans from
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the definition of CRE in the original
proposal. Specifically, these
commenters stated that numerous
CMBS securitizations include loans to
owners of a fee interest in land that is
ground leased to a third party who owns
the improvements and whose ground
lease payments are a source of income
for debt service payments on the loan.
These commenters suggested that the
agencies clarify that the exclusion did
not apply to such loans.
Third, many commenters criticized
the agencies for excluding loans to
REITs from the definition of CRE loans
in the original proposal. These
commenters asserted that mortgage
loans on commercial properties where
the borrower was a REIT are no riskier
than similar loans where the borrower
was a non-REIT partnership or
corporation and that a significant
portion of the CMBS market involves
underlying loans to finance buildings
owned by REITs. These commenters
requested that the agencies delete the
restriction against REITs, or in the
alternative clarify that the prohibition
only applies to loans to REITs that are
not secured by mortgages on specific
commercial real estate.
The agencies are proposing the CRE
definition from the original proposal
again, with some modifications to
address the commenter concerns
discussed above. Regarding affiliate
rental income, the agencies were
concerned when developing the original
proposal that a parent company might
lease a building to an affiliate and
manipulate the rental income so that the
loan on the building would meet the
requirements for a qualifying CRE loan.
However, the agencies did not intend to
exclude the types of hotel loans
mentioned by commenters from the CRE
loan definition, because the agencies do
not consider income from hotel guests
to be derived from an affiliate. The
agencies are therefore proposing to
specify that ‘‘rental income’’ in the CRE
loan definition would be any income
derived from a party who is not an
affiliate of the borrower, or who is an
affiliate but the ultimate income stream
for repayment comes from unaffiliated
parties (for example, in a hotel,
dormitory, nursing home, or similar
property).
Regarding land loans, the agencies are
concerned that weakening any
restriction on land loans would allow
for riskier QCRE loans, as separate
parties could own the land and the
building on the land and could make
servicing and foreclosure on the loan
more difficult. Therefore, the agencies
are continuing to propose to exclude all
land loans from the CRE loan definition.
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Finally, in developing the original
proposal, the agencies intended to not
allow unsecured loans to REITs, or
loans secured by general pools of REIT
assets rather than by specific properties,
to be qualifying CRE loans. However,
the agencies did not intend to exclude
otherwise valid CRE loans from the
definition solely because the borrower
was organized as a REIT structure. After
reviewing the comments and the
definition of CRE loan, the agencies
have decided to remove the language
excluding REITs in the proposed
definition.
The agencies divided the
underwriting criteria in the original
proposal into four categories: Ability to
repay, loan-to-value requirement,
valuation of the collateral, and risk
management and monitoring.
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1. Ability To Repay
The agencies proposed in the original
proposal a number of criteria relating to
the borrower’s ability to repay in order
for a loan to qualify as QCRE. The
borrower would have been required to
have a debt service coverage (DSC) ratio
of at least 1.7, or at least 1.5 for certain
residential properties or certain
commercial properties with at least 80
percent triple-net leases.124 The
proposed standards also would have
required reviewing two years of
historical financial data and two years
of prospective financial data of the
borrower. The loan would have been
required to have either a fixed interest
rate or a floating rate that was effectively
fixed under a related swap agreement.
The loan document also would have
had to prohibit any deferral of principal
or interest payments and any interest
reserve fund. The loan payment amount
had to be based on straight-line
amortization over the term of the loan
not to exceed 20 years, with payments
made at least monthly for at least 10
years of the loan’s term.
Numerous commenters objected to the
agencies’ proposed DSC ratios as too
conservative, and proposed eliminating
the DSC ratio, lowering qualifying DSC
ratios to a range between 1.15 and 1.40,
or establishing criteria similar to those
used by Fannie Mae or Freddie Mac to
fund multifamily real estate loans.
Many commenters stated that, if the
agencies retained the DSC ratios, they
should remove the triple-net-lease
requirement. Many of these commenters
stated that full service gross leases,
124 The original proposal defined a triple-net lease
as one in which the lessee, not the lessor, is
obligated to pay for taxes, insurance, and
maintenance on the leased property.
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rather than triple-net leases, are used
more often in the industry.125
Some commenters supported
replacing the proposed requirement to
examine two years of past and future
borrower data with one to gather two or
three years of historical financial data
on the property, not attempt to forecast
two years of future data and to allow
new properties with no operating
history to qualify. Many commenters
supported the requirement for fixed
interest rate loans for QCRE. However,
some commenters suggested expanding
the types of derivatives allowed to
convert a floating rate into a fixed rate.
Many commenters also supported the
restrictions on deferrals of principal and
interest and on interest reserve funds.
However, a few commenters supported
allowing some interest-only loans or
interest-only periods, in connection
with a lower LTV ratio (such at 50
percent).
Many commenters objected to the
minimum length and amortization of
QCRE loans. These commenters said
that 3, 5, and 7-year CRE loans have
become common in the industry, and so
a minimum 10-year term would
disqualify numerous loans. In addition,
most commenters supported a longer
amortization period for QCRE loans,
such as 25 or 30 years. Some
commenters also proposed replacing the
amortization requirement with a
maximum LTV at maturity (based on
value at origination) that is lower than
LTV at origination, which would require
some amortization of the loan principal.
After considering the comments on
the underwriting criteria for QCREs, the
agencies are proposing criteria similar to
that of the original proposal, with some
modifications. Based on a review of
underwriting standards and
performance data for multifamily loans
purchased by the Enterprises, the
agencies are proposing to require a 1.25
DSCR for multifamily properties to be
QCRE.126 After review of the comments
and the Federal banking agencies’
historical standards for conservative
CRE lending,127 for loans other than
qualifying multifamily property loans,
the agencies are proposing to retain the
125 In a full-service gross lease, the lessor pays for
taxes, maintenance, and insurance (presumably
covering the additional costs by charging a higher
rental amount to the lessee than under a triple-net
lease).
126 The agencies reviewed origination volume and
performance history, as tracked by the TREPP
CMBS database, for multifamily loans securitized
from 2000 through 2011.
127 These standards include the ‘‘Interagency
Guidelines for Real Estate Lending.’’ 12 CFR part
34, subpart D, Appendix A (OCC); 12 CFR part 208,
subpart C, Appendix A (FRB); 12 CFR part 365,
Appendix A (FDIC).
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57981
1.5 DSCR for leased QCRE loans and 1.7
for all other QCREs. As discussed
below, removing the criterion on triplenet leases should allow more loans to
qualify for an exemption with the 1.5
DSCR requirement, rather than the 1.7
DSCR requirement that would have
applied under the original proposal.
The agencies considered the
comments requesting a debt yield
requirement, but have decided not to
include that in the proposed rule.
Historically, DSCR has been, and
continues to be, widely used in CRE
lending. Debt yield is a relatively recent
concept that was not tracked in many
historic CMBS deals, which makes it
difficult for the agencies to calculate
historical performance and determine
what the appropriate level should be for
a CRE loan exempt from risk retention.
The agencies recognize that the DSCR is
not a perfect measure, particularly in
low interest rate environments.
However, the agencies also do not want
to introduce a relatively new
methodology into the CRE market
without long-term data to support the
appropriateness of that measure.
Based on the agencies’ further review
of applicable data, it appears that a
significant number of leases are written
as full-service gross leases, not triple-net
leases, and that difference should not
preclude treatment as a QCRE loan.
Since the proposed underwriting
requirements are based on net operating
income (NOI), whether a tenant has a
triple-net lease or full-service gross lease
should not significantly affect the
borrower’s NOI.
The agencies propose to continue to
require that the analysis of whether a
loan is a QCRE be made with respect to
the borrower and not be limited to the
property only. While the agencies
observe that some CRE loans are nonrecourse, others include guarantees by
the borrowers. The agencies are
concerned that focusing solely on the
property could be problematic in cases
where the borrower may have other
outstanding commitments that may lead
the borrower to siphon cash flow from
the underwritten property to service the
other commitments. By analyzing the
borrower’s position, and not solely the
property’s income, the underwriting
should better address this risk. The
agencies believe that two years of
historical data collection and two years
of forecasted data are appropriate, and
that properties with less than two years
of operating history should not qualify
as QCRE loans. The longer a property
has been operating, particularly after the
first few years of operation, the better
the originator can assess the stability of
cash flows from the property going
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forward. New properties present
significant additional risks and loans on
those properties generally should not be
exempt from risk retention.
The proposal would continue to
require that the interest rate on a QCRE
loan be fixed or fully convertible into a
fixed rate using a derivative product.
The agencies are not proposing to allow
other types of derivatives because of
concerns about transparency with other
types of derivative products, including
mixed derivative products. For example,
if the agencies allowed a derivative that
established an interest rate cap, it may
not be clear to investors whether a loan
was underwritten using the current
market rate or the maximum rate
allowed under the interest rate cap. The
agencies are also proposing to retain
from the original proposal the
requirement not to include interest-only
loans or interest-only periods in QCRE
loans. The agencies believe that interestonly loans or interest-only periods are
associated with higher credit risk. If a
borrower is not required to make any
form of principal payment, even with a
25-year amortization period, it raises
questions as to the riskiness of the loan,
and would be inappropriate for
qualifying CRE loan treatment.
The agencies are proposing some
modifications from the original proposal
to the standards for QCRE loan terms.
The agencies recognize that there are
CRE loans with amortization periods in
excess of 20 years. Allowing a longer
amortization period reduces the amount
of principal paid on the CRE loan before
maturity, which can increase risks
related to having to refinance a larger
principal amount than would be the
case for a CRE loan with a shorter
amortization period. Because the
agencies believe exemptions from risk
retention should be available only for
the most prudently underwritten CRE
loans, the agencies believe it is
appropriate to consider the risks of an
overly long amortization period for a
QCRE. In balancing those risks with
commenters’ concerns, the agencies are
proposing to increase the amortization
period to 30 years for multifamily
residential QCRE loans and to 25 years
for all other QCRE loans.
The agencies are continuing to
propose to set a 10-year minimum
maturity for QCRE loans. The agencies
are concerned that introducing terms
shorter than 10 years, such as three or
five years, may create improper
underwriting incentives and not create
the low-risk CRE loans intended to
qualify for the exemption. When making
a short-term CRE loan, an originator
may focus only on a short timeframe in
evaluating the stability of the CRE
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underlying the loan in an industry that
might be at or near the peak of its
business cycle. In contrast, a 10-year
maturity CRE loan allows for
underwriting through a longer business
cycle, including downturns that may
not be appropriately captured when
underwriting to a three-year time
horizon.
2. Loan-to-Value Requirement
The agencies proposed in the original
proposal that the combined loan-tovalue ratio (CLTV) for QCRE loans be
less than or equal to 65 percent (or 60
percent for certain valuation
assumptions).
Many commenters recognized the
value in setting LTV ratio requirements
in CRE underwriting. While some
commenters supported the agencies’
proposed ratios, others did not. Some
commenters suggested that higher LTV
ratios should be allowed in the QCRE
standards, generally between 65 percent
and 80 percent, particularly for
properties in stable locations with
strong historical financial performance.
One commenter suggested lower LTVs
for properties that may be riskier.
Numerous commenters suggested taking
a different approach by setting
maximum LTVs at origination and
maturity, with a maturity LTV aimed at
controlling the risk that the borrower
would not be able to refinance. A
number of commenters also objected to
setting the CLTV ratio at 65 percent.
These commenters said that many
commercial properties involve some
form of subordinate financing. Some
commenters proposed eliminating the
CLTV ratio entirely and thus allow
borrowers to use non-collateralized debt
to finance the properties. Other
commenters proposed establishing a
higher CLTV ratio (such as 80 percent)
and allow for non-QCRE second liens on
the properties.
The agencies have considered the
comments on LTV for QCRE loans and
are proposing to modify this aspect of
QCRE underwriting standards from the
standard in the original proposal by
proposing to establish a maximum LTV
ratio of 65 percent for QCRE loans. The
agencies also are proposing to allow up
to a 70 percent CLTV for QCRE loans.
The more equity a borrower has in a
CRE project, generally the lower the
lender or investor’s exposure to credit
risk. Overreliance on excessive
mezzanine financing instead of equity
financing for a CRE property can
significantly reduce the cash flow
available to the property, as investors in
mezzanine finance often require high
rates of return to offset the increased
risk of their subordinate position. In
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proposing underwriting criteria for the
safest CRE loans that would be exempt
from risk retention requirements, the
agencies believe a 70 percent CLTV cap
is appropriate, which would require the
borrower to have at least 30 percent
equity in the project to help protect
securitization investors against losses
from declining property values and
potential defaults on the CRE loans.
The agencies are also proposing to
retain the requirement that the
maximum CLTV ratio be lowered by 5
percent if the CRE property was
appraised with a low capitalization
(cap) rate. Generally, assuming a low
cap rate will inflate the appraised value
of the CRE property and thus increase
the amount that can be borrowed given
a fixed LTV or CLTV. Therefore, such a
loan would have a maximum 60 percent
LTV and 65 percent CLTV. In addition,
to address the commenters’ concerns
about high cap rates, the agencies are
proposing that the cap rates used in CRE
appraisals be disclosed to investors in
securitizations that own CRE loans on
those properties.
The agencies are declining to propose
requirements for LTVs or CLTVs at both
origination and maturity. The agencies
are concerned that introducing the
concept of front-end and back-end LTV
ratios, rather than using straight-line
amortization, would allow borrowers to
make nominal principal payments in
early years and back-load a large
principal payment toward maturity. The
effect would be to significantly increase
the riskiness of the CRE loan at
maturity, rather than if the loan had
been underwritten to provide straightline amortization throughout its life.
Therefore, the agencies have decided
not to propose to include this
amortization approach in the revised
proposal and instead continue to
propose the straight-line amortization
requirement.
3. Collateral Valuation
In the original proposal, the agencies
proposed to require an appraisal and
environmental risk assessment for every
property serving as collateral for a
QCRE. Commenters strongly supported
both the valuation appraisal and
environmental risk assessment for all
QCRE properties. Many commenters
indicated this is already standard
industry practice. The agencies are
continuing to include this requirement
in the proposed rule.
4. Risk Management and Monitoring
The original proposal would have
required that a QCRE loan agreement
require borrowers to supply certain
financial information to the sponsor and
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servicer. In addition, the agreement
would have had to require lenders to
take a first lien in the property and
restrict the ability to pledge the property
as collateral for other loans.
Many commenters supported the risk
management provisions for supplying
financial information. Some
commenters requested clarification that
such information should relate to the
property securing the QCRE loan rather
than financial information on the
borrower. These commenters said that
most CRE loans are non-recourse,
making the property the sole source of
repayment and thus its financial
condition as far more important than the
borrower’s condition.
Commenters supported the first-lien
requirement. In addition, some
commenters requested removing the
restriction on granting second liens on
the property to allow borrowers access
to subordinate financing. These
commenters suggested establishing a
CLTV to restrict the total debt on the
property. Finally, some commenters
supported the requirement that a
borrower retain insurance on the
property up to the property value, while
other commenters supported a
requirement to have insurance only for
the replacement cost of the property.
The agencies are proposing to modify
the requirement in the original proposal
that the borrower provide information to
the originator (or any subsequent
holder) and the servicer, including
financial statements of the borrower, on
an ongoing basis. The agencies believe
that the servicer would be in the best
position to collect, store, and
disseminate the required information,
and could make that information
available to holders of the CRE loans.
Therefore, to reduce burden on the
borrowers, the agencies are not
proposing a requirement to provide this
information directly to the originator or
any subsequent holder.
The agencies are retaining the
proposed requirement from the original
proposal that the lender obtain a first
lien on the financed property. The
agencies note that most CRE loan
agreements allow the lender to receive
additional security by taking an
assignment of leases or other occupancy
agreements on the CRE property, and
the right to enforce those leases in case
of a breach by the borrower. In addition,
the agencies observe that standard CRE
loan agreements also often include a
first lien on all interests the borrower
has in or arising out of the property
used to operate the building (for
example, furniture in a hotel). The
agencies believe these practices enhance
prudent lending and therefore would be
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appropriate to include this blanket lien
requirement on most types of borrower
property to support a QCRE loan. There
would be an exception for purchasemoney security interests in machinery,
equipment, or other borrower personal
property.
The agencies continue to believe that
as long as the machinery and equipment
or other personal property subject to a
purchase-money security interest is also
pledged as additional collateral for the
QCRE loan, it would be appropriate to
allow such other liens. In addition, the
proposal would restrict junior liens on
the underlying real property and leases,
rents, occupancy, franchise and license
agreements unless a total CLTV ratio
was satisfied.
The agencies are continuing to
propose a requirement that the borrower
maintain insurance against loss on the
CRE property at least up to the amount
of the CRE loan. The agencies believe
that the insurance requirement should
serve to protect the interests of investors
and the qualifying CRE loan in the event
of damage to the property. Insuring only
the replacement cost would not
sufficiently protect investors, who may
be exposed to loss on the CRE loan from
significantly diminished cash flows
during the period when a damaged CRE
property is being repaired or rebuilt.
Although commenters were
concerned that few CMBS issuers will
be able to use this exemption due to the
conservative QCRE criteria, the agencies
are keeping many of the same
underwriting characteristics for the
reasons discussed at the beginning of
Part V of this Supplementary
Information.
Request for Comment
81(a). Is including these requirements
in the QCRE exemption appropriate?
81(b). Why or why not?
82. The agencies request comment on
the proposed underwriting standards,
including the proposed definitions and
the documentation requirements
C. Qualifying Automobile Loans
The original proposal included
underwriting standards for automobile
loans that would be exempt from risk
retention (qualifying automobile loans,
or QALs). Some commenters proposed
including an additional QAL-lite option,
which would incorporate less stringent
underwriting standards but be subject to
a 2.5 percent risk retention amount
based on a matrix of borrower FICO
scores, loan terms and LTVs of up to
135 percent. The agencies are declining
to propose a QAL-lite standard to avoid
imposing a regulatory burden of
monitoring multiple underwriting
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standards for this asset class. However,
as discussed below, the agencies are
proposing to allow blended pools of
QALs and non-QALs, which should
help address commenters’ concerns.
The definition of automobile loan in the
original proposal generally would have
included only first-lien loans on light
passenger vehicles employed for
personal use. It specifically would have
excluded loans for vehicles for business
use, medium or heavy vehicles (such as
commercial trucks and vans), lease
financing, fleet sales, and recreational
vehicles such as motorcycles. The
underwriting standards from the
original proposal focused predominately
on the borrower’s credit history and a
down payment of 20 percent.
While some commenters supported
the definition of automobile loan, others
stated it was too narrow. These
commenters suggested expanding the
definition to include motorcycles
because they may not be used solely as
recreational vehicles. In addition,
commenters suggested allowing vehicles
purchased by individuals for business
use, as it may be impossible to monitor
the use of a vehicle after sale.
Commenters representing sponsors also
supported allowing automobile leases to
qualify as QALs, with corresponding
technical changes. In addition, a few
commenters supported expanding the
definition to include fleet purchases or
fleet leasing, on the basis that these
leases or sales are generally with
corporations or government entities
with strong repayment histories.
The agencies have considered these
comments and are proposing a
definition of automobile loans for QAL
underwriting standards that is
substantially similar to the definition in
the original proposal. The agencies
believe it continues to be appropriate to
restrict the definition of automobile loan
to not include loans on vehicles that are
more frequently used for recreational
purposes, such as motorcycles or other
recreational vehicles. The agencies also
do not believe it would be appropriate
to expand the exemption to include
vehicles used for business purposes, as
the risks and underwriting of such loans
differ from those of vehicles used for
personal transportation. For example, a
car or truck used in a business may
endure significantly more wear and
depreciate much faster than a vehicle
used only for normal household use.
The agencies are not proposing to
expand the definition to include
automobile leases. While the difference
between an automobile purchase and a
lease may not be significant to a
customer, leases represent a different set
of risks to securitization investors. As
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one example, at the end of a lease, a
customer has the right to return the
automobile, and the securitization may
suffer a loss if the resale price of that
automobile is less than expected. In an
automobile loan securitization, the
customer owns the vehicle at the end of
the loan term, and cannot return it to
the dealer or the securitization trust.
In the original proposal, the agencies
proposed conservative underwriting
standards, including a 36 percent DTI
requirement, a 20 percent down
payment requirement, and credit history
standards. Generally, commenters
opposed the QAL criteria as too
conservative, and asserted that less than
1 percent of automobile loans would
qualify. Even those commenters who
otherwise supported the conservative
QAL underwriting suggested some
revisions would be necessary to bring
them in line with current market
standards. Automobile sponsor
commenters acknowledged that the
agencies’ proposed terms would be
consistent with very low credit risk, or
‘‘super-prime’’ automobile loans, but
believed that the standard should be set
at the ‘‘prime’’ level, consistent with
low credit risk. In addition, commenters
criticized the agencies for applying to
QALs underwriting criteria similar to
those they applied to QRMs and
unsecured lending. Automobile sponsor
commenters stated that automobile
loans are significantly different from
mortgage loans, as they are smaller and
shorter in duration and have readilysalable collateral. Investor commenters
supported a standard that was above
‘‘prime,’’ but indicated that they could
support a standard that included loans
that did not meet the very conservative
‘‘super-prime’’ QAL criteria proposed by
the agencies.
Although the agencies have taken into
consideration the comments that these
standards do not reflect current
underwriting practices, the agencies
generally do not believe it would be
appropriate to include a standard based
on FICO scores in the QAL underwriting
standards. Further, as discussed in Part
III.B.1 of this SUPPLEMENTARY
INFORMATION, the agencies have revised
the risk retention requirements to
address some of the concerns about risk
retention for automobile securitizations
to better enable sponsors of automobile
securitizations to comply with the risk
retention requirements in a manner
consistent with their existing and
current practices.
1. Ability To Repay
The agencies proposed in the original
proposal for QALs a debt-to-income
(DTI) ratio not in excess of 36 percent
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of a borrower’s monthly gross income.
Originators would have been required to
verify a borrower’s income and debt
payments using standard methods.
Many commenters opposed including a
DTI ratio as part of the underwriting
criteria for QALs. These commenters
believed that the significant additional
burden of collecting documents to verify
debts and income would far outweigh
any benefit, and could have the
unanticipated result of only applying
the burden to the most creditworthy
borrowers whose loans could
potentially qualify for QAL status. A
few commenters asserted that it was
nearly impossible to check information
such as required alimony or child
support. In addition, these commenters
were concerned about potentially
changing DTIs between origination and
securitization. Commenters also
asserted that in practice, only the most
marginal of automobile lending used
income or employment verification.
Some automobile sponsor commenters
said the industry does not use DTIs in
prime automobile origination because
they do not believe it is predictive of
default, and that the agencies should
instead adopt the established industry
practice of setting FICO score thresholds
as an indicator of ability to repay.
The agencies have considered these
comments, but continue to believe that
assessing a borrower’s ability to repay is
important in setting underwriting
criteria to identify automobile loans that
would not be subject to risk retention.
DTI is a meaningful figure in calculating
a customer’s ability to repay a loan, and
therefore the agencies continue to
propose the same DTI requirement as in
the original proposal. As discussed in
more detail, the agencies also observe
that they generally do not believe it
would be appropriate to include a
standard based on FICO scores in the
QAL underwriting standards, because it
would tie a regulatory requirement to
third party, private industry models.
2. Loan Terms
Under the original proposal, QAL
interest rates and payments would have
had to be fixed over the term of the loan.
In addition, the loan would have had to
be amortized on a straight-line basis
over the term. Loans could not have
exceeded five years (60 months); for
used car loans, the maximum term
would have been one year shorter for
every year difference between the
current year and the used car’s model
year. Furthermore, the terms would
have required that the originator, or
agent, to retain physical possession of
the title until full repayment.
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While commenters supported the
proposed requirements for fixed interest
rates and fixed monthly payments, most
commenters opposed one or more of the
additional proposed QAL loan terms.
The straight-line amortization
requirement was the most problematic
issue for commenters. Commenters
asserted that automobile loans are
generally amortized using the simple
interest method with fixed, level
payments and that the simple interest
method provides that earlier payments
would amortize less principal, and later
payments would amortize more
principal, rather than a straight-line
amortization as proposed by the
agencies.
In addition, many commenters were
concerned that numerous states require
the vehicle’s owner (borrower) to retain
the physical title, and that some states
are moving to issue electronic titles that
cannot have a physical holder. These
commenters suggested revising the
proposed rule to either remove the
requirement, or condition it on
compliance with applicable state law.
Many commenters also opposed the
60-month maximum loan term, stating
that current industry standards allow for
72-month loans. Some commenters
believed that the used-car restrictions
were too harsh, citing the ‘‘certified preowned’’ programs available for most
used cars and longer car lives in general.
These commenters suggested either
removing the used car term restriction,
or else loosening the standard to
exclude from QALs used cars over six
years old, rather than over five years
old, as proposed by the agencies.
Commenters also suggested a technical
change to require the first payment
within 45 days of the contract date
rather than on the closing date.
The agencies have considered these
comments and are proposing the QAL
standards with some modifications to
the original proposal’s standards.
Instead of a straight-line amortization
requirement, the agencies are proposing
a requirement that borrowers make level
monthly payments that fully amortize
the automobile loan over its term.
Second, the agencies are replacing the
requirement in the original proposal
that the originator retain physical title
with a proposed requirement that the
lender comply with appropriate state
law for recording a lien on the title.
Third, the agencies are proposing to
expand the maximum allowable loan
term for QALs to the lesser of six years
(72 months) or 10 years less the
vehicle’s age (current model year less
vehicle’s model year). Due to this
modification, there would no longer be
a distinction between new vehicles and
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used vehicles for the QAL definition.
Finally, the agencies are proposing that
payment timing be based on the contract
date.
3. Reviewing Credit History
In the original proposal, an originator
would have been required to verify,
within 30 days of originating a QAL,
that the borrower was not 30 days or
more past due; was not more than 60
days past due over the past two years;
and was not a judgment debtor or in
bankruptcy in the past three years. The
agencies also proposed a safe harbor
requiring the originator to review the
borrower’s credit reports from two
separate agencies, both showing the
borrower complies with the past-due
standards. Also, the agencies proposed
a requirement that all QALs be current
at the closing of the securitization.
Commenters were concerned that
these criteria in the original proposal
were so strict as to require them to
follow the safe harbor. They indicated
substantial risk that they may make a
QAL, but then within 30 days after the
loan, review the credit history and note
a single 30-day late payment, thus
disqualifying the loan for QAL status.
To avoid this outcome, commenters
(including some investors) suggested
removing the 30-day past due criteria,
also citing their belief that many
otherwise creditworthy borrowers could
have inadvertently missed a single
payment within that timeframe. Some
sponsor commenters favored
elimination of the credit disqualification
standards entirely in favor of a FICO
cutoff; some investor commenters
acknowledged the established role of
FICO but favored maintaining most of
the disqualification standards in
addition to FICO.
On the assumption that all originators
would rely on the credit report safe
harbor, commenters asserted that the
requirement to obtain reports from two
separate credit reporting agencies
unnecessarily increased costs. These
commenters stated that so much
information is shared among the credit
reporting agencies, that two credit
reports are no more predictive than one
report of the creditworthiness of a
borrower. The commenters also stated
that this report should be obtained
within 30 days of the contract date,
rather than within 90 days as proposed.
Some commenters also opposed the
requirement in the original proposal
that borrowers remain current when the
securitization closes. These commenters
stated that securitizations have a
‘‘cutoff’’ date before the closing date,
when all the QALs would be pooled and
information verified. It would be
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possible for a loan to become late
between the cutoff and closing date
without the sponsor knowing until after
closing. Instead, sponsors suggested
replacing the proposed rule requirement
with a representation made by the
sponsor that no loan in the securitized
pool is more than 30 days past due at
cutoff, with the securitizer being
required to verify that representation for
each loan no more than 62 days from
the securitization’s closing date.
The agencies believe that a QAL
should meet conservative underwriting
criteria, including that the borrower not
be more than 30 days late. However, to
reduce the burden associated with
reviewing credit reports for those
delinquencies, the agencies are
proposing to require only one credit
report rather than two, and that the
report be reviewed within 30 days of the
contract date, as requested by
commenters. The agencies are proposing
the same requirements as in the original
proposal for verification that the
automobile loan is current when it is
securitized. The agencies believe a
securitization exempt from risk
retention should contain only current
automobile loans.
Finally, the agencies are not
proposing requirements that would rely
on proprietary credit scoring systems or
underwriting systems. The agencies
recognize that much of the current
automobile lending industry relies
heavily or solely on a FICO score to
approve automobile loans. However, the
agencies do not believe that a credit
score alone is sufficient underwriting
for a conservative automobile loan with
a low risk of default. Furthermore, the
agencies do not believe it is appropriate
to establish regulatory requirements that
use a specific credit scoring product
from a private company, especially one
not subject to any government oversight
or investor review of its scoring model.
The agencies believe that the risks to
investors of trusting in such proprietary
systems and models weighs against this
alternative, and does not provide the
transparency of the bright line
underwriting standards proposed by the
agencies.
4. Loan-to-Value
In the original proposal, the agencies
proposed to require automobile loan
borrowers to pay 100 percent of the
taxes, title costs, and fees, in addition to
20 percent of the net purchase price
(gross price less manufacturer and
dealer discounts) of the car. For used
cars, the purchase price would have
been the lesser of the actual purchase
price or a value from a national pricing
service.
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Most commenters opposed the down
payment and loan-to-value
requirements. These commenters cited
current automobile industry practices
where up to 100 percent of the purchase
price of the car is financed, along with
taxes, title costs, dealer fees, accessories,
and warranties. Some commenters
proposed eliminating the LTV entirely,
or replacing it with a less conservative
standard.
The agencies have considered the
comments and the underwriting
standards and have concluded that a
lower down payment could be required
without a significant decline in the
credit quality of a QAL. Therefore, the
agencies are proposing a down payment
of at least 10 percent of the purchase
price of the vehicle, plus 100 percent of
all taxes, fees, and extended warranties.
The agencies do not believe that a
collateralized loan with an LTV over 90
percent would be low-risk, and that a
customer should put some of the
customer’s own cash into the deal to
reduce risks for strategic default and
incent repayment of the loan. The
agencies would also define purchase
price consistently across new and used
vehicles to equal the price negotiated
with the dealer less any manufacturer
rebates.
Request for Comment
83(a). Are the revisions to the
qualifying automobile loan exemption
appropriate? 83(b). If not, how can they
be modified to more appropriately
reflect industry standards?
84. Are all the proposed underwriting
criteria appropriate?
D. Qualifying Asset Exemption
As discussed above, numerous
industry and sponsor commenters on
the original proposal for reduced risk
retention requirements for commercial,
CRE, and automobile loans asserted that
the requirement that all assets in a
collateral pool must meet the proposed
underwriting standards (qualifying
assets) to exempt the securitization
transaction from risk retention was too
stringent. These commenters stated that
requiring every asset in a collateral pool
to meet the proposed conservative
underwriting requirements would make
it difficult to obtain a large enough pool
of qualifying assets to issue a
securitization in a timely manner, and
therefore some originators would not
underwrite to the qualifying asset
standards. These commenters suggested
that the agencies allow a proportional
reduction in required risk retention for
those assets in a collateral pool that met
the proposed underwriting standards.
For example, if a pool contained 20
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percent automobile loans that are
qualifying assets and 80 percent of other
automobile loans, only 80 percent of the
pool would be subject a risk retention
requirement.
Commenters representing investors in
securitization transactions generally
opposed blended pools of qualifying
assets and other assets. These investors
stated that blending could allow
sponsors too much latitude to mix highquality qualifying assets, which may
pay down first, with low-quality nonqualifying assets, which would create
significant risk of credit loss for
investors over the course of the
transaction.
The agencies have carefully
considered the comments and are
proposing to apply a 0 percent risk
retention requirement to qualifying
assets, where both qualifying assets and
non-qualifying assets secure an assetbacked security.128 Any non-qualifying
assets that secure an asset-backed
security would be subject to the full risk
retention requirements in the proposed
rule, including hedging and transfer
restrictions.
The agencies believe that applying a
0 percent risk retention requirement to
assets that meet the proposed
underwriting standards would be
appropriate given the very high credit
quality of such assets. In addition,
allowing both qualifying and nonqualifying assets to secure an assetbacked security should promote
liquidity in the relevant securitization
markets without harming the goals of
risk retention requirement. The agencies
understand that a lender may not be
able to originate, or a sponsor aggregate,
an entire pool of qualifying assets
within a reasonable amount of time to
promote efficient securitization. The
128 Under 15 U.S.C. 78o–11(c)(1)(B)(ii), the
agencies may require a sponsor to retain less than
5 percent of the credit risk for an asset that
securitizes an asset-backed security, if the asset
meets the underwriting standards established by the
agencies under 15 U.S.C. 78o–11(c)(2)(B).
Accordingly, the agencies are proposing to require
0 percent risk retention with respect to any asset
securitizing an asset-backed security that meet the
proposed underwriting standards for automobile
loans, commercial loans, or commercial real estate
loans. See 15 U.S.C. 78o–11(c)(1)(B)(ii). The
agencies also believe that exempting qualifying
assets from risk retention would be consistent with
15 U.S.C. 78o–11(e) and the purposes of the statute.
The agencies believe the exemption could, in a
direct manner, help ensure high-quality
underwriting standards for assets that are available
for securitization, and create additional incentives
under the risk retention rules for these high-quality
assets to be originated in the market. The agencies
further believe such an exemption would encourage
appropriate risk management practices by
securitization sponsors and asset originators, by
establishing rigorous underwriting standards for the
exempt assets and providing additional incentives
for these standards to take hold in the marketplace.
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agencies believe that the proposal to
apply a 0 percent risk retention
requirement to qualifying assets would
likely enhance the liquidity of loans
underwritten to the qualifying asset
underwriting standards, thereby
encouraging originators to underwrite
more qualifying assets of high credit
quality.
The agencies recognize that section
15G is generally structured in
contemplation of pool-level exemptions,
and that investors, whom the statute is
designed to protect, expressed some
preference during the agencies’ initial
proposal for a pool-level approach. The
agencies believe the structure of the
proposal could offset these concerns.
The agencies are proposing to reduce
the sponsor’s 5 percent risk retention
requirement by the ratio of the
combined unpaid principal balance
(UPB) of qualified loans bears to the
total UPB of the loans in the pool.129
The agencies believe this method is
more appropriate than a system based
on the absolute number of qualifying
loans in the pool, as a sponsor could
create a pool with a large number of
small value qualifying loans combined
with a few low-quality loans with large
principal balances. The agencies have
also considered an ‘‘average balance’’
approach as an alternative, but are
concerned that it could be used to
reduce overall risk retention on pools of
loans with disparate principal balances
skewed towards a few large nonqualified loans.
To address transparency concerns, the
agencies are proposing that sponsors of
asset-backed securities that are secured
by both qualifying and non-qualifying
assets disclose to investors, their
primary Federal regulator (as
appropriate), and the Commission the
manner in which the sponsor
determined the aggregate risk retention
requirement for the pool after including
qualifying assets with 0 percent risk
retention, a description of the qualified
and nonqualified assets groups, and any
material differences between them with
respect to the composition of each
group’s loan balances, loan terms,
interest rates, borrower credit
information, and characteristics of any
loan collateral.
The agencies would not make blended
pool treatment available for
securitizations of loans from different
asset classes (i.e., automobile and
commercial) that secure the same asset-
backed security. The agencies believe
that blending across asset classes would
significantly reduce transparency to
investors. In addition, the agencies are
also considering imposing a limit on the
amount of qualifying assets a sponsor
could include in any one securitization
involving blended pools through a 2.5
percent risk retention minimum for any
securitization transaction, but the
agencies are also considering the
possibility of raising or lowering that
limit by 1 or more percent. The agencies
recognize that it might be useful for
sponsors acting on a transparent basis to
attempt to allay moderate investor
reservations about some assets in a pool
by including other high-quality assets.
However, one consistent theme in the
agencies consideration of risk retention
has been to require sponsors to hold a
meaningful exposure to all assets they
securitize that are subject to the full risk
retention requirement. The agencies are
concerned that providing sponsors
unlimited flexibility with respect to
mixing qualifying and non-qualifying
collateral pools could create
opportunities for practices that would
be inconsistent with this over-arching
principle.
The agencies also acknowledge
investor concerns about mixing
qualifying and non-qualifying assets, as
noted above. For example, some
investors commenting on the original
proposal expressed concern that
sponsors might be able to manipulate
such combinations to achieve
advantages that are not easily
discernible to investors, such as mixing
high-quality shorter-term assets with
lower-quality longer-term assets. In this
regard, the agencies observe the
Commission’s current proposal on loan
level disclosures to investors in assetbacked securities represents a
mechanism by which investors would
obtain a more detailed view of loans in
the pool than they sometimes did in
prior markets.130 However the agencies
remain concerned about potential
abuses of this aspect of the proposed
rule and seek comment on how to
address this issue beyond the disclosure
requirements already included in the
proposed rule. For example, an
additional requirement that qualifying
assets and non-qualifying assets in the
same collateral pool do not have greater
than a one year difference in maturity
might alleviate some investor concerns.
129 If a $100 million pool of commercial
mortgages included a sum total of $20 million of
qualified commercial mortgages (by UPB), the ratio
would be 1/5, and the sponsor could reduce its 5
percent risk retention requirement by one-fifth, for
a retention holding requirement of 4 percent.
130 See Asset-Backed Securities, Release Nos. 33–
9117, 34–61858, 75 FR 23328 (May 3, 2010), and
Re-proposal of Shelf Eligibility Conditions for AssetBacked Securities and Other Additional Requests
for Comment, Release Nos. 33–9244, 34–64968, 76
FR 47948 (August 5, 2011).
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Additional disclosure requirements
might also alleviate this concern.
In addition, the agencies are
proposing (consistent with the original
proposal) that securitization
transactions that are collateralized
solely by qualifying assets (of the same
asset class) and servicing assets would
be exempt from the risk retention
requirements of the proposed rule.
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Request for Comment
85. Commenters on the QRM
approach contained in the agencies’
original proposal requested that the
agencies permit blended pools for
RMBS. The agencies invite comment on
whether and, if so how, such an
approach may be constructed where the
underlying assets are residential
mortgages, given the provisions of
paragraph (c)(1)(B)(i)(II) and the
exemption authority in paragraph
(c)(2)(B), (e)(1) and (e)(2) of Section 15G.
86(a). How should the proportional
reduction in risk retention be
calculated? 86(b). What additional
disclosures should the agencies require
for collateral pools that include both
qualifying and non-qualifying assets?
86(c). How would these additional
disclosures enhance transparency and
reduce the risk of sponsors taking
advantage of information asymmetries?
86(d). Should a collateral pool that
secures asset-backed securities be
subject to a minimum total risk
retention requirement of 2.5 percent?
86(e). If not, what would be an
appropriate limit on the amount of
qualifying assets that may be included
in a collateral pool subject to 0 percent
risk retention? 86(f). What other limiting
mechanisms would be appropriate for
mixed collateral pools?
87(a). Would a maturity mismatch
limit such as the one discussed above
(such that qualifying and non-qualifying
assets do not have a difference in
maturity of more than one year) be an
appropriate requirement for collateral
pools containing qualifying and nonqualifying assets? 87(b). How should
such a limit be structured? 87(c). What
other limits would be appropriate to
address the investor and agency
concerns discussed above?
E. Buyback Requirement
The original proposal provided that, if
after issuance of a qualifying asset
securitization, it was discovered that a
loan did not meet the underwriting
criteria, the sponsor would have to
repurchase the loan. Industry
commenters asserted that if the agencies
retained this requirement, it should
include a materiality standard.
Alternately, these groups suggested that
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the agencies allow curing deficiencies in
the underwriting or loans instead of
requiring buyback. Finally, industry
commenters stated that they should not
be responsible for post-origination
problems with qualifying loans, and
expressed concern that investors may
seek to use the buyback requirement to
make the sponsor repurchase poorly
performing assets that met all the
requirements at origination. Investor
commenters, on the other hand,
supported the buyback requirement as
the sole remedy, and they opposed
relying solely on representations and
warranties.
The agencies have observed that
during the recent financial crisis,
investors who sought a remedy through
representations and warranties often
struggled through litigation with the
sponsor or originator. Requiring the
prompt repurchase of non-qualifying
loans affords investors a clear path to
remedy problems in the original
underwriting. Therefore, the agencies
are again proposing a buyback
requirement for commercial, CRE, and
automobile loans subsequently found
not to meet the underwriting
requirements for an exemption to the
risk retention requirements. However,
the agencies also agree with the sponsor
commenters that buyback should not be
the sole remedy, and therefore are
proposing to allow a sponsor the option
to cure a defect that existed at the time
of origination to bring the loan into
conformity with the proposed
underwriting standards. Curing a loan
should put the investor in no better or
worse of a position than if the loan had
been originated correctly. Some
origination deficiencies may not be able
to be cured after origination, and so for
those deficiencies, buyback would
remain the sole remedy.
The agencies also agree that buyback
or cure should occur only when there
are material problems with the
qualifying loan that caused it not to
meet the qualifying standards at
origination. The agencies are not
proposing any specific materiality
standards in the rule, but believe that
sponsors and investors could be guided
by standards of materiality.131
Finally, as the agencies explained in
the original proposal, the underwriting
requirements need to be met only at the
origination of the loan. Subsequent
performance of the loan, absent any
failure to meet the underwriting
requirements at origination or failure of
the loan to be current at the time of
origination, would not be grounds for a
loan buyback or cure. The borrower’s
failure to meet its continuing obligations
under the loan document covenants
required for qualifying loan treatment,
such as the requirement for periodic
financial statements for CRE loans,
would also not be grounds for a buyback
or cure if the loan terms at origination
appropriately imposed the obligation on
the borrower.
Request for Comment
88. The agencies request comment on
the buyback provision for qualifying
loans, including on the proposed
changes discussed above to allow cure
and to incorporate a materiality
standard.
VI. Qualified Residential Mortgages
A. Overview of Original Proposal and
Public Comments
Section 15G of the Exchange Act
exempts sponsors of securitizations
from the risk retention requirements if
all of the assets that collateralize the
securities issued in the transaction are
QRMs.132 Section 15G directs the
agencies to define QRM jointly, taking
into consideration underwriting and
product features that historical loan
performance data indicate result in a
lower risk of default. In addition,
section 15G requires that the definition
of a QRM be ‘‘no broader than’’ the
definition of a QM.133
In developing the definition of a QRM
in the original proposal,134 the agencies
articulated several goals and principles.
First, the agencies stated that QRMs
should be of very high credit quality,
given that Congress exempted QRMs
completely from the credit risk retention
requirements. Second, the agencies
recognized that setting fixed
underwriting rules to define a QRM
could exclude many mortgages to
creditworthy borrowers. In this regard,
the agencies recognized that a trade-off
exists between the lower
implementation and regulatory costs of
providing fixed and simple eligibility
requirements and the lower probability
of default attendant to requirements that
incorporate detailed and compensating
underwriting factors. Third, the
agencies sought to preserve a
sufficiently large population of nonQRMs to help enable the market for
securities backed by non-QRM
mortgages to be relatively liquid.
Fourth, the agencies sought to
implement standards that would be
132 See
131 See,
e.g., TSC Industries, Inc. v. Northway,
Inc., 426 U.S. 438 (1976).
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15 U.S.C. 78o–11(c)(1)(C)(iii).
id. at section 78o–11(e)(4).
134 See Original Proposal, 76 FR at 24117.
133 See
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transparent and verifiable to
participants in the market.
The agencies also sought to
implement the statutory requirement
that the definition of QRM be no
broader than the definition of a QM, as
mandated by the Dodd-Frank Act.135
Under the original proposal, the
agencies proposed to incorporate the
statutory QM standards, in addition to
other requirements, into the definition
of a QRM and apply those standards
strictly in setting the QRM requirements
to ensure that the definition of QRM
would be no broader than the definition
of a QM. The agencies noted in the
original proposal that they expected to
monitor the rules adopted under TILA
to define a QM and review those rules
to determine whether changes to the
definition of a QRM would be necessary
or appropriate.
In considering how to determine if a
mortgage is of sufficient credit quality,
the agencies examined data from several
sources.136 Based on these and other
data, the agencies originally proposed
underwriting and product features that
were robust standards designed to
ensure that QRMs would be of very high
credit quality.137 A discussion of the
135 See 15 U.S.C. 78o–11(e)(4)(C). At the time of
issuance of the original proposal on April 29, 2011,
the Board had sole rulemaking authority for
defining QM, which authority transferred to CFPB
on July 21, 2011, the designated transfer date under
the Dodd-Frank Act.
136 As provided in the original proposal, the
agencies reviewed data supplied by McDash
Analytics, LLC, a wholly owned subsidiary of
Lender Processing Services, Inc. (LPS), on prime
fixed-rate loans originated from 2005 to 2008,
which included underwriting and performance
information on approximately 8.9 million
mortgages; data from the 1992 to 2007 waves of the
triennial Survey of Consumer Finances (SCF),
which focused on respondents who had purchased
their homes either in the survey year or the
previous year, and included information on
approximately 1,500 families; and data regarding
loans purchased or securitized by the Enterprises
from 1997 to 2009, which 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. See 76 FR at
24152.
137 The agencies acknowledged in the original
proposal that any set of fixed underwriting rules
likely would 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
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full range of factors that the agencies
considered in developing a definition of
a QRM can be found in the original
proposal.138
The agencies originally proposed to
define QRM to mean 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 was 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 12 months or less, such as a loan to
purchase a new dwelling where the
borrower plans to sell a current
dwelling within 12 months; or (iv) a
timeshare plan described in 11 U.S.C.
101(53D).139 In addition, under the
original proposal, a QRM (i) must be a
first lien transaction with no
subordinate liens; (ii) have a mortgage
term that does not exceed 30 years; (iii)
have maximum front-end and back-end
DTI ratios of 28 percent and 36 percent,
respectively; 140 (iv) have a maximum
LTV ratio of 80 percent in the case of
a purchase transaction, 75 percent in the
case of rate and term refinance
transactions, and 70 percent in the case
of cash out refinancings; (v) include a 20
percent down payment from borrower
funds in the case of a purchase
transaction; and (vi) meet certain credit
history restrictions.141
The agencies sought comment on the
overall approach to defining QRM as
well as on the impact of the QRM
definition on the securitization market,
mortgage pricing, and credit availability,
including to low-to-moderate income
borrowers. The agencies further
requested comment on the proposed
eligibility criteria of QRMs, such as the
LTV, DTI, and borrower credit history
standards.
to originate, QRMs. See Original Proposal, 76 FR at
24118.
138 See Original Proposal, 76 FR at 24117–29.
139 See id. at 24166.
140 A front-end DTI 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.
141 In order to facilitate the use of these standards
for QRM purposes, the original proposal included
as an appendix to the proposed rule (Additional
QRM Standards Appendix) all of the standards in
the HUD Handbook 4155–1 that are used for QRM
purposes. (See HUD Handbook, available at https://
portal.hud.gov/hudportal/HUD?src=/program_
offices/administration/hudclips/handbooks/hsgh/
4155.1.) 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). See discussion in the
Original Proposal, 76 FR at 24119.
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The scope of the QRM definition
generated a significant number of
comments. Some commenters expressed
support for the overall proposed
approach to QRM, including the 20
percent down payment requirement of
the QRM definition. These commenters
asserted that an LTV requirement would
be clear, objective, and relatively easy to
implement, and represent an important
determinant of a loan’s default
probability.
However, the overwhelming majority
of commenters, including individuals,
industry participants (e.g., real estate
brokers, mortgage bankers,
securitization sponsors), insurance
companies, public interest groups, state
agencies, financial institutions and trade
organizations, opposed various aspects
of the originally proposed approach to
defining QRM. In addition, many
members of Congress commented that
the proposed 20 percent down payment
requirement was inconsistent with
legislative intent, and strongly urged the
agencies to eliminate or modify the
down payment requirement.
Many commenters argued that the
proposed QRM definition was too
narrow, especially with respect to the
LTV and DTI requirements. Many of
these commenters asserted that the
proposed QRM definition would
prevent recovery of the housing market
by restricting available credit, and as a
result, the number of potential
homebuyers. These commenters also
argued that the proposed definition of
QRM, especially when combined with
the complexities of the proposed risk
retention requirement that would have
applied to non-QRMs, would make it
difficult for private capital to compete
with the Enterprises and thus, impede
the return of private capital to the
mortgage market. Many also asserted
that the proposed LTV and DTI
requirements favored wealthier persons
and disfavored creditworthy low- and
moderate-income persons and first-time
homebuyers. A number of commenters
believed that LTV and DTI elements of
the proposed QRM definition would not
only affect mortgages originated for
securitization, but would likely also be
adopted by portfolio lenders,
magnifying the adverse effects described
above. Other commenters claimed that
the proposed QRM definition and
proposed risk retention requirements
would harm community banks and
credit unions by increasing costs to
those who purchase loans originated by
these smaller institutions.
Some commenters urged the agencies
to implement a more qualitative QRM
standard with fewer numerical
thresholds. Others argued for a matrix
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system that would weigh compensating
factors, instead of using an all-ornothing approach to meeting the
threshold standards. Commenters stated
that requiring borrowers to put down
more cash for a rate-and-term
refinancing may prevent them from
refinancing with safer and more
economically desirable terms.
Commenters were also critical of the
proposed credit history requirements (in
particular, the 30-day past due
restriction), and the points and fees
component of the proposed QRM
definition.
Although a few commenters
supported the inclusion of servicing
standards in the QRM definition under
the original proposal, the majority of
those who submitted comment on this
subject opposed the proposed servicing
standards for a variety of reasons. For
example, commenters asserted that
servicing standards were not an
underwriting standard or product
feature, and were not demonstrated to
reduce the risk of default. In addition,
commenters stated that the proposed
standards were too vague for effective
compliance, and that the proposed
rule’s approach of requiring them to be
terms of the mortgage loan would
prevent future improvements in
servicing from being implemented with
respect to QRMs.
Many commenters urged the agencies
to postpone finalizing the QRM
definition until after the QM definition
was finalized. Many commenters also
advocated for the agencies to align the
QRM definition to the QM definition.
B. Approach to Defining QRM
In determining the appropriate scope
of the proposed QRM definition, the
agencies carefully weighed a number of
factors, including commenters’
concerns, the cost of risk retention,
current and historical data on mortgage
lending and performance, and the
recently finalized QM definition and
other rules addressing mortgages. For
the reasons discussed more fully below,
the agencies are proposing to broaden
and simplify the scope of the QRM
exemption from the original proposal
and define ‘‘qualified residential
mortgage’’ to mean ‘‘qualified mortgage’’
as defined in section 129C of TILA 142
and implementing regulations, as may
be amended from time to time.143 The
agencies propose to cross-reference the
definition of QM, as defined by the
CFPB in its regulations, to minimize
potential for future conflicts between
the QRM standards in the proposed rule
142 15
U.S.C. 1639c.
Final QM Rule.
143 See
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and the QM standards adopted under
TILA.
The risk retention requirements are
intended to address problems in the
securitization markets by requiring
securitizers to generally retain some
economic interest in the credit risk of
the assets they securitize (i.e., have
‘‘skin in the game’’). Section 15G of the
Exchange Act requires the agencies to
define a QRM exception from the credit
risk retention requirement, taking into
consideration underwriting and product
features that historical loan performance
data indicate result in a lower expected
risk of default. The requirements of the
QM definition are designed to help
ensure that borrowers are offered and
receive residential mortgage loans on
terms that reasonably reflect their
financial capacity to meet the payment
obligations associated with such loans.
The QM definition excludes many loans
with riskier product features, such as
negative amortization and interest-only
payments, and requires consideration
and verification of a borrower’s income
or assets and debt. This approach both
protects the consumer and should lead
to lower risk of default on loans that
qualify as QM.
As discussed more fully below, the
agencies believe a QRM definition that
aligns with the definition of a QM meets
the statutory goals and directive of
section 15G of the Exchange Act to limit
credit risk, preserves access to
affordable credit, and facilitates
compliance.
1. Limiting Credit Risk
Section 129(C)(a) of TILA, as
implemented by 12 CFR 1026.43(c),
requires lenders to make a ‘‘reasonable
and good faith determination’’ that a
borrower has the ability to repay a
residential mortgage loan. The QM rules
provide lenders with a presumption of
compliance with the ability-to-repay
requirement. Together, the QM rules
and the broader ability-to-repay rules
restrict certain product features and lax
underwriting practices that contributed
significantly to the extraordinary surge
in mortgage defaults that began in
2007.144
The QM rule does this, in part, by
requiring documentation and
verification of consumers’ debt and
income.145 To obtain the presumption of
compliance with the ability-to-repay
requirement as a QM, the loan must
have a loan term not exceeding 30 years;
points and fees that generally do not
144 See Christopher Mayer, Karen Pence, and
Shane M. Sherlund, ‘‘The Rise in Mortgage
Defaults, Journal of Economic Perspectives, 23(1),
27–50 (Winter 2009).
145 See generally 12 CFR 1026.43(c).
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exceed 3 percent; 146 and not have risky
product features, such as negative
amortization, interest-only and balloon
payments (except for those loans that
qualify for the definition of QM that is
only available to eligible small portfolio
lenders).147 Formal statistical models
indicate that mortgages that do not meet
these aspects of the QM definition rule
are associated with a higher probability
of default.148
Consistent with these statistical
models, historical data indicate that
mortgages that meet the QM criteria
have a lower probability of default than
mortgages that do not meet the criteria.
This pattern is most pronounced for
loans originated near the peak of the
housing bubble, when non-traditional
mortgage products and lax underwriting
proliferated. For example, of loans
originated from 2005 to 2008, 23 percent
of those that met the QM criteria
experienced a spell of 90-day or more
delinquency or a foreclosure by the end
of 2012, compared with 44 percent of
loans that did not meet the QM
criteria.149
In citing these statistics, the agencies
are not implying that they consider a 23
146 The QM definition provides a tiered-cap for
points and fees for loan amounts less than
$100,000. See id. at 1026.43(e)(3).
147 See 78 FR 35430 (June 12, 2013). In addition,
the loan must have consumer debt payments that
represent 43 percent or less of a borrower’s income,
or the loan must be eligible for purchase, guarantee
or insurance by an Enterprise, HUD, the U.S.
Department of Veteran Affairs, the U.S. Department
of Agriculture, or the Rural Housing Service. See 12
CFR 1026.43(e)(2)(vi).
148 See Shane M. Sherlund, ‘‘The Past, Present,
and Future of Subprime Mortgages,’’ Finance and
Economics Discussion Series, Paper 2008–63
available at https://www.federalreserve.gov/pubs/
feds/2008/200863/200863pap.pdf; Ronel Elul,
Nicholas S. Souleles, Souphala Chomsisengphet,
Dennis Glennon, and Robert Hunt. ‘‘What ‘Triggers’
Mortgage Default?’’ American Economic Review
100(2), 490–494 (May 2010).
149 For purposes of this calculation, mortgages
that do not meet the QM criteria are those with
negative amortization, balloon, or interest-only
features; those with no documentation; and those
with DTI ratios in excess of 43 percent that were
not subsequently purchased or guaranteed by the
Enterprises or the FHA. Because of data limitations,
loans with points and fees in excess of 3 percent
and low-documentation loans that do not comply
with the QM documentation criteria may be
erroneously classified as QMs. The default
estimates are based on data collected from mortgage
servicers by Lender Processing Services and from
securitized pools by CoreLogic. These data will
under-represent mortgages originated and held by
small depository institutions and adjustable-rate
mortgages guaranteed by the FHA. The difference
between delinquency statistics for QM and non-QM
mortgages is consistent with a comparable
tabulation estimated on loans securitized or
purchased by the Enterprises. In the Enterprise
analysis for loans originated from 2005 to 2008, 14
percent of those that met the QM criteria, compared
with 33 percent of loans that did not meet the QM
criteria, experienced a 90-day or more delinquency
or a foreclosure by the end of 2012.
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percent default rate to be an acceptable
level of risk. The expansion in nontraditional mortgages and the lax
underwriting during this period
facilitated the steep rise in house prices
and the subsequent sharp drop in house
prices and surge in unemployment, and
the default rates reflect this
extraordinary macroeconomic
environment. This point is underscored
by the superior performance of more
recent mortgage vintages. For example,
of prime fixed-rate mortgages that
comply with the QM definition, an
estimated 1.4 percent of those originated
from 2009 to 2010, compared with 16
percent of those originated from 2005 to
2008, experienced a 90-day or more
delinquency or a foreclosure by the end
of 2012.150
In the original proposal, the criteria
for a QRM included an LTV ratio of 80
percent or less for purchase mortgages
and measures of solid credit history that
evidence low credit risk. Academic
research and the agencies’ own analyses
indicate that credit history and the LTV
ratio are significant factors in
determining the probability of mortgage
default.151 However, these additional
credit overlays may have ramifications
for the availability of credit that many
commenters argued were not
outweighed by the corresponding
reductions in likelihood of default from
including these determinants in the
QRM definition.
Moreover, the QM definition provides
protections against mortgage default that
are consistent with the statutory
requirements. As noted above, risk
retention is intended to align the
interests of securitization sponsors and
investors. Misalignment of these
interests is more likely to occur where
there is information asymmetry, and is
particularly pronounced for mortgages
with limited documentation and
verification of income and debt.
Academic studies suggest that securities
collateralized by loans without full
documentation of income and debt
performed significantly worse than
expected in the aftermath of the housing
boom.152
The QM definition limits the scope of
this information asymmetry and
misalignment of interests by requiring
improved verification of income and
debt. An originator that does not follow
these verification requirements, in
addition to other QM criteria, may be
subject under TILA to potential liability
and a defense to foreclosure if the
consumer successfully claims he or she
did not have the ability to repay the
loan.153 The potential risk arising from
the consumer’s ability to raise a defense
to foreclosure extends to the creditor,
assignee, or other holder of the loan for
the life of the loan, and thereby may
provide originators and their assignees
with an incentive to follow verification
and other QM requirements
scrupulously.154
Other proposed and finalized
regulatory changes are also intended to
improve the quality and amount of
information available to investors in
QRM and non-QRM residential
mortgage securitizations and incentivize
originators and servicers to better
manage mortgage delinquencies and
potential foreclosures. These
improvements may help to lessen the
importance of broad ‘‘skin in the game’’
requirements on sponsors as an
additional measure of protection to
investors and the financial markets. For
example, the Commission has proposed
rules that, if finalized, would require in
registered RMBS transactions disclosure
of detailed loan-level information at the
time of issuance and on an ongoing
basis. The proposal also would require
that securitizers provide investors with
this information in sufficient time prior
to the first sale of securities so that they
can analyze this information when
making their investment decision.155 In
addition, the CFPB has finalized loan
originator compensation rules that help
to reduce the incentives for loan
originators to steer borrowers to
unaffordable mortgages 156 as well as
mortgage servicing rules that provide
procedures and standards that servicers
must follow when working with
troubled borrowers in an effort to avoid
150 The higher default rate for the loans originated
from 2005 to 2008 may reflect the looser
underwriting standards in place at that time and the
greater seasoning of these loans in addition to the
changes in the macroeconomic environment. The
estimates are shown only for prime fixed-rate
mortgages because these mortgages have made up
almost all originations since 2008.
151 See Original Proposal, 76 FR at 24120–24124.
152 See Benjamin J. Keys, Amit Seru, and Vikrant
Vig, ‘‘Lender Screening and the Role of
Securitization: Evidence from Prime and Subprime
Mortgage Markets,’’ Review of Financial Studies,
25(7) (July 2012); Adam Ashcraft, Paul GoldsmithPinkham, and James Vickery, ‘‘MBS Ratings and the
Mortgage Credit Boom,’’ Federal Reserve Bank of
New York Staff Report 449 (2010), available at
https://www.newyorkfed.org/research/staff_reports/
sr449.html.
153 See sections 130(a) and 130(k) of TILA, 15
U.S.C. 1640.
154 There are limits on the exposure to avoid
unduly restricting market liquidity.
155 See Asset-Backed Securities, Release Nos. 33–
9117, 34–61858 75 FR 23328 at 23335, 23355 (May
3, 2010).
156 See Loan Originator Compensation
Requirements Under the Truth in Lending Act
(Regulation Z); Final Rules, 78 FR 11280 (Feb. 15,
2013).
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unnecessary foreclosures.157 The
Enterprises and the mortgage industry
also have improved standards for due
diligence, representations and warrants,
appraisals, and loan delivery data
quality and consistency.
2. Preserving Credit Access
Mortgage lending conditions have
been tight since 2008, and to date have
shown little sign of easing. Lending
conditions have been particularly
restrictive for borrowers with lower
credit scores, limited equity in their
homes, or with limited cash reserves.
For example, between 2007 and 2012,
originations of prime purchase
mortgages fell about 30 percent for
borrowers with credit scores greater
than 780, compared with a drop of
about 90 percent for borrowers with
credit scores between 620 and 680.158
Originations are virtually nonexistent
for borrowers with credit scores below
620. These findings are also evident in
the results from the Senior Loan Officer
Opinion Survey. In the April 2012
Survey, a large share of lenders
indicated that they were less likely than
in 2006 to originate loans to borrowers
with weaker credit profiles. In the April
2013 survey, lenders indicated that their
appetite for making such loans had not
changed materially over the previous
year.159
Market conditions reflect a variety of
factors, including various supervisory,
regulatory, and legislative efforts such
as the Enterprises’ representations and
warrants policies; mortgage servicing
settlements reached with federal
regulators and the state attorney
generals; revised capital requirements;
and new rules addressing all aspects of
the mortgage lending process. These
efforts are far-reaching and complex,
and the interactions and aggregate effect
of them on the market and participants
are difficult to predict. Lenders may
157 See Mortgage Servicing Rules Under the Truth
in Lending Act (Regulation Z); Final Rule, 78 FR
10902 (Feb. 14, 2013); Mortgage Servicing Rules
Under the Truth in Lending Act (Regulation Z);
Final Rule, 78 FR 10696 (Feb. 14, 2013).
158 These calculations are based on data provided
by McDash Analytics, LLC, a wholly owned
subsidiary of Lender Processing Services, Inc. The
underlying data are provided by mortgage servicers.
These servicers classify loans as ‘‘prime,’’
‘‘subprime,’’ or ‘‘FHA.’’ Prime loans include those
eligible for sale to the Enterprises as well as those
with favorable credit characteristics but loan sizes
that exceed the Enterprises’ guidelines (‘‘jumbo
loans’’).
159 Data are from the Federal Reserve Board’s
Senior Loan Officer Opinion Survey on Bank
Lending Practices. The April 2012 report is
available at https://www.federalreserve.gov/
boarddocs/SnLoanSurvey/201205/default.htm and
the April 2013 report is available at https://
www.federalreserve.gov/boarddocs/SnLoanSurvey/
201305/default.htm.
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continue to be cautious in their lending
decisions until they have incorporated
these regulatory and supervisory
changes into their underwriting and
servicing systems and gained experience
with the rules.
The agencies are therefore concerned
about the prospect of imposing further
constraints on mortgage credit
availability at this time, especially as
such constraints might
disproportionately affect groups that
have historically been disadvantaged in
the mortgage market, such as lowerincome, minority, or first-time
homebuyers.
The effects of the QRM definition on
credit pricing and access can be
separated into the direct costs incurred
in funding the retained risk portion and
the indirect costs stemming from the
interaction of the QRM rule with
existing regulations and current market
conditions. The agencies’ estimates
suggest that the direct costs incurred by
a sponsor for funding the retained
portion should be small. Plausible
estimates by the agencies range from
zero to 30 basis points, depending on
the amount and form of incremental
sponsor risk retention, and the amount
and form of debt in sponsor funding of
incremental risk retention. The funding
costs may be smaller if investors value
the protections associated with risk
retention and are thereby willing to
accept tighter spreads on the securities.
However, the indirect costs stemming
from the interaction of the QRM
definition with existing regulations and
market conditions are more difficult to
quantify and have the potential to be
large. The agencies judge that these
costs are most likely to be minimized by
aligning the QM and QRM definitions.
The QM definition could result in some
segmentation in the mortgage
securitization market, as sponsors may
be reluctant to pool QMs and non-QMs
because of the lack of presumption of
compliance available to assignees of
non-QMs. As QRMs cannot be
securitized with non-QRMs under the
proposed rule,160 the QRM definition
has the potential to compound this
segmentation if the QM and QRM
definitions are not aligned. Such
segmentation could also lead to an
increase in complexity, regulatory
burden, and compliance costs, as
lenders might need to set up separate
underwriting and securitization
platforms beyond what is already
necessitated by the QM definition.
These costs could be passed on to
borrowers in the form of higher interest
rates or tighter credit standards. Finally,
160 See
15 U.S.C. 78o–11(c)(1)(B).
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in addition to the costs associated with
further segmentation of the market,
setting a QRM definition that is distinct
from the QM definition may interact
with the raft of other regulatory changes
in ways that are near-impossible to
predict. Cross-referencing to the QM
definition should facilitate compliance
with QM and reduce these indirect
costs.
The agencies recognize that aligning
the QRM and QM definitions has the
potential to intensify any existing
bifurcation in the mortgage market
between QM and non-QM loans, as
securitizations collateralized by nonQMs could have higher funding costs
due to risk retention requirements in
addition to potential risk of legal
liability under the ability-to-repay rule.
The agencies acknowledge this risk but
judge it to be smaller than the risk
associated with further segmentation of
the market.
If adopted, the agencies intend to
review the advantages and
disadvantages of aligning the QRM and
QM definitions as the market evolves to
ensure the rule best meets the statutory
objectives of section 15G of the
Exchange Act.
Request for Comment
89(a). Is the agencies’ approach to
considering the QRM definition, as
described above, appropriate? 89(b).
Why or why not? 89(c). What other
factors or circumstances should the
agencies take into consideration in
defining QRM?
C. Proposed Definition of QRM
As noted above, Section 15G of the
Exchange Act requires, among other
things, that the definition of QRM be no
broader than the definition of QM. The
Final QM Rule is effective January 10,
2014.161 The external parameters of
what may constitute a QRM may
continue to evolve as the CFPB clarifies,
modifies or adjusts the QM rules.162
161 See
Final QM Rule.
162 For example, the CFPB recently finalized rules
to further clarify when a loan is eligible for
purchase, insurance or guarantee by an Enterprise
or applicable federal agency for purposes of
determining whether a loan is a QM. See
Amendments to the 2013 Mortgage Rules under the
Real Estate Settlement Procedures Act (Regulation
X) and the Truth in Lending Act (Regulation Z), 78
FR 44686 (July 24, 2013). The CFPB also recently
proposed rules that further address what amounts
should be included as loan originator compensation
in certain cases (i.e., manufactured home loans) for
purposes of calculating the 3 percent points and
fees threshold under the QM rules. See
Amendments to the 2013 Mortgage Rules under the
Equal Credit Opportunity Act (Regulation B), Real
Estate Settlement Procedures Act (Regulation X),
and the Truth in Lending Act (Regulation Z), 78 FR
39902 (July 2, 2013).
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Because the definition of QRM
incorporates QM by reference, the
proposed QRM definition would
expressly exclude home-equity lines of
credit (HELOCs), reverse mortgages,
timeshares, and temporary loans or
‘‘bridge’’ loans of 12 months or less,
consistent with the original proposal of
QRM.163 It would also expand the types
of loans eligible as QRMs.164 Under the
original proposal, a QRM was limited to
closed-end, first-lien mortgages used to
purchase or refinance a one-to-four
family property, at least one unit of
which is the principal dwelling of the
borrower. By proposing to align the
QRM definition to the QM definition,
the scope of loans eligible to qualify as
a QRM would be expanded to include
any closed-end loan secured by any
dwelling (e.g., home purchase,
refinances, home equity lines, and
second or vacation homes).165
Accordingly, the proposed scope of the
QRM definition would differ from the
original proposal because it would
include loans secured by any dwelling
(consistent with the definition of QM),
not only loans secured by principal
dwellings. In addition, if a subordinate
lien meets the definition of a QM, then
it would also be eligible to qualify as a
QRM, whereas under the original
proposal QRM-eligibility was limited to
first-liens. The agencies believe the
expansion to permit loans secured by
any dwelling, as well as subordinate
liens, is appropriate to preserve credit
access and simplicity in incorporating
the QM definition into QRM.
The CFPB regulations implementing
the rules for a QM provide several
definitions of a QM. The agencies
propose that a QRM would be a loan
that meets any of the QM definitions.166
These include the general QM
definition, which provide that a loan
must have:
• Regular periodic payments that are
substantially equal;
163 Also excluded would be most loan
modifications, unless the transaction meets the
definition of refinancing set forth in section
1026.20(a) of the Final QM rule, and credit
extended by certain community based lending
programs, down payment assistance providers,
certain non-profits, and Housing Finance Agencies,
as defined under 24 CFR 266.5. For a complete list,
see 12 CFR 1026.43(a).
164 See 12 CFR 1026.43(e)(2), which provides that
QM is a covered transaction that meets the criteria
set forth in §§ 1026.43(e)(2), (4), (5), (6) or (f). A
‘‘covered transaction’’ is defined to mean ‘‘a
consumer credit transaction that is secured by a
dwelling, as defined in § 1026.2(a)(19), including
any real property attached to a dwelling, other than
a transaction exempt from coverage under
[§ 1026.43(a)].’’
165 See 12 CFR 1026.43(a).
166 See 12 CFR 1026.43(e)(2), (e)(4), (e)(5), or (e)(6)
or (f).
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• No negative amortization, interest
only, or balloon features;
• A maximum loan term of 30 years;
• Total points and fees that do not
exceed 3 percent of the total loan
amount, or the applicable amounts
specified in the Final QM Rule, for
small loans up to $100,000;
• Payments underwritten using the
maximum interest rate that may apply
during the first five years after the date
on which the first regular periodic
payment is due;
• Consideration and verification of
the consumer’s income and assets,
including employment status if relied
upon, and current debt obligations,
mortgage-related obligations, alimony
and child support; and
• Total debt-to-income ratio that does
not exceed 43 percent.
In recognition of the current mortgage
market conditions and expressed
concerns over credit availability, the
CFPB also finalized a second temporary
QM definition.167 The agencies propose
that a QRM would also include a
residential mortgage loan that meets this
second temporary QM definition. This
temporary QM definition provides that
a loan must have:
• Regular periodic payments that are
substantially equal;
• No negative amortization, interest
only, or balloon features;
• A maximum loan term of 30 years;
• Total points and fees, that do not
exceed 3 percent of the total loan
amount, or the applicable amounts
specified for small loans up to $100,000;
and
• Be eligible for purchase, guarantee
or insurance by an Enterprise, HUD, the
Veterans Administration, U.S.
Department of Agriculture, or Rural
Housing Service.168
Lenders that make a QM have a
presumption of compliance with the
ability-to-repay requirement under
129C(a) of TILA, as implemented by
§ 1026.43(c) of Regulation Z, and
therefore obtain some protection from
such potential liability.169 However,
there are different levels of protection
from TILA liability 170 depending on
167 12
CFR 1026.43(e)(4).
12 CFR 1206.43(e)(4)(ii).
169 See section 129C(b)(1) of TILA, 15 U.S.C.
1639c(b)(1).
170 Lenders that violate the ability-to-repay
requirement may be liable for actual and statutory
damages, plus court and attorney fees. Consumers
can bring a claim for damages within three years
against a creditor. Consumers can also raise a claim
for these damages at any time in a foreclosure
action taken by the creditor or an assignee. The
damages are capped to limit the lender’s liability.
See sections 130(a), (e), and (k) of TILA, 15 U.S.C.
1640. However, the level of protection afforded
differs depending on the loan’s price. For a detailed
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168 See
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whether a QM is higher-priced or not.171
QMs that are not higher-priced loans
received a legal safe harbor for
compliance with the ability-to-repay
requirement, whereas QMs that are
higher-priced covered transactions
received a rebuttable presumption of
compliance.172 Both non-higher priced
and higher-priced QMs would be
eligible as QRMs without distinction,
and could be pooled together in the
same securitization.
The temporary QM definition for
loans eligible for purchase or guarantee
by an Enterprise expires once the
Enterprise exits conservatorship.173 In
addition, the FHA, the U.S. Department
of Veteran Affairs, the U.S. Department
of Agriculture, and the Rural Housing
Service each have authority under the
Dodd-Frank Act to define QM for their
own loans.174 The temporary QM
definition for loans eligible to be
insured or guaranteed by one of these
federal agencies expires once the
relevant federal agency issues its own
QM rules.175
Finally, the CFPB provided several
additional QM definitions to facilitate
credit offered by certain small creditors.
The agencies propose that a QRM would
be a QM that meets any of these three
special QM definitions.176 The Final
QM Rule allows small creditors to
originate loans as QMs with greater
underwriting flexibility (e.g., no
quantitative DTI threshold applies) than
under the general QM definition.177
However, this third QM definition is
available only to small creditors that
meet certain asset and threshold
criteria 178 and hold the QM loans in
portfolio for at least three years, with
certain exceptions (e.g., transfer of a
loan to another qualifying small
creditor, supervisory sales, and merger
and acquisitions).179 Accordingly, loans
meeting this third ‘‘small creditor’’ QM
discussion of the safe harbor and presumption of
compliance, see 78 FR at 6510–6514.
171 For the definition of higher-priced covered
transaction, see 12 CFR 1026.43(b)(4) and
accompanying commentary.
172 For a detailed discussion of the safe harbor
and presumption of compliance, see 78 FR at 6510–
6514.
173 See 12 CFR 1026.43(e)(4)(iii).
174 See section 129C(b)(3)(B)(ii) of TILA; 15 U.S.C.
1639c.
175 See 12 CFR 1026.43(e)(4)(iii).
176 See 12 CFR 1026.43(e)(5), 12 CFR
1026.43(e)(6), and 12 CFR 1026.43(f).
177 See 12 CFR 1026.43(e)(5).
178 An entity qualifies as a ‘‘small creditor’’ if it
does not exceed $2 billion in total assets; originates
500 or fewer first-lien covered transactions in the
prior calendar year (including all affiliates); and
holds the QMs in portfolio for at least three years,
with certain exceptions. See 12 CFR
1026.43(e)(5)(i)(D), discussed in detail in 78 FR at
35480–88 (June 12, 2013).
179 See 12 CFR 1026.43(e)(5)(ii).
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definition would generally be ineligible
as QRMs for three years following
consummation because they could not
be sold.
The Final QM Rule also provides
these eligible small creditors with a twoyear transition period during which
they can originate balloon loans that are
generally held in portfolio, and meet
certain criteria, as QMs.180 This twoyear transition period expires January
10, 2016. Again, loans meeting this
fourth QM definition would generally
be ineligible as QRMs for three years
following consummation. Last, the Final
QM Rule allows eligible small creditors
that operate predominantly in rural or
underserved areas to originate balloonpayment loans as QMs if they are
generally held in portfolio, and meet
certain other QM criteria.181 Loans
meeting this third QM definition would
also generally be ineligible for
securitization for three years following
consummation because they cannot be
sold.
For the reasons discussed above, the
agencies are not proposing to
incorporate either an LTV ratio
requirement or standards related to a
borrower’s credit history into the
definition of QRM.182 Furthermore, the
agencies are not proposing any written
appraisal requirement or assumability
requirement as part of QRM. In response
to comments, and as part of the
simplification of the QRM exemption
from the original proposal, the agencies
are not proposing any servicing
standards as part of QRM.
Request for Comment
The agencies invite comment on all
aspects of the proposal to equate QRM
with QM. In particular,
90. Does the proposal reasonably
balance the goals of helping ensure high
quality underwriting and appropriate
risk management, on the one hand, and
the public interest in continuing access
to credit by creditworthy borrowers, on
the other?
91. Will the proposal, if adopted,
likely have a significant effect on the
availability of credit? Please provide
data supporting the proffered view.
92(a). Is the proposed scope of the
definition of QRM, which would
include loans secured by subordinate
liens, appropriate? 92(b). Why or why
not? 92(c). To what extent do concerns
180 See 12 CFR 1026.43(e)(6), discussed in detail
at 78 FR at 35488.
181 See 12 CFR 1026.43(f).
182 The agencies continue to believe that both
LTV and borrower credit history are important
aspects of prudent underwriting and safe and sound
banking.
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about the availability and cost of credit
affect your answer?
93(a). Should the definition of QRM
be limited to loans that qualify for
certain QM standards in the final QM
Rule? 93(b). For example, should the
agencies limit QRMs to those QMs that
could qualify for a safe harbor under 12
CFR 1026.43(e)(1)? Provide justification
for your answer.
D. Exemption for QRMs
In order for a QRM to be exempted
from the risk retention requirement, the
proposal includes evaluation and
certification conditions related to QRM
status, consistent with statutory
requirements. For a securitization
transaction to qualify for the QRM
exemption, each QRM collateralizing
the ABS would be required to be
currently performing (i.e., the borrower
is not 30 days or more past due, in
whole or in part, on the mortgage) at the
closing of the securitization transaction.
Also, the depositor for the securitization
would be required to certify that it
evaluated the effectiveness of its
internal supervisory controls to ensure
that all of the assets that collateralize
the securities issued out of the
transaction are QRMs, and that it has
determined that its internal supervisory
controls are effective. This evaluation
would 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 would be required to
provide, or cause to be provided, a copy
of this certification to potential
investors a reasonable period of time
prior to the sale of the securities and,
upon request, to the Commission and its
appropriate Federal banking agency, if
any.
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
Request for Comment
94(a). Are the proposed certification
requirements appropriate? 94(b). Why or
why not?
E. Repurchase of Loans Subsequently
Determined To Be Non-Qualified After
Closing
The original proposal provided that, if
after the closing of a QRM securitization
transaction, it was discovered that a
mortgage did not meet all of the criteria
to be a QRM due to inadvertent error,
the sponsor would have to repurchase
the mortgage. The agencies received a
few comments regarding this
requirement. Some commenters were
supportive of the proposed requirement,
while other commenters suggested that
the agencies allow substitution of
mortgages failing to meet the QRM
definition.
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The agencies are again proposing a
buyback requirement for mortgages that
are determined to not meet the QRM
definition by inadvertent error after the
closing of the securitization transaction,
provided that the conditions set forth in
section 12 of the proposed rules are
met.183 These conditions are intended to
provide a sponsor with the opportunity
to correct inadvertent errors by
promptly repurchasing any nonqualifying mortgage loans from the pool.
In addition, this proposed requirement
would help ensure that sponsors have a
strong economic incentive to ensure that
all mortgages backing a QRM
securitization satisfy all of the
conditions applicable to QRMs prior to
closing of the transactions. Subsequent
performance of the loan, absent any
failure to meet the QRM requirements at
the closing of the securitization
transaction, however, would not trigger
the proposed buyback requirement.
Request for Comment
95(a). What difficulties may occur
with the proposed repurchase
requirement under the QRM exemption?
95(b). Are there alternative approaches
that would be more effective? 95(c).
Provide details and supporting
justification.
E. Request for Comment on Alternative
QRM Approach
Although the agencies believe that the
proposed approach of aligning QRM
with QM is soundly based, from both a
policy and a legal standpoint, the
agencies are seeking public input on its
merits. The agencies are also seeking
input on an alternative approach,
described below, that was considered by
the agencies, but ultimately not selected
as the preferred approach. The
alternative approach would take the QM
criteria as a starting point for the QRM
definition, and then incorporate
additional standards that were selected
to reduce the risk of default. Under this
approach, significantly fewer loans
likely would qualify as a QRM and,
therefore, be exempt from risk retention.
1. Description of Alternative Approach
The alternative approach, referred to
as ‘‘QM-plus’’ would begin with the
core QM criteria adopted by the CFPB,
and then add four additional factors.
Under this ‘‘QM-plus’’ approach:
• Core QM criteria. A QRM would be
required to meet the CFPB’s core criteria
183 Sponsors may choose to repurchase a loan
from securitized pools even if there is no
determination that the loan is not a QRM. The
agencies would not view such repurchases as
determinative of whether or not a loan meets the
QRM standard.
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57993
for QM, including the requirements for
product type,184 loan term,185 points
and fees,186 underwriting,187 income
and debt verification,188 and DTI.189 For
loans meeting these requirements, the
QM-plus approach would draw no
distinction between those mortgages
that fall within the CFPB’s ‘‘safe harbor’’
versus those that fall within the CFPB’s
‘‘presumption of compliance for higherpriced’’ mortgages.190 Under QM-plus,
either type of mortgage that meets the
CFPB’s core criteria for QM would pass
this element of the QM-plus test. Loans
that are QM because they meet the
CFPB’s provisions for GSE-eligible
covered transactions, small creditor
exceptions, or balloon loan provisions
would, however, not be considered
QRMs under the QM-plus approach.
• One-to-four family principal
dwelling. In addition, QRM treatment
would only be available for loans
secured by one-to-four family real
properties that constitute the principal
dwelling of the borrower.191 Other types
of loans eligible for QM status, such as
loans secured by a boat used as a
residence, or loans secured by a
consumer’s vacation home, would not
be eligible under the QM-plus approach.
• Lien requirements. All QRMs would
be required to be first-lien mortgages.
For purchase QRMs, the QM-plus
approach excludes so-called
‘‘piggyback’’ loans; no other recorded or
perfected liens on the property could
exist at closing to the knowledge of the
originator. For refinance QRMs, junior
liens would not be prohibited, but
would be included in the LTV
calculations described below.192
• Credit history. To be eligible for
QRM status, the originator would be
required to determine the borrower was
not currently 30 or more days past due
on any debt obligation, and the
borrower had not been 60 or more days
184 12
CFR 1026.43(e)(2)(i).
CFR 1026.43(e)(2)(ii).
186 12 CFR 1026.43(e)(2)(iii); 12 CFR
1026.43(e)(3).
187 12 CFR 1026.43(e)(2)(iv).
188 12 CFR 1026.43(e)(2)(v).
189 12 CFR 1026.43(e)(2)(vi).
190 Cf. 12 CFR 1026.43(e)(1)(i) with 12 CFR
1026.43(e)(1)(ii).
191 The scope of properties that fall within the
meaning of ‘‘one-to-four family property’’ and
‘‘principal dwelling’’ would be consistent with the
definitions used in the agencies’ original QRM
proposal in § l.15(a), including consistent
application of the meaning of the term ‘‘principal
dwelling’’ as it is used in TILA (see 12 CFR
1026.2(a)(24) and Official Staff Interpretations to
the Bureau’s Regulation Z, comment 2(a)(24)–3).
192 These requirements are similar to those in the
agencies’ original QRM proposal in § l.15. See
§ l.15(a) (definitions of ‘‘combined loan to value
ratio’’ and ‘‘loan to value ratio’’) and § l.15(d)(2)
(subordinate liens).
185 12
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past due on any debt obligations within
the preceding 24 months. Further, the
borrower must not have, within the
preceding 36 months, been a debtor in
a bankruptcy proceeding or been subject
to a judgment for collection of an
unpaid debt; had personal property
repossessed; had any one-to-four family
property foreclosed upon; or engaged in
a short sale or deed in lieu of
foreclosure.193
• Loan to value ratio. To be eligible
for QRM status, the LTV at closing
could not exceed 70 percent. Junior
liens, which would only be permitted
for non-purchase QRMs as noted above,
must be included in the LTV calculation
if known to the originator at the time of
closing, and if the lien secures a HELOC
or similar credit plan, must be included
as if fully drawn.194 Property value
would be determined by an appraisal,
but for purchase QRMs, if the contract
price at closing for the property was
lower than the appraised value, the
contract price would be used as the
value.195
As discussed elsewhere in this
Supplementary Information, the
agencies’ analysis of mortgage market
data led the agencies to conclude that an
approach that aligns QRM with QM
covers most of the present mortgage
market, and a significant portion of the
historical market, putting aside nontraditional mortgages related primarily
to subprime lending and lending with
little documentation. This QM-plus
approach would cover a significantly
smaller portion of the mortgage market.
Securitizers would be required to retain
risk for QMs that do not meet the four
factors above.
193 These credit history criteria would be the
same as the one used in the agencies’ original QRM
proposal in § l.15(d)(5), including the safe harbor
allowing the originator to make the required
determination by reference to two credit reports.
194 These requirements would be consistent with
the approach used in the agencies’ original QRM
proposal in §§ l.15(a) and __.15(d)(9), except the
same LTV would be used for purchases,
refinancings, and cash-out refinancings. As the
agencies discussed in the original proposal, there is
data to suggest that refinance loans are more
sensitive to LTV level. See Original Proposal at
section IV.B.4. This single LTV approach in the
QM-plus is equivalent to the most conservative LTV
level (for cash-out refinancings) included in the
original proposal.
195 As in the agencies’ original proposal, the
appraisal would be required to be a written estimate
of the property’s market value, and be 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 promulgated by the Appraisal Standards
Board of the Appraisal Foundation, the appraisal
requirements of the Federal banking agencies, and
applicable laws.
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Request for Comment
96(a). As documented in the initial
proposal, academic research and the
agencies’ own analyses show that credit
history and loan-to-value ratio are key
determinants of mortgage default, along
with the product type factors that are
included in the QM definition.196 If
QRM criteria do not address credit
history and loan-to-value, would
securitizers packaging QRM-eligible
mortgages into RMBS have any financial
incentive to be concerned with these
factors in selecting mortgages for
inclusion in the RMBS pool? 96(b). Is
the incentive that would be provided by
risk retention unnecessary in light of the
securitizer incentives and investor
disclosures under an approach that
aligns QRM with QM as described in the
previous section of this SUPPLEMENTARY
INFORMATION?
97(a). Does the QM-plus approach
have benefits that exceed the benefits of
the approach discussed above that
aligns QRM with QM? For example,
would the QM-plus approach favorably
alter the balance of incentives for
extending credit that may not be met by
the QM definition approach or the QRM
approach previously proposed? 97(b).
Would the QM-plus approach have
benefits for financial stability?
98. Would the QM-plus approach
have greater costs, for example in
decreased access to mortgage credit,
higher priced credit, or increased
regulatory burden?
99. Other than the different incentives
described above, what other benefits
might be obtained under the QM-plus
approach?
2. Mortgage Availability and Cost
As discussed above, the
overwhelming majority of commenters,
including securitization sponsors,
housing industry groups, mortgage
bankers, lenders, consumer groups, and
legislators opposed the agencies’
original QRM proposal, recommending
instead that almost all mortgages
without features such as negative
amortization, balloon payments, or
teaser rates should qualify for an
exemption from risk retention.197 The
basis for these commenters’ objections
was a unified concern that the proposal
would result in a decrease in the
availability of non-QRM mortgages and
196 Original Proposal, section IV.B.2; section
IV.B.3; section IV.B. 4; section IV.B.5; Appendix A
to the SUPPLEMENTARY INFORMATION.
197 Some commenters expressed support for
additional factors, such as less stringent LTV
restrictions, reliance on private mortgage insurance
for loans with LTVs in excess of such restrictions,
and different approaches to the agencies’ proposed
credit quality restrictions.
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an increase in their cost. The other
strong element of concern was that the
original proposal’s 20 percent purchase
down payment requirement may have
become a de facto market-wide
standard, with harsh consequences for
borrowers in economic circumstances
that make it extremely difficult to save
such sums.
In developing QRM criteria under
section 15G, the agencies have balanced
the benefits, including the public
interest, with the cost and the other
considerations. To the extent risk
retention would impose any direct
restriction on credit availability and
price, the agencies proposed an
approach that aligns QRM with QM,
which directly reflects this concern.
There may be concerns, however, that
the effect of aligning QRM with QM
could ultimately decrease credit
availability as lenders, and
consequently securitizers, would be
very reluctant to transact in non-QM
loans. Since the QM criteria have been
issued (and even before), many lenders
have indicated they would not make
any non-QM mortgages, expressing
concern that they are uncertain of their
potential liability under the TILA
ability-to-repay requirements.
Request for Comment
100(a). Would setting the QRM
criteria to be the same as QM criteria
give originators additional reasons to
have reservations about lending outside
the QM criteria? 100(b). Would the QMplus approach, which confers a
distinction on a much smaller share of
the market than the approach that aligns
QRM with QM, have a different effect?
Numerous commenters on the original
QRM proposal asserted that lenders may
charge significantly higher interest rates
on non-QRM loans, with estimates
ranging from 75 to 300 basis points. A
limited number of these commenters
described or referred to an underlying
analysis of this cost estimate. The
agencies take note that a significant
portion of the costs were typically
ascribed to provisions of the risk
retention requirements that the agencies
have eliminated from the proposal. As
discussed in the previous section of this
SUPPLEMENTARY INFORMATION, the
agencies are considering the factors that
will drive the incremental cost of risk
retention. If the non-QRM market is
small relative to the QRM market,
investors might demand a liquidity
premium for holding securities
collateralized by non-QRMs. Investors
might also demand a risk premium for
holding these securities if non-QRMs
are perceived to be lower-quality
mortgages. If the scope of the non-QRM
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market is sufficiently broad to avoid
these types of premiums, the factors
impacting cost will be the amount of
additional risk retention that would be
required under the rule, above current
market practice, and the cost to the
securitizer of funding and carrying that
additional risk retention asset, reduced
by the expected yield on that asset.
There are a significant number of
financial institutions that possess
securitization expertise and
infrastructure, and that also have
management expertise in carrying the
same type of ABS interests they would
be required to retain under the rule; in
fact, they have long carried large
volumes of them as part of their
business model. They also compete for
securitization business and compete on
mortgage pricing.
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
Request for Comment
101. In light of these factors, the
agencies seek comment on whether the
QM-plus approach would encourage a
broader non-QRM market and thus
mitigate concerns about the types of
costs associated with a narrow QRM
approach described above. Considering
the number of institutions in the market
with securitization capacity and
expertise that already hold RMBS
interests presenting the same types of
risks as the RMBS interests the
proposed rule now establishes as
permissible forms of risk retention,
would the requirement to retain risk in
a greater number of securitizations
under the QM-plus approach act as a
restraint on the amount and cost of
mortgage credit available in the market?
3. Private Securitization Activity
In structuring the risk retention rules,
the agencies have sought to minimize
impediments to private securitization
activity as a source of market liquidity
for lending activity, and this principle
has not been overlooked in the RMBS
asset class. To the extent risk retention
would impose any impediment to
private securitization activity, the
agencies proposed an approach that
aligns QRM with QM to address that
concern.
In response to the agencies’ original
QRM proposal, comments from RMBS
investors generally supported the kinds
of loan-to-value, credit history, and
debt-to-income factors the agencies
proposed.198 While there were some
198 For example, one such investor stated that the
proposed QRM criteria were appropriate to
maintain the proper balance between incentives for
securitizers and mortgage credit availability. SIFMA
Asset Management. Another expressed concern that
broadening the QRM definition will give
securitizers less ‘‘skin in the game’’ and increase
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investors who expressed concern as to
the exact calibration of the QRM
requirements, on balance, these
commenters expressed support for an
approach that made risk retention the
rule, not the exception.
Additionally, commenters
recommended that the agencies examine
data from the private securitization
market in addition to the GSE data that
was considered in the original proposal.
The agencies conducted two such
analyses.199 The first analysis was based
on all securitized subprime and Alt-A
loans originated from 2005 to 2008.200
That analysis indicated that of such
mortgages that did not meet the QM
criteria, 52 percent experienced a
serious delinquency by the end of 2012,
where serious delinquency is defined as
90 or more days delinquent or in
foreclosure. In contrast, 42 percent of
such mortgages that met the QM criteria
experienced a serious delinquency by
the end of 2012.201 If the set of QMeligible mortgages were limited to those
with a loan-to-value ratio of 70 percent
or less, the serious delinquency rate
falls to 27 percent. As discussed earlier
in this SUPPLEMENTARY INFORMATION,
these extraordinarily high delinquency
rates reflect the sharp drop in house
prices and surge in unemployment that
occurred after the loans were originated,
as well as lax underwriting practices. In
addition, Alt-A and subprime loans are
not reflective of the overall market and
had many features that would exclude
them from the QM definition, but data
regarding these features were not always
captured in the data sets.
The second analysis was based on all
types of privately securitized loans
originated from 1997 to 2009.202
Although these data cover a broader
range of loan types and years than the
first analysis, subprime and Alt-A loans
originated towards the end of the
housing boom represent the bulk of all
issuance during this period. That
investors’ risk exposure, which is contrary to
investors’ long-term interests. Vanguard.
199 The two analyses are not perfectly
comparable. The first analysis included some loans
with less than full documentation and the second
analysis excluded no documentation loans. The
second analysis used data with cumulative loan-tovalue data while the first did not, and the second
analysis used a credit overlay while the first did
not.
200 These data are a subset of the same data
referenced in Part VI.B.1 of this Supplementary
Information.
201 These data do not include information on
points and fees or full information on whether the
loan met the QM documentation requirements. If
these factors were taken into account, the
delinquency rate on QM-eligible loans might be
lower.
202 See Part VIII.C.7.c, infra (Commission’s
Economic Analysis).
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analysis indicated that 48 percent of
mortgages that did not meet the QM
criteria experienced a serious
delinquency by the end of 2012,
compared with 34 percent of mortgages
that met the QM criteria. Limiting the
set of QM-eligible mortgages to those
with a loan-to-value ratio of 70 percent
or less and a minimum FICO score of
690 resulted in a 12 percent serious
delinquency rate, and when that set was
further limited to a combined loan-tovalue ratio of 70 percent or less, it
resulted in a 6.4 percent serious
delinquency rate.
The agencies also analyzed GSE data
to compare delinquency rates of loans
that would have met QM criteria with
those of loans that would have met
criteria approximating the QM-plus
criteria—those with loan-to-value ratios
of 70 percent or less, minimum FICO
scores of 690, and debt-to-income ratios
of no more than 43 percent. Those
meeting the tighter criteria and
originated in 2001–2004 had ever 90day delinquency rates of 1.1 percent,
compared with 3.9 percent for all QM
loans. For loans originated in 2005–
2008, the rates were 3.8 percent and
13.9 percent, respectively.
Request for Comment
102. How would the QM-plus
approach influence investors’ decisions
about whether or not to invest in private
RMBS transactions?
Another factor in investor willingness
to invest in private label RMBS, as well
as the willingness of originators to sell
mortgages to private securitizers,
concerns the presence of the Enterprises
in the market, operating as they are
under the conservatorship of the FHFA
and with capital support by the U.S.
Treasury.203 Currently, the vast majority
of residential mortgage securitization
activity is performed by the Enterprises,
who retain 100 percent of the risk of the
mortgages they securitize.204
Request for Comment
103. How would the QM-plus
approach affect or not affect investor
appetite for investing in private label
RMBS as opposed to securitizations
guaranteed by the Enterprises?
The agencies note that the proposed
requirements for risk retention have
203 Groups representing securitizers and mortgage
originators have recently expressed the view that
restarting the private securitization market for
conforming mortgages is dependent upon sweeping
reform to the current role of the Enterprises. See,
e.g., American Securitization Forum, White Paper:
Policy Proposals to Increase Private Capital in the
U.S. Housing Finance System (April 23, 2013);
Mortgage Bankers Association, Key Steps on the
Road to GSE Reform (August 8, 2013).
204 Ginnie Mae plays the next largest role.
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been significantly revised in response to
commenter concerns about the original
proposal. With respect to the costs of
risk retention for sponsors and the
possible effect that a QM-plus approach
could have on their willingness to
participate in the securitization market,
the agencies request comment on
whether risk retention could be unduly
burdensome for sponsors or whether it
would provide meaningful alignment of
incentives between sponsors and
investors.
Request for Comment
104. Since more RMBS transactions
would be subject to risk retention under
the QM-plus approach, how would the
proposed forms of risk retention affect
sponsors’ willingness to participate in
the market?
4. Request for Comment About the
Terms of the QM-Plus Approach
In addition, to the questions posed
above, the agencies request public
comment on a few specific aspects of
the QM-plus approach, as follows.
a. Core QM Criteria
The QM-plus approach would only
include mortgages that fall within the
QM safe harbor or presumption of
compliance under the core QM
requirements. If a mortgage achieved
QM status only by relying on the CFPB’s
provisions for GSE-eligible covered
transactions, small creditors, or balloon
loans, it would not be eligible for QRM
status.205
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Request for Comment
105. The agencies request comment
whether the QM-plus approach should
also include mortgages that fall within
QM status only in reliance on the
CFPB’s provisions for GSE-eligible
covered transactions, small creditors, or
balloon loans. For all but the GSEeligible covered transactions, the CFPB’s
rules make the mortgages ineligible for
QM status if the originator sells them
into the secondary market within three
years of origination. For GSE-eligible
loans, it appears sale to the GSEs may
remain the best execution alternative for
small originators (although the agencies
are seeking comment on this point). The
agencies request commenters advocating
inclusion of these non-core QMs under
the QM-plus approach to address
205 Specifically, the QRM would need to be
eligible for the safe harbor or presumption of
compliance for a ‘‘qualified mortgage,’’ as defined
in regulations codified at 12 CFR 1026.43(e) and the
associated Official Interpretations published in
Supplement I to Part 1026, without regard to the
special rules at 12 CFR 1026.43(e)(4)–(6) or 12 CFR
1026.43(f).
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specifically how inclusion would
improve market liquidity for such loans.
b. Piggyback Loans
For purchase QRMs, the QM-plus
approach excludes so-called
‘‘piggyback’’ loans; no other recorded or
perfected liens on the property could
exist at closing of the purchase
mortgage, to the knowledge of the
originator at closing. The CFPB’s QM
requirements do not prohibit piggyback
loans, but the creditor’s evaluation of
the borrower’s ability to repay must
include consideration of the obligation
on the junior lien (similar to the
treatment the QM-plus approach
incorporates for junior liens on
refinancing transactions). As the
agencies discussed in the original
proposal, the economic literature
concludes that, controlling for other
factors, including combined LTV ratios,
the use of junior liens at origination of
purchase mortgages to reduce down
payments significantly increases the risk
of default.206
Request for Comment
106. The agencies request comment
whether, notwithstanding the agencies’
concern about this additional risk of
default, the agencies should remove the
outright prohibition on piggyback loans
from the QM-plus approach.
107(a). Commenters, including one
group representing RMBS investors,
expressed concern that excluding loans
to a borrower that is 30 days past due
on any obligation at the time of closing
from the definition of QRM would be
too conservative.207 The QM-plus
approach is based on the view that these
30-day credit derogatories are typically
errors, or oversights by borrowers, that
are identified to borrowers and
eliminated during the underwriting
process. Thus a 30-day derogatory that
cannot be resolved before closing is an
indication of a borrower who, as he or
she approaches closing, is not meeting
his or her obligations in a timely way.
The agencies request comments from
originators as to this premise. 107(b).
The agencies also request comment on
whether the QM-plus approach should
permit a borrower to have a single 60day plus past-due at the time of closing,
but not two. 107(c). The agencies further
request comment on whether this
approach should be included if the
borrower’s single 60-day past-due is on
a mortgage obligation.
In connection with the agencies’
discussion elsewhere in this
206 See Original Proposal at note 132 and
accompanying text.
207 ASF Investors.
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Supplementary Information notice of
underwriting criteria for commercial
loans, commercial mortgages, and auto
loans, the agencies have requested
comment about permitting blended
pools of qualifying and non-qualifying
assets, with proportional reductions in
risk retention.208 Commenters are
referred to an invitation to comment on
blended pools with respect to
residential mortgage securitizations that
appears at the end of that discussion.
VII. Solicitation of Comments on Use of
Plain Language
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 the agencies 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?
• What else could the agencies do to
make the regulation easier to
understand?
VIII. Administrative Law Matters
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.209 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 $500
208 See
Part V.D of this SUPPLEMENTARY
INFORMATION.
209 See
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million) and publishes its certification
and a short, explanatory statement in
the Federal Register together with the
rule.
As discussed in the SUPPLEMENTARY
INFORMATION above, section 941 of the
Dodd-Frank Act 210 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,
subject to a 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 QRMs, 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
210 Codified at section 15G of the Exchange Act,
17 U.S.C. 78o–11.
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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. Under the proposed rule a
sponsor may offset the risk retention
requirement by the amount of any
eligible vertical risk retention interest 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 December 31, 2012
Call Report data to evaluate the
origination and securitization activity of
small banking organizations that
potentially could retain credit risk
directly through their own
securitization activity or indirectly
under allocation provisions of the
proposal.211
As of December 31, 2012, there were
approximately 1,291 small national
banks and Federal savings associations
that would be subject to this rule. The
Call Report data indicates that
approximately 140 small national banks
and Federal savings associations,
originate loans to securitize themselves
or sell to other entities for
securitization, predominately through
ABS issuances collateralized by one-tofour family residential mortgages. This
number reflects conservative
assumptions, as few small entities
sponsor securitizations, and few
originate a sufficient number of loans
for securitization to meet the minimum
20 percent share for the allocation to
originator provisions under the
proposed rule. As the OCC regulates
approximately 1,291 small entities, and
211 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.
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57997
140 of those entities could be subject to
this proposed rule, the proposed rule
could impact a substantial number of
small national banks and Federal
savings associations.
The vast majority of securitization
activity by small entities is in the
residential mortgage sector. 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. For those
loans not sold to the Enterprises, most
would likely meet the QRM exemption.
The QM rule, on which the QRM
proposal is based, also includes
exceptions for small creditors, which
may be utilized by many of these small
entities to meet the requirements and
thus not need to hold risk retention on
those assets. For these reasons, the OCC
believes the proposed rule would not
have a substantial economic effect on
small entities.
Therefore, the OCC concludes that the
proposed rule would not have a
significant impact on a substantial
number of small entities. 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 Federal savings
associations 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.212 Under regulations
promulgated by the Small Business
Administration, a small entity includes
a commercial bank or bank holding
company with assets of $500 million or
less (each, a small banking
organization).213 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
212 See
213 13
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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
a securitization transaction 214 (based on
December 31, 2012 data).215 As of
December 31, 2012, there were
approximately 5,135 small banking
organizations supervised by the Board,
which includes 4,092 bank holding
companies, 297 savings and loan
holding companies, 632 state member
banks, 22 Edge and agreement
corporations and 92 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 eligible vertical risk
retention interest 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.216 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 December 31, 2012 regulatory
report data 217 indicates that
approximately 723 small banking
organizations, 87 of which are small
214 For purposes of the proposed rules, this would
include a small bank holding company; savings and
loan holding company; state member bank; Edge
corporation; agreement corporation; foreign banking
organization; and any subsidiary of the foregoing.
215 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.
216 With respect to an open market CLO
transaction, the risk retention retained by the
originator must be at least 20 percent of the
aggregate principal balance at origination of a CLOeligible loan tranche.
217 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) 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 (2) assets sold with recourse or
other seller-provided credit enhancements and not
securitized by the reporting bank.
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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.218
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 December 31, 2012,
only one small banking organization
supervised by the Board reported an
outstanding principal balance of assets
sold and securitized of $100 million or
more.219
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.220 However, a
regulatory flexibility analysis is not
required if the agency certifies that the
rule will not have a significant
218 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.
219 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.
220 See 5 U.S.C. 601 et seq.
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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 $500 million)
and publishes its certification and a
short, explanatory statement in the
Federal Register together with the rule.
As of March 31, 2013, there were
approximately 3,711 small FDICsupervised institutions, which include
3,398 state nonmember banks and 313
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 221 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,
subject to a 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 QRMs, 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
221 Codified at section 15G of the Exchange Act,
17 U.S.C. 78o–11.
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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
40 small banking organizations that
currently sponsor securitizations (two of
which are national banks, seven are
state member banks, 23 are state
nonmember banks, and eight are savings
associations, based on March 31, 2013
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
eligible vertical risk retention 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.222 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
March 31, 2013 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.223
222 With respect to an open market CLO
transaction, the risk retention retained by the
originator must be at least 20 percent of the
aggregate principal balance at origination of a CLOeligible loan tranche.
223 Call Report Schedule RC–S provides
information on the servicing, securitization, and
asset sale activities of banking organizations. For
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The Call Report data indicates that
approximately 703 small banking
organizations, 456 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.224 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 March 31, 2013, only
two small banking organizations
reported an outstanding principal
balance of assets sold and securitized of
$100 million or more.225
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.
Commission: 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,
purposes of the RFA analysis, the agencies gathered
and evaluated data regarding (1) 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 (2) assets sold with recourse or
other seller-provided credit enhancements and not
securitized by the reporting bank.
224 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.
225 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.
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in general, requires the securitizer of
asset-backed securities (ABS) to retain
not less than 5 percent of the credit risk
of the assets collateralizing the ABS.226
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.227 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.
A few commenters on the original
proposal indicated that the proposed
risk retention requirements could
indirectly affect the availability of credit
to small businesses and lead to
contractions in the secondary mortgage
market, with a corresponding reduction
in mortgage originations. The
Regulatory Flexibility Act only requires
an agency to consider regulatory
alternatives for those small entities
subject to the proposed rules. The
Commission has considered the broader
economic impact of the proposed rules,
including their potential effect on
efficiency, competition and capital
formation, in the Commission’s
Economic Analysis below.
The Commission encourages written
comments regarding this certification.
The Commission requests, in particular,
that commenters describe the nature of
any direct impact on small entities and
provide empirical data to support the
extent of the impact.
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
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
226 See
227 5
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have been submitted by the FDIC, OCC,
and the Commission to OMB for
approval under section 3507(d) 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, by
facsimile to 202–395–6974, or by email
to: oira_submission@omb.eop.gov.
Attention, Commission and Federal
Banking Agency Desk Officer.
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2. Proposed Information Collection
Title of Information Collection: Credit
Risk Retention.
Frequency of response: Event
generated; annual, monthly.
Affected Public: 228
FDIC: Insured state non-member
banks, insured state branches of foreign
banks, state savings associations, and
certain subsidiaries of these entities.
OCC: National banks, Federal savings
associations, Federal branches or
agencies of foreign banks, or any
operating subsidiary thereof.
228 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
public of the Commission is based on those entities
not already accounted for by the FDIC, OCC, and
Board.
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Board: Insured state member banks,
bank holding companies, savings and
loan holding companies, Edge and
agreement corporations, foreign banking
organizations, nonbank financial
companies supervised by the Board, and
any subsidiary thereof.
Commission: 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 proposed
rule contains requirements subject to
the PRA. The information requirements
in the joint regulations proposed by the
three Federal banking agencies and the
Commission are found in sections l.4,
l .5, l .6, l.7, l.8, l.9, l.10, l.11,
l.13, l.15, l.16, l.17, and l.18. 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 for the
recordkeeping requirements set forth in
sections l .4(e) and l .5(g)(2), there
would be no mandatory retention period
for the proposed collections of
information.
Section-by-Section Analysis
Section l.4 sets forth the conditions
that must be met by sponsors electing to
use the standard risk retention option,
which may consist of an eligible vertical
interest or an eligible horizontal
residual interest, or any combination
thereof. Sections l .4(d)(1) and
l.4(d)(2) specify the disclosures
required with respect to eligible
horizontal residual interests and eligible
vertical interests, respectively.
A sponsor retaining any eligible
horizontal residual interest (or funding
a horizontal cash reserve account) is
required to calculate the Closing Date
Projected Cash Flow Rate and Closing
Date Projected Principal Repayment
Rate for each payment date, and certify
to investors that it has performed such
calculations and that the Closing Date
Projected Cash Flow Rate on any
payment date does not exceed the
Closing Date Projected Principal
Repayment Rate on such payment date
(§ l.4(b)(2)).
Additionally, the sponsor is required
to disclose: the fair value of the eligible
horizontal residual interest retained by
the sponsor and the fair value of the
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eligible horizontal residual interest
required to be retained (§ l.4(d)(1)(i));
the material terms of the eligible
horizontal residual interest
(§ l.4(d)(1)(ii)); the methodology used
to calculate the fair value of all classes
of ABS interests (§ l.4(d)(1)(iii)); the
key inputs and assumptions used in
measuring the total fair value of all
classes of ABS interests, and the fair
value of the eligible horizontal residual
interest retained by the sponsor
(§ l.4(d)(1)(iv)); the reference data set
or other historical information used to
develop the key inputs and assumptions
(§ l.4(d)(1)(v)); the number of
securitization transactions securitized
by the sponsor during the previous fiveyear period in which the sponsor
retained an eligible horizontal residual
interest pursuant to this section, and the
number (if any) of payment dates in
each such securitization on which
actual payments to the sponsor with
respect to the eligible horizontal
residual interest exceeded the cash flow
projected to be paid to the sponsor on
such payment date in determining the
Closing Date Projected Cash Flow Rate
(§ l.4(d)(1)(vi)); and the amount placed
by the sponsor in the horizontal cash
reserve account at closing, the fair value
of the eligible horizontal residual
interest that the sponsor is required to
fund through such account, and a
description of such account
(§ l.4(d)(1)(vii)).
For eligible vertical interests, the
sponsor is required to disclose: whether
the sponsor retains the eligible vertical
interest as a single vertical security or as
a separate proportional interest in each
class of ABS interests in the issuing
entity issued as part of the securitization
transaction (§ l.4(d)(2)(i)); for eligible
vertical interests retained as a single
vertical security, the fair value amount
of the single vertical security retained at
the closing of the securitization
transaction and the fair value amount
required to be retained, and the
percentage of each class of ABS interests
in the issuing entity underlying the
single vertical security at the closing of
the securitization transaction and the
percentage of each class of ABS interests
in the issuing entity that would have
been required to be retained if the
eligible vertical interest was held as a
separate proportional interest
(§ l.4(d)(2)(ii)); for eligible vertical
interests retained as a separate
proportional interest in each class of
ABS interests in the issuing entity, the
percentage of each class of ABS interests
in the issuing entity retained at the
closing of the securitization transaction
and the percentage of each class of ABS
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interests required to be retained
(§ l.4(d)(2)(iii)); and information with
respect to the measurement of the fair
value of the ABS interests in the issuing
entity (§ l.4(d)(2)(iv)).
Section l.4(e) requires a sponsor to
retain the certifications and disclosures
required in paragraphs (b) and (d) of this
section in written form in its records
and must provide the disclosure upon
request to the Commission and its
appropriate Federal banking agency, if
any, until three years after all ABS
interests are no longer outstanding.
Section l.5 requires sponsors relying
on the revolving master trust risk
retention option to disclose: The value
of the seller’s interest retained by the
sponsor, the fair value of any horizontal
risk retention retained by the sponsor
under § l.5(f), and the unpaid principal
balance value or fair value, as
applicable, the sponsor is required to
retain (§ l.5(g)(1)(i)); the material terms
of the seller’s interest and of any
horizontal risk retention retained by the
sponsor under § l.5(f) (§ l.5(g)(1)(ii));
and if the sponsor retains any horizontal
risk retention under § l.5(f), the same
information as is required to be
disclosed by sponsors retaining
horizontal interests (§ l.5(g)(1)(iii)).
Additionally, a sponsor must retain the
disclosures required in § l.5(g)(1) in
written form in its records and must
provide the disclosure upon request to
the Commission and its appropriate
Federal banking agency, if any, until
three years after all ABS interests are no
longer outstanding (§ l.5(g)(2)).
Section l.6 addresses the
requirements for sponsors utilizing the
eligible ABCP conduit risk retention
option. The requirements for the eligible
ABCP conduit risk retention option
include disclosure to each purchaser of
ABCP and periodically to each holder of
commercial paper issued by the ABCP
conduit of the name and form of
organization of the regulated liquidity
provider that provides liquidity
coverage to the eligible ABCP conduit,
including a description of the form,
amount, and nature of such liquidity
coverage, and notice of any failure to
fund; and with respect to each ABS
interest held by the ABCP conduit, the
asset class or brief description of the
underlying receivables, the standard
industrial category code for the
originator-seller or majority-owned OS
affiliate that retains an interest in the
securitization transaction, and a
description of the form, fair value, and
nature of such interest (§ l.6(d)). An
ABCP conduit sponsor relying upon this
section shall provide, upon request, to
the Commission and its appropriate
Federal banking agency, if any, the
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information required under § l.6(d), in
addition to the name and form of
organization of each originator-seller or
majority-owned OS affiliate that retains
an interest in the securitization
transaction (§ l.6(e)).
A sponsor relying on the eligible
ABCP conduit risk retention option
shall maintain and adhere to policies
and procedures to monitor compliance
by each originator-seller or majorityowned OS affiliate (§ l.6(f)(2)(i)). If the
ABCP conduit sponsor determines that
an originator-seller or majority-owned
OS affiliate is no longer in compliance,
the sponsor must promptly notify the
holders of the ABCP, the Commission
and its appropriate Federal banking
agency, in writing of the name and form
of organization of any originator-seller
or majority-owned OS affiliate that fails
to retain and the amount of asset-backed
securities issued by an intermediate
SPV of such originator-seller and held
by the ABCP conduit, the name and
form of organization of any originatorseller or majority-owned OS affiliate
that hedges, directly or indirectly
through an intermediate SPV, their risk
retention in violation and the amount of
asset-backed securities issued by an
intermediate SPV of such originatorseller or majority-owned OS affiliate
and held by the ABCP conduit, and any
remedial actions taken by the ABCP
conduit sponsor or other party with
respect to such asset-backed securities
(§ l.6(f)(2)(ii)).
Section l.7 sets forth the
requirements for sponsors relying on the
commercial mortgage-backed securities
risk retention option, and includes
disclosures of: The name and form of
organization of each third-party
purchaser (§ l.7(a)(7)(i)); each initial
third-party purchaser’s experience in
investing in commercial mortgagebacked securities (§ l.7(a)(7)(ii)); other
material information (§ l.7(a)(7)(iii));
the fair value of the eligible horizontal
residual interest retained by each thirdparty purchaser, the purchase price
paid, and the fair value of the eligible
horizontal residual interest that the
sponsor would have retained if the
sponsor had relied on retaining an
eligible horizontal residual interest
under the standard risk retention option
(§ l.7(a)(7)(iv) and (v)); a description of
the material terms of the eligible
horizontal residual interest retained by
each initial third-party purchaser,
including the same information as is
required to be disclosed by sponsors
retaining horizontal interests pursuant
to § l.4 (§ l.7(a)(7)(vi)); the material
terms of the applicable transaction
documents with respect to the
Operating Advisor (§ l.7(a)(7)(vii); and
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representations and warranties
concerning the securitized assets, a
schedule of any securitized assets that
are determined not to comply with such
representations and warranties, and the
factors used to determine such
securitized assets should be included in
the pool notwithstanding that they did
not comply with the representations and
warranties (§ l.7(a)(7)(viii)). A sponsor
relying on the commercial mortgagebacked securities risk retention option
shall provide in the underlying
securitization transaction documents
certain provisions related to the
Operating Advisor (§ l.7(a)(6)),
maintain and adhere to policies and
procedures to monitor compliance by
third-party purchasers with regulatory
requirements (§ l.7(b)(2)(A)), and
notify the holders of the ABS interests
in the event of noncompliance by a
third-party purchaser with such
regulatory requirements (§ l.7(b)(2)(B)).
Section l.8 requires that a sponsor
relying on the Federal National
Mortgage Association and Federal Home
Loan Mortgage Corporation ABS risk
retention option must disclose a
description of the manner in which it
has met the credit risk retention
requirements (§ l.8(c)).
Section l.9 sets forth the
requirements for sponsors relying on the
open market CLO risk retention option,
and includes disclosures of a complete
list of, and certain information related
to, every asset held by an open market
CLO (§ l.9(d)(1)), and the full legal
name and form of organization of the
CLO manager (§ l.9(d)(2).
Section l.10 sets forth the
requirements for sponsors relying on the
qualified tender option bond risk
retention option, and includes
disclosures of the name and form of
organization of the Qualified Tender
Option Bond Entity, and a description
of the form, fair value (expressed as a
percentage of the fair value of all of the
ABS interests issued in the
securitization transaction and as a dollar
amount), and nature of such interest in
accordance with the disclosure
obligations in section l.4(d)
(§ l.10(e)).
Section l.11 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 that
acquires and retains an interest in the
transaction, a description of the form,
amount and nature of such interest, and
the method of payment for such interest
(§ l.11(a)(2)). A sponsor relying on this
section shall maintain and adhere to
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policies and procedures that are
reasonably designed to monitor
originator compliance with retention
amount and hedging, transferring and
pledging requirements (§ l.11(b)(2)(A))
and shall promptly notify the holders of
the ABS interests in the transaction in
the event of originator noncompliance
with such regulatory requirements
(§ l.11(b)(2)(B)).
Section l.13 provides an exemption
from the risk retention requirements for
qualified residential mortgages that
meet certain specified criteria, including
that the depositor of the asset-backed
security certify that it has evaluated the
effectiveness of its internal supervisory
controls and concluded that the controls
are effective (§ l.13(b)(4)(i)), and that
the sponsor provide a copy of the
certification to potential investors prior
to sale of asset-backed securities
(§ l.13(b)(4)(iii)). In addition,
§ l.13(c)(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 provides exemptions
from the risk retention requirements for
qualifying commercial loans that meet
the criteria specified in Section l.16,
qualifying CRE loans that meet the
criteria specified in Section l.17, and
qualifying automobile loans that meet
the criteria specified in Section l.18.
Section l.15 also requires the sponsor
to disclose a description of the manner
in which the sponsor determined the
aggregate risk retention requirement for
the securitization transaction after
including qualifying commercial loans,
qualifying CRE loans, or qualifying
automobile loans with 0 percent risk
retention, and descriptions of the
qualifying commercial loans, qualifying
CRE loans, and qualifying automobile
loans (‘‘qualifying assets’’) and
descriptions of the assets that are not
qualifying assets, and the material
differences between the group of
qualifying assets and the group of assets
that are not qualifying assets with
respect to the composition of each
group’s loan balances, loan terms,
interest rates, borrower credit
information, and characteristics of any
loan collateral (§ l.15(a)(4)).
Sections l.16, l.17 and l.18 each
require that: The depositor of the assetbacked security certify that it has
evaluated the effectiveness of its
internal supervisory controls and
concluded that its internal supervisory
controls are effective (§§ l.16(b)(8)(i),
l.17(b)(10)(i), and l.18(b)(8)(i)); the
sponsor provide a copy of the
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certification to potential investors prior
to the sale of asset-backed securities
(§§ l.16(b)(8)(iii), l.17(b)(10)(iii), and
l.18(b)(8)(iii)); and the sponsor
promptly notify the holders of the
securities of any loan included in the
transaction that is required to be cured
or repurchased by the sponsor,
including the principal amount of such
loan(s) and the cause for such cure or
repurchase (§§ l.16(c)(3), l.17(c)(3),
and l.18(c)(3)).
Estimated Paperwork Burden
Estimated Burden per Response:
§ l.4—Standard risk retention:
Horizontal interests:
Recordkeeping—0.5 hours,
disclosures—3.0 hours, payment
date disclosures—1.0 hour with a
monthly frequency; vertical
interests: Recordkeeping—0.5
hours, disclosures—2.5 hours;
combined horizontal and vertical
interests: Recordkeeping—0.5
hours, disclosures—4.0 hours,
payment date disclosures—1.0 hour
with a monthly frequency.
§ l.5—Revolving master trusts:
Recordkeeping—0.5 hours;
disclosures—4.0 hours.
§ l.6—Eligible ABCP conduits:
Recordkeeping—20.0 hours;
disclosures—3.0 hours.
§ l.7—Commercial mortgage-backed
securities: Recordkeeping—30.0
hours; disclosures—20.75 hours.
§ l.8—Federal National Mortgage
Association and Federal Home Loan
Mortgage Corporation ABS:
Disclosures—1.5 hours.
§ l.9—Open market CLOs:
Disclosures—20.25 hours.
§ l.10—Qualified tender option bonds:
Disclosures—4.0 hours.
§ l.11—Allocation of risk retention to
an originator: Recordkeeping 20.0
hours; disclosures 2.5 hours.
§ l.13—Exemption for qualified
residential mortgages:
Recordkeeping—40.0 hours;
disclosures 1.25 hours.
§ l.15—Exemption for qualifying
commercial loans, commercial real
estate loans, and automobile loans:
Disclosure—20.0 hours.
§ l.16—Underwriting standards for
qualifying commercial loans:
Recordkeeping—40.0 hours;
disclosures—1.25 hours.
§ l.17– Underwriting standards for
qualifying CRE loans:
Recordkeeping—40.0 hours;
disclosures—1.25 hours.
§ l.18—Underwriting standards for
qualifying automobile loans:
Recordkeeping—40.0 hours;
disclosures—1.25 hours.
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FDIC
Estimated Number of Respondents: 92
sponsors; 494 annual offerings per year.
Total Estimated Annual Burden:
10,726 hours.
OCC
Estimated Number of Respondents: 30
sponsors; 160 annual offerings per year.
Total Estimated Annual Burden:
3,549 hours.
Board
Estimated Number of Respondents: 20
sponsors; 107 annual offerings per year.
Total Estimated Annual Burden:
2,361 hours.
Commission
Estimated Number of Respondents:
107 sponsors; 574 annual offerings per
year.
Total Estimated Annual Burden:
12,355 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 249 unique sponsors
conduct ABS offerings per year. This
estimate was based on the average
number of ABS offerings from 2004
through 2012 reported by the ABS
database AB Alert for all non-CMBS
transactions and by Securities Data
Corporation for all CMBS transactions.
Of the 249 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, and then
estimated how frequently 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 2012,
and therefore, we estimate the total
number of annual offerings per year to
be 1,334.229 We also made the following
additional estimates:
229 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, offerings made under
Securities Act Rule 144A, and traditional private
placements. We also note that this estimate is for
offerings that are not exempted under §§ l.19 and
l.20 of the proposed rule.
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• 12 offerings per year will be subject
to disclosure and recordkeeping
requirements under section § l.11,
which are divided equally among the
four agencies (i.e., 3 offerings per year
per agency);
• 100 offerings per year will be
subject to disclosure and recordkeeping
requirements under section § __.13,
which are divided proportionately
among the agencies based on the entity
percentages described above (i.e., 8
offerings per year subject to § l.13 for
the Board; 12 offerings per year subject
to § l.13 for the OCC; 37 offerings per
year subject to § l.13 for the FDIC; and
43 offerings per year subject to § l.13
for the Commission); and
• 120 offerings per year will be
subject to the disclosure requirements
under § l.15, which are divided
proportionately among the agencies
based on the entity percentages
described above (i.e., 10 offerings per
year subject to § l.15 for the Board, 14
offerings per year subject to § l.15 for
the OCC; 44 offerings per year subject to
§ l.15 for the FDIC, and 52 offerings
per year subject to § l.15 for the
Commission. Of these 120 offerings per
year, 40 offerings per year will be
subject to disclosure and recordkeeping
requirements under §§ l.16, l.17, and
l.18, 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 subpart B
of the proposed rule, the agencies
multiplied the number of offerings
estimated to be subject to the base risk
retention requirements (i.e., 1,114) 230
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 1,114
offerings per year by 43 percent, which
equals 479 offerings per year. This
number was then divided by the
number of base risk retention options
under subpart B of the proposed rule
(i.e., nine) 231 to arrive at the estimate of
230 Estimate of 1,334 offerings per year minus the
estimate of the number of offerings qualifying for
an exemption under §§ l.13 and l.15 (220 total).
231 For purposes of this calculation, the
horizontal, vertical, and combined horizontal and
vertical risk retention methods under the standard
risk retention option are each counted as a separate
option under subpart B of the proposed rule.
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the number of offerings per year per
agency per base risk retention option.
For the Commission, this was calculated
by dividing 479 offerings per year by
nine options, resulting in 53 offerings
per year per base risk retention option.
The total estimated annual burden for
each agency was then calculated by
multiplying the number of offerings per
year per section for such agency by the
number of burden hours estimated for
the respective section, then adding these
subtotals together. For example, under
§ l.10, the Commission multiplied the
estimated number of offerings per year
for § l.10 (i.e., 53 offerings per year) by
the estimated annual frequency of the
response for § l.10 of one response,
and then by the disclosure burden hour
estimate for § l.10 of 4.0 hours. Thus,
the estimated annual burden hours for
respondents to which the Commission
accounts for the burden hours under
§ l.10 is 212 hours (53 * 1 * 4.0 hours
= 212 hours). 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.
For disclosures made at the time of
the securitization transaction,232 the
Commission allocates 25 percent of
these hours (1,070 hours) to internal
burden for all sponsors. For the
remaining 75 percent of these hours,
(3,211 hours), the Commission uses an
estimate of $400 per hour for external
costs for retaining outside professionals
totaling $1,284,400. For disclosures
made after the time of sale in a
securitization transaction,233 the
Commission allocated 75 percent of the
total estimated burden hours (1,911
hours) to internal burden for all
sponsors. For the remaining 25 percent
of these hours (637 hours), the
Commission uses an estimate of $400
per hour for external costs for retaining
outside professionals totaling $254,800.
FHFA: The proposed regulation does
not contain any FHFA information
collection requirement that requires the
approval of OMB under the Paperwork
Reduction Act.
232 These are the disclosures required by
§ l.4(d)(1) and (2) (as applicable to horizontal
interests, vertical interests, or any combination of
horizontal and vertical interests); §§ l.5(g)(1)
through (3); l.6(d) and (e); l.7(a)(7)(i) through
(viii); l.8(c); l.9(d); l10(e); l.11(a)(2);
l.13(b)(4)(iii); l.15(a)(4); l.16(b)(8)(iii);
l.17(b)(10)(iii); and l.18(b)(8)(iii).
233 These are the disclosures required by
§§ l.4(b)(2); l.6(f)(2)(ii); l.7(b)(2)(B); l.9(d);
l.11(b)(2)(B); l13(c)(3); l.16(c)(3); l17(c)(3); and
l.18(c)(3).
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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 5 percent of the
credit risk of any asset that the sponsor,
through the issuance of an asset-backed
security (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.234
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
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.235 In addition, Section 15G
states that the agencies must permit a
sponsor to retain less than 5 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.236
Section 15G requires the agencies to
prescribe risk retention requirements for
‘‘securitizers,’’ which the agencies
interpret as depositors or sponsors of
ABS. The proposal would 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
is appropriate in light of the active and
direct role that a sponsor typically has
234 See 15 U.S.C. 78o–11(b), (c)(1)(A) and
(c)(1)(B)(ii).
235 See id. at section 78o–11(c)(1)(C)(iii), (4)(A)
and (B).
236 See id. at section 78o–11(c)(1)(B)(ii) and (2).
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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. Moreover, 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 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 QRM on the
housing and housing finance markets.
The Commission is sensitive to the
economic impacts, including the costs
and benefits, of its rules. The discussion
below addresses the economic effects of
the proposed rules, including the likely
benefits and costs of the rules as well as
their effects on efficiency, competition
and capital formation. Some of the
economic effects stem from the statutory
mandate of Section 15G, whereas others
are affected by the discretion the
agencies have exercised in
implementing this mandate. These two
types of costs and benefits may not be
entirely separable to the extent that the
agencies’ discretion is exercised to
realize the benefits that they believe
were intended by Section 15G.
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.237
Further, Section 3(f) of the Exchange
Act requires the Commission,238 when
engaging in rulemaking where it is
required to consider or determine
whether an action is necessary or
appropriate in the public interest, to
consider, in addition to the protection of
237 15
238 17
U.S.C. 78w(a).
U.S.C. 78c(f).
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investors, whether the action will
promote efficiency, competition and
capital formation.
2. Background
a. Historical Background
Asset-backed securitizations, or the
pooling of consumer and business loans
into financial instruments that trade in
the financial markets, play an important
role in the creation of credit for the U.S.
economy. Benefits of securitization may
include reduced cost of credit for
borrowers, expanded availability of
credit, and increased secondary market
liquidity for loans.239 The securitization
process generally involves the
participation of multiple parties, each of
whom has varying amounts of
information and differing economic
incentives. For example, the entity
establishing and enforcing underwriting
standards and credit decisions (i.e., the
originator) and the entity responsible for
structuring the securitization (i.e., the
securitizer) are not required to bear any
credit risk. By contrast, the ultimate
holders of the securitized assets (i.e., the
investors) bear considerable credit risk
and yet typically have minimal
influence over underwriting standards
and decisions and limited information
about the characteristics of the
borrower.
A considerable amount of literature
has emerged that supports the view that,
during the early to mid-2000s,
residential mortgage-backed
securitizations (RMBSs) contributed to a
significant decline in underwriting
standards for residential mortgage
loans.240 Much of the initial
securitization issuance focused
primarily on mortgages, which had
guarantees from the Government
National Mortgage Association (Ginnie
Mae) or the Government Sponsored
Enterprises (Enterprises), which
included the Federal National Mortgage
Association, also known as Fannie Mae,
and the Federal Home Loan Mortgage
Corporation, also known as Freddie
Mac. Based on the initial success of
these pass through securitizations 241
239 See, e.g., Board of Governors of the Federal
Reserve System, ‘‘Report to the Congress on Risk
Retention’’, (October 2010) and Financial Stability
Oversight Committee, ‘‘Macroeconomic Effects of
Risk Retention Requirements’’, (January 2011).
240 Keys, Mukherjee, Seru and Vig, ‘‘Did
Securitization Lead to Lax Screening? Evidence
From Subprime Loans’’ (February 2010) and
Nadauld and Sherlund, ‘‘The Impact of
Securitization on the Expansion of Subprime
Credit’’, (2013).
241 Pass through securitization is considered the
simplest and least complex way to securitize an
asset. In this structure, investors receive a direct
participation in the cash flows from a pool of assets.
Payments on the securities are made in essentially
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and investor demand and acceptance of
these instruments, asset-backed
securitizations subsequently expanded
to include other asset classes (e.g., car
loans, student loans, credit card
receivables, corporate loans and
commercial mortgages). Over the years,
securitizers began creating increasingly
complex structures, including credit
tranching and resecuritizations. As a
result, securitizations increased over
time in a variety of asset classes,
providing investors with relatively
attractive risk-return investment
choices.
In the early 2000s, as securitizers
sought additional assets to securitize,
originators turned to a formerly lightlytapped segment of the residential home
market, known as the sub-prime
market.242 This segment serves the
mortgage needs of individuals that are
less credit worthy, generally for reasons
related to income, assets and/or
employment. The securitization of
subprime loans facilitated the extension
of credit to this segment of the market,
which allowed securitizers to generate
more collateral for the securitization
market and led to a significant increase
in the availability of low credit quality
mortgage loans for purposes of meeting
the relatively high demand for
securitized investment products. This
high volume of lending contributed to
higher residential property prices.243 A
contributing factor to the increase in
housing prices was the unrealistically
high ratings provided by credit rating
agencies on residential mortgage-backed
securities.244 Many investors may not
have performed independent credit
assessments, either due to a lack of
transparency into the characteristics of
the underlying assets or an undue
reliance on credit rating agencies that
provided third-party credit evaluations.
This situation persisted until a high
the same manner as payments on the underlying
loans. Principal and interest are collected on the
underlying assets and ‘passed through’ to investors
without any tranching or structuring or
reprioritization of the cash flows.
242 Dell’Ariccia, Deniz and Laeven, ‘‘Credit
Booms and Lending Standards: Evidence From the
Subprime Mortgage Market’’, (2008); Mian and Sufi,
‘‘The Consequences of Mortgage Credit Expansion:
Evidence from the 2007 Mortgage Default Crisis’’,
(2008); Puranandam, ‘‘Originate-to-Distribute Model
and the Sub-Prime Mortgage Crisis’’, (2008).
243 Board of Governors of the Federal Reserve,
‘‘Report to the Congress on Risk Retention’’,
(October 2010).
244 See, e.g., Benmelech and Dlugosz, 2010, The
Credit Rating Crisis, Chapter 3 of NBER
Macroeconomics Annual 2009, Vol. 24, pp. 161–
207, Acemoglu, Rogoff and Woodford, eds.,
University of Chicago Press; Bolton, Freixas and
Shapiro, ‘‘The Credit Ratings Game’’ Journal of
Finance (February 2012); Griffin and Tang, ‘‘Did
Subjectivity Play a Role in CDO Credit Ratings’’,
Working paper (2010).
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number of defaults and an increase in
interest rates led to subsequent declines
in housing prices. The ‘‘originate-todistribute’’ model was blamed by many
for these events, as the originators and
securitizers were compensated on the
basis of volume rather than quality of
underwriting. Because lenders often did
not expect to bear the risk of borrower
default in connection with those loans
that were securitized and sold to thirdparty investors, the lenders had little
ongoing economic interest in the
performance of the securitization.245
b. Broad Economic Considerations
While securitization can redistribute
financial risks in ways that provide
significant economic benefits, certain
market practices related to its
implementation can potentially
undermine the efficiency of the market.
In particular, securitization removes key
features of the classic borrower-lender
relationship, which relies on borrower
and lender performance incentives
generated from repeated interactions, as
well as the ongoing communication of
proprietary information between the
borrower and the lender. The separation
between the borrower and the ultimate
provider of credit in securitization
markets can introduce significant
informational asymmetries and
misaligned incentives between the
originators and the ultimate investors.
In particular, the originator has more
information about the credit quality and
other relevant characteristics of the
borrower than the ultimate investors,
which could introduce a moral hazard
problem—the situation where one party
(e.g., the loan originator) may have a
tendency to incur risks because another
party (e.g., investors) will bear the costs
or burdens of these risks. Hence, when
there are inadequate processes in place
to encourage (or require) sufficient
transparency to overcome concerns
about informational differences, the
securitization process could lead certain
participants to maximize their own
welfare and interests at the expense of
other participants.
For example, in the RMBS market,
mortgage originators generally have
more information regarding a borrower’s
ability to repay a loan obligation than
the investors that ultimately own the
economic interest, as the originator
collects and evaluates information to
initiate the mortgage. In a securitization,
since ABS investors typically do not
participate in this process, they likely
have less information about expected
loan performance than the originators.
Disclosures to investors may not be
sufficiently detailed regarding the
quality of the underlying assets to
adequately evaluate the assets backing
the security. In addition, in a
securitization the underlying pool is
comprised of hundreds or thousands of
loans, each requiring time to evaluate.
Thus, such information asymmetry may
have an adverse impact on investors,
especially in the case when the
originator and securitizer receive full
compensation before the time when
investors ultimately learn about loan
quality. Consequently, the originator
may have incentive to approve and fund
a loan that they would not otherwise. In
other words, the originator may be less
diligent in solving the adverse selection
problem since the consequences are
transferred to the investors.
The securitization process removes
(or lessens) the consequences of poor
loan performance from the loan
originators, whose compensation
depends primarily on the fees generated
during the origination process. This
provides economic incentive to produce
as many loans as possible because loan
origination, structuring, and
underwriting fees for securitizations
reward transaction volume. Without the
requirement by the market to bear any
of the risk associated with subsequent
defaults, this can result in potentially
misaligned incentives between the
originators and the ultimate
investors.246 Through the securitization
process, risk is transferred from the
originators to investors, who in the
absence of transparency into the
composition of the underlying assets,
may rely too readily on credit rating
agency assessments of the underlying
loans and credit enhancement
supporting the securitization. In the
years preceding the financial crisis,
these incentives may have motivated
originators to structure mortgage
securitizations with little or no credit
enhancement and extend credit to less
creditworthy borrowers, whose
subsequent defaults ultimately helped
to trigger the crisis.
TABLE 1—RATING PERFORMANCE OF PRIME RMBS (%)
All
Year
Up
2004
2005
2006
2007
2008
2009
2010
2011
2012
AAA
Investment grade
Speculative grade
Likely to default
Issues
...................................
...................................
...................................
...................................
...................................
...................................
...................................
...................................
...................................
15,512
14,474
16,859
18,452
20,924
20,475
19,700
18,338
16,886
Down
3.5
4.6
3.1
1.8
0.5
0.0
0.1
0.3
0.2
Share
0.0
0.1
0.1
0.2
12.4
46.4
29.0
36.7
16.3
80.9
72.1
71.0
72.1
73.7
65.6
42.5
36.9
27.4
Up
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Down
Share
0.0
0.0
0.0
0.0
9.9
32.0
12.8
14.4
3.6
14.3
18.6
18.7
17.9
16.8
21.2
16.3
14.2
10.7
Up
Down
Share
0.0
0.1
0.1
0.3
13.0
69.0
44.8
62.3
31.3
4.4
8.9
9.9
9.7
9.3
9.5
12.9
10.8
10.8
23.3
20.9
13.8
8.5
2.5
0.0
0.2
0.6
0.0
Up
4.6
7.4
5.8
2.6
1.4
0.0
0.0
0.9
0.6
Down
Share
0.1
0.7
0.8
1.1
31.1
81.7
64.4
81.3
24.7
0.2
0.2
0.2
0.2
0.2
3.7
28.3
38.1
51.1
Up
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.5
0.4
Down
0.0
0.0
14.3
21.4
45.0
91.2
34.3
49.4
27.8
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Notes: The numbers in the table were calculated by Division of Economic and Risk Analysis (DERA) staff using the Standard & Poor’s (S&P) RatingsXpress data.
These statistics are for securities issued by U.S. entities in U.S. dollars, carrying a local currency rating, and having a rating on the scale of AAA to D. Each security
is assigned to an asset class based on the collateral type information provided by S&P. Securities backed by collateral that mixes multiple types of assets are not included. ‘‘Issues’’ is the total number of RMBS issuances outstanding as of January 1 for each year. ‘‘Share’’ is the share of each rating category among all rated
RMBS. Upgrades and downgrades are expressed as a percentage of all rated securitizations in a specified year and in a specified rating class. ‘‘Investment Grade’’
(IG) are ratings from AA+ to BBB¥, ‘‘Speculative’’ are from BB+ to B¥, and ‘‘Likely to Default’’ are CCC+ and below.
245 Dell’Ariccia, Deniz and Laeven, ‘‘Credit
Booms and Lending Standards: Evidence From the
Subprime Mortgage Market’’, (2008), Mian and Sufi,
‘‘The Consequences of Mortgage Credit Expansion:
Evidence from the 2007 Mortgage Default Crisis’’,
(2008), Puranandam, ‘‘Originate-to-Distribute Model
and the Sub-Prime Mortgage Crisis’’, (2008), Keys,
Mukherjee, Seru and Vig, ‘‘Did Securitization Lead
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to Lax Screening? Evidence from Subprime Loans’’
(February 2010) and Nadauld and Sherlund, ‘‘The
Impact of Securitization on the Expansion of
Subprime Credit’’, (2013).
246 As an example, Ashcraft and Schuermann
(2008) identify at least seven different frictions in
the residential mortgage securitization chain that
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can cause agency and adverse selection problems in
a securitization transaction. The main point of their
analysis is that there are many different parties in
a securitization transaction, each with differing
economic interests and incentives. Hence, there are
multiple opportunities for conflicts of interest to
arise in such structures.
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Evidence of the credit worthiness of
borrowers during this period is
illustrated in Table 1, which shows that
9.9 percent of presumably low-risk
securities, such as AAA-rated nonagency RMBS, outstanding in 2008 were
downgraded during 2008. More
significantly 32.0 percent of these
securities outstanding in 2009 were
downgraded during the year. Thus,
almost one third of the outstanding
RMBS securities with the highest
possible credit rating were downgraded
during 2009, suggesting that the credit
quality of the underlying collateral and
underlying credit enhancement for AAA
notes was far poorer than originally
rated by the credit rating agencies.
The downgrades serve to illustrate the
extent to which misaligned incentives
between originators/sponsors of ABS
and the ultimate investors may have
manifested in the form of lax lending
standards and relaxed credit
enhancement standards during the
period before the financial crisis. Risk
retention is one possible response to
this problem. Requiring securitizers to
share the same risks as the investors that
purchase these products seeks to
mitigate the problems caused by
misaligned incentives. By retaining loss
exposure to the securitized assets,
securitizers are considered to have ‘‘skin
in the game’’ and thus are economically
motivated to be more judicious in their
selection of the underlying pool of
assets, thereby helping to produce
higher quality (i.e., lower probability of
default) securities.
Currently, sponsors who do not retain
5 percent of the securitization likely
deploy those funds to other uses, such
as repaying lines of credit used to fund
securitized loans, holding other assets
or making new loans, which may earn
a different interest rate and have a
different risk exposure. Therefore, a risk
retention requirement could impose
costs to those sponsors who do not
currently hold risk, in the form of the
opportunity costs of those newly tied-up
funds, or could limit the volume of
securitizations that they can perform.
These costs will likely be passed onto
borrowers, either in terms of borrowing
costs or access to capital. In particular,
borrowers whose loans do not meet the
eligibility requirements or qualify for an
exemption (i.e., those that require risk
retention when securitized by the ABS
originator/sponsor) will face increased
borrowing costs, or be priced out of the
loan market, thus restricting their access
to capital. As a result, there could be a
negative impact on capital formation.
Hence, there are significant potential
costs to the implementation of risk
retention requirements in the
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securitization market. The Commission
notes that the costs will also be
impacted by any returns and timing of
the returns of any retained interest. If
the costs are deemed by sponsors to be
onerous enough that they would no
longer be able to earn a sufficiently high
expected return by sponsoring
securitizations, this form of supplying
capital to the underlying asset markets
would decline. Fewer asset
securitizations would require other
forms of funding to emerge in order to
serve the needs of borrowers and
lenders. Given the historically large
dollar volumes in the securitization
markets, this could reduce capital flows
into the underlying asset markets,
thereby reducing the amount of capital
available for lending and possibly
adversely impacting efficiency.
The net impact of this outcome
depends on the availability of
alternative arrangements for transferring
capital to the underlying assets markets
and the costs of transferring capital to
sponsors. For example, the impact of the
potential decrease in the use of
securitizations in the residential home
mortgage market would depend on the
cost and availability of alternative
mortgage funding sources, and the
willingness of these originators to retain
the full burden of the associated risks.
To the extent there are alternatives, and
these alternatives can provide funding
on terms similar to those available in
the securitization markets, the impact of
the substitution of these alternatives for
securitizations would likely be minimal.
To the extent that securitizers can find
sources of capital at costs similar to the
returns paid on retained interests, the
impact of risk retention requirements
would likely be minimal. Currently,
however, there is little available
empirical evidence to reliably estimate
the cost and consequence of either such
outcome.
To maintain a commensurate level of
funding to underlying asset markets
with the risk retention requirement, the
rates on the underlying assets would
have to increase so that sponsors could
achieve their higher target returns by
serving the securitization market. Two
recent studies by the Federal Reserve
Bank of New York attempt to estimate
the impact of the higher risk retention
on the underlying asset markets.247
Their analysis suggests that incremental
sponsor return requirements for serving
markets with the higher levels of risk
retention are relatively modest,
somewhere on the order of 0–30 basis
247 See
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points.248 If so, the higher levels of risk
retention would increase residential
mortgage rates by approximately 0.25
percent. While this would increase the
average borrower cost for loans that
would not otherwise be eligible for
securitizations exempt from risk
retention, the increment may be
sufficiently small such that
securitizations would be expected to
remain a significant component of the
capital formation process.
3. Economic Baseline
The baseline the Commission uses to
analyze the economic effects of the risk
retention requirements added by
Section 15G of the Exchange Act is the
current set of rules, regulations, and
market practices that may determine the
amount of credit exposure retained by
securitizers. To the extent not already
followed by current market practices,
the proposed risk retention
requirements will impose new costs.
The risk retention requirements will
affect ABS market participants,
including loan originators, securitizers
and investors in ABS, and consumers
and businesses that seek access to
credit. The costs and benefits of the risk
retention requirements depend largely
on the current market practices specific
to each securitization market—
including current risk retention
practices—and corresponding asset
characteristics. The economic
significance or the magnitude of the
effects of the risk retention requirements
will also depend on the overall size of
the securitization market and the extent
to which the requirements could affect
access to, and cost of, capital. Below the
Commission describes the
Commission’s current understanding of
the securitization markets that are
affected by this proposed rule.
a. Size of Securitization Markets
The ABS market is important for the
U.S. economy and comprises a large
fraction of the U.S. debt market. During
the four year period from 2009 to 2012,
31.1 percent of the $26.8 trillion in
public and private debt issued in the
United States was in the form of
mortgage-backed securities (MBS) or
other ABS, and 2.7 percent was in the
form of non-U.S. agency backed (private
label) MBS or ABS. For comparison,
32.8 percent of all debt issued was U.S.
248 This assessment assumes that the underlying
loan pool characteristics are accurately disclosed,
and with sufficient detail for investors to properly
assess the underlying risk. Such a scenario would
be reflective of the risk retention requirements
solving the moral hazard problem that might
otherwise result in the obfuscation of intrinsic risks
to the ultimate investors.
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Treasury debt, and 5.7 percent was
municipal debt at the end of 2012.249
Figure 1 shows the percentage
breakdown of total non-Agency
issuances from 2009 to 2012 for various
asset classes excluding asset-backed
commercial paper (ABCP) and
collateralized loan obligations
(CLOs).250 Consumer credit categories
including automobile and credit card
backed ABS comprise 39 percent and 15
percent of the total annual issuance
volume, respectively. Non-agency
RMBS and commercial mortgage backed
securities (CMBS) comprise 4 percent
and 18 percent of the market,
respectively, while student loan backed
ABS account for 11 percent of the
market. Below the Commission analyzes
the variation in issuance among these
five largest asset classes. For several
categories the Commission provides
detailed information about issuance
volume and the number of active
securitizers (Table 2).
Prior to the financial crisis of 2008,
the number of non-agency RMBS
issuances was substantial. For example,
new issuances totaled $503.9 billion in
2004 and peaked at $724.1 billion in
2005. Non-agency RMBS issuances fell
dramatically in 2008, to $28.6 billion, as
did the total number of securitizers,
from a high of 78 in 2007 to 31 in 2008.
In 2012, there was only $15.7 billion in
new non-agency RMBS issuances by 13
separate securitizers. Of this amount,
however, only $3.6 billion was issued
by 3 separate securitizers backed by
prime mortgages and were not
resecuritizations.
TABLE 2—ANNUAL ISSUANCE VOLUME AND NUMBER OF SECURITIZERS BY CATEGORY
Credit card ABS
Year
SEC
144A
Private
Automobile ABS
Total
SEC
144A
Private
Student loan ABS
Total
SEC
144A
Private
Non-agency RMBS
Private
Total
13.6
16.2
20.4
42.2
16.4
47.8
46.1
11.1
12.6
0.0
0.0
0.0
0.0
0.0
0.0
12.8
10.5
1.2
503.9
724.1
723.3
640.3
28.6
48.1
59.2
22.2
15.7
15
0
44
Total
SEC
144A
0.2
0.4
0.5
0.6
0.0
0.0
1.2
1.1
0.0
45.9
62.6
66.2
58.3
28.2
20.8
20.2
17.5
29.9
490.3
707.9
702.8
598.1
12.2
0.3
0.2
0.7
1.9
1
16
41
2004
2005
2006
2007
2008
2009
2010
2011
2012
................................
................................
................................
................................
................................
................................
................................
................................
................................
46.3
61.2
60.0
88.1
56.7
34.1
5.3
10.0
28.7
4.9
1.8
12.5
6.4
5.0
12.5
2.1
4.8
10.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.5
0.0
51.2
62.9
72.5
94.5
61.6
46.6
7.5
16.3
39.2
63.4
85.1
68.0
55.8
31.9
33.9
38.0
41.9
65.6
6.5
8.7
12.2
6.8
5.6
15.4
15.3
14.4
13.9
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
70.0
93.9
80.2
62.6
37.6
49.2
53.3
56.3
79.5
38.3
54.1
54.9
41.7
25.8
8.3
2.8
2.5
6.6
7.5
8.1
10.9
16.0
2.4
12.5
16.2
13.9
23.2
Panel B—Annual Number of Securitizers by Category
2004 ................................
12
4
249 Source:
0
SIFMA.
estimate the size and composition of the
private-label securitization market the Commission
uses the data from Securities Industry and Financial
250 To
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15
29
9
0
37
10
Markets Association (SIFMA) and AB Alert. In the
following analysis, the Commission excludes all
securities guaranteed by U.S. government agencies.
ABCP is a short-term financing instrument and is
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7
frequently rolled over, thus, its issuance volume is
not directly comparable to the issuance volume of
long-term ABS of other sectors. The Commission
does not have CLO issuance data.
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Panel A—Annual Issuance Volume by Category ($ bn)
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TABLE 2—ANNUAL ISSUANCE VOLUME AND NUMBER OF SECURITIZERS BY CATEGORY—Continued
Credit card ABS
Year
SEC
2005
2006
2007
2008
2009
2010
2011
2012
................................
................................
................................
................................
................................
................................
................................
................................
144A
13
10
12
9
9
5
5
7
Private
5
11
8
3
6
5
7
9
0
0
0
0
0
0
1
0
Automobile ABS
Total
SEC
144A
17
18
16
11
11
9
12
13
30
23
23
16
13
19
14
18
Private
9
12
9
7
13
15
16
24
0
0
0
0
0
0
0
0
Student loan ABS
Total
SEC
144A
38
30
28
20
22
27
25
36
13
8
7
3
3
2
1
1
Private
7
17
17
6
6
18
19
26
1
1
1
0
0
1
1
0
Non-agency RMBS
Total
SEC
144A
19
24
22
8
6
19
20
26
46
50
46
12
1
1
1
1
Private
18
27
32
19
16
18
12
11
0
0
0
0
0
1
2
1
Total
51
62
59
24
17
20
14
12
Notes: The numbers in the table were calculated by DERA staff using the AB Alert database. The deals are categorized by offering year, underlying asset type,
and offering type (SEC registered offerings, Rule 144A offerings, or traditional private placement). Non-agency RMBS include residential, Alt-A, and subprime RMBS.
Automobile loan ABS include ABS backed by automobile loans, both prime and subprime, motorcycle loans, and truck loans). Panel A shows the total issuance
amount in billions of dollars. Panel B shows the number of unique sponsors of ABS in each category (the number in the column ‘‘Total’’ may not be the sum of numbers in the columns ‘‘SEC’’, ‘‘144A’’ and ‘‘Private’’ because some securitizers may sponsor deals in several categories). Only ABS deals sold in the U.S. and sponsors of such deals are counted.
Although the amount of new credit
card ABS issuances has not fully
rebounded from pre-crisis levels, it is
currently substantially larger than in
recent years. There were $39.2 billion in
new credit card ABS issuances in 2012,
a five-fold increase over the amount of
new issuances in 2010 ($7.5 billion).
The number of credit card ABS
securitizers has remained steady over
TABLE 3—CMBS ISSUANCE ($BN)
time, totaling 16 in 2012. The amount of
new student loan issuances has also not
Year
Issuance
fully rebounded from pre-crisis levels.
2004 ......................................
93.5 There were $29.9 billion in new student
2005 ......................................
156.7 loan ABS issuances in 2012, compared
2006 ......................................
183.8 to a range from $45.9 billion to $58.3
2007 ......................................
229.2 billion between 2004 and 2007.
2008 ......................................
4.4 However, the number of student loan
2009 ......................................
8.9 securitizers has returned to pre-crisis
2010 ......................................
22.5 levels, totaling 27 in 2012. While risk
2011 ......................................
34.3
retention requirements will apply to the
2012 ......................................
35.7
previous asset classes there are other
Notes: Source—SIFMA.
asset classes not listed here to which
risk retention will also apply.
While the ABS markets based on
Information describing the amount of
credit cards, automobile loans, and
issuances and the number of securitizers
student loans experienced a similar
in the ABCP and CLO markets is not
decline in issuances following the
readily available, however, information
financial crisis, the issuance trends in
on the total amount of issuances
Table 2 indicate that they have
outstanding indicates that the ABCP
rebounded substantially more than the
market has decreased since the end of
non-agency RMBS and CMBS markets.
The automobile loans sector currently
2006, when the total amount
has the largest issuance volume and the outstanding was $1,081.4 billion, 55
largest number of active sponsors of
percent of the entire commercial paper
ABS among all asset classes. There were market.252 As of the end of 2012, there
$79.5 billion in new automobile ABS
were $319.0 billion of ABCP
issuances in 2012 from 42 securitizers.
outstanding, accounting for 30 percent
This amount of new issuances is
of the commercial paper market.
approximately twice the amount of new
issuances in 2008 ($37.6 billion) and is
similar to the amount of new issuances
from 2004 to 2007.
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Similar to the market for non-agency
RMBS, the market for CMBS also
experienced a decline following the
financial crisis. There were $229.2
billion in new issuances at the market’s
peak in 2007.251 New issuances fell to
$4.4 billion in 2008 and to $8.9 billion
in 2009. In 2012, there were $35.7
billion in new CMBS issuances.
251 See Table 3. The estimates relating to the
CMBS market are from SIFMA, and can be found
at https://www.sifma.org/research/statistics.aspx.
The SIFMA dataset does not include information
relating to the number of CMBS securitizers and
does not distinguish issuances by type.
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252 Based on information from the Federal
Reserve Bank of St. Louis FRED Economic Data
database.
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TABLE 4—COMMERCIAL PAPER (CP)
OUTSTANDING ($BN)
Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
ABCP
..
..
..
..
..
..
..
..
..
688.9
860.3
1,081.4
774.5
734.0
487.0
348.1
328.8
319.0
All CP
outstanding
1,401.5
1,637.5
1,974.7
1,785.9
1,681.5
1,170.0
971.5
959.3
1,065.6
ABCP
share
(percent)
49.2
52.5
54.8
43.4
43.7
41.6
35.8
34.3
29.9
Notes: Source—Federal Reserve.
b. Current Risk Retention Market
Practices
As noted earlier, the potential
economic effects of the proposed risk
retention requirements will depend on
current market practices. Currently, risk
retention is not mandated in any sector
of the U.S. ABS market, although some
sponsors of different ABS classes do
retain risk voluntarily—at least at initial
issuance. The aggregate levels of current
risk retention vary across sponsors and
ABS asset classes. Adopted practices are
different for different sectors (to the
extent that they are applied at all) and
there is no uniform reporting of the
types or amounts of retained ABS
pieces. Because aggregated quantitative
information relating to the current risk
retention practices of ABS securitizers is
currently unavailable, the Commission
does not have sufficient information to
measure the extent to which risk is
currently retained. Below the
Commission describes current risk
retention practices for various asset
classes based upon its understanding of
these markets and public comment
received to date. The Commission
would benefit from additional public
comment and data about historical and
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current risk retention practices in all
ABS sectors.
i. RMBS Risk Retention Practices
The Commission understands that
securitizers of non-agency RMBS
historically did not generally retain a
portion of credit risk.253 Consequently,
except in the case where exemptions are
applicable (e.g., the QRM exemption),
the proposed risk retention
requirements likely will impose new
constraints on these securitizers.
The Commission also understands
that securitizers of other ABS market
sectors typically retain some portion of
credit risk. For these securitizers,
depending on the amount and form of
risk currently retained, the proposed
risk retention requirements may pose
less of a constraint. Markets where
securitizers typically retain some
portion of risk include the markets for
CMBS, automobile loan ABS, ABS with
a revolving master trust structure, and
CLOs. The markets for CMBS and ABCP
include structures in which parties
involved in the securitization other than
the securitizer retain risk.
ii. CMBS Risk Retention Practices
The current risk retention practice in
the CMBS market is to retain at issuance
the ‘‘first loss piece’’ (riskiest tranche).
This tranche is typically sold to a
specialized category of CMBS investors,
known as a ‘‘B-piece buyer’’. The Bpiece investors in CMBS often hold dual
roles as bond investors, if the assets
remain current on their obligations, and
as holders of controlling interests to
appoint special servicers, if the loans
default and go into special servicing. As
holders of the controlling interest, they
will typically appoint an affiliate as the
special servicer. The B-piece CMBS
investors are typically real estate
specialists who use their extensive
knowledge about the underlying assets
and mortgages in the pools to conduct
extensive due diligence on new
deals.254 The B-pieces are often ‘‘buyand-hold’’ investments, and secondary
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253 However,
more recently, one of the largest
sponsors of SEC-registered RMBS has stated it
currently retains some interest in the RMBS
transactions that it sponsors. For example, see
Sequoia Mortgage Trust 2013–1, 424b5, File No.
333–179292–06 filed January 16, 2013; https://
www.sec.gov/Archives/edgar/data/1176320/
000114420413002646/v332142_424b5.htm.
254 CMBS have a much smaller number of
underlying loans in a pool (based on data from ABS
prospectuses filed on EDGAR, a typical CMBS has
about 150 commercial properties in a pool, whereas
RMBS have about 3,000 assets in a pool and
automobile loan/lease ABS typically have 75,000
assets) and these loans are often not standardized.
Thus, direct management of individual
underperforming loans is often necessary and is
much more viable for CMBS than for other asset
classes.
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markets for B-pieces are virtually nonexistent at this time.255 Currently, the Bpiece (as defined by Standard & Poor’s)
typically makes up the lowest rated 3–
4 percent of the outstanding amount of
interests issued in CMBS securitization
at issuance. During the four year period
from 2009 to 2012, the non-rated and all
speculative grade tranches typically
bought by B-piece buyers made up the
lowest 4.4 percent.256 Thus, the
prevailing market practice for risk
retention in the CMBS sector is less than
the proposed 5 percent B-piece risk
retention option for CMBS sponsors.
iii. Master Trusts Risk Retention
Practices
Securitizers of revolving master trusts
often maintain risk exposures through
the use of a seller’s interest which, as
discussed above, is intended to be
equivalent to the securitizer’s interest in
the receivables underlying the ABS. The
Commission does not have sufficient
aggregated data about revolving master
trusts that would permit it to estimate
the amount of risk currently retained.
The Commission requests comment for
this below.
iv. Other ABS Risk Retention Practices
The current voluntary market
practices for other categories of ABS
that serve to align the interests of the
sponsor and investors vary across asset
classes. The Commission understands
that securitizers of automobile loan ABS
typically maintain exposure to the
quality of their underwriting by
retaining ABS interests from their
securitization transactions; however,
there is insufficient data available to the
Commission to estimate the equivalent
amount of risk retained through this
practice. The Commission understands
that securitizers of student loans do not
typically retain credit risk. However,
Sallie Mae, the largest sponsor of
student loan asset-backed securities,
does retain a residual interest in the
securitizations that it sponsors.
vi. ABCP Risk Retention Practices
Commenting on the original proposal,
ABCP conduit operators noted that there
are structural features in ABCP that
align the interests of the ABCP conduit
sponsor and the ABCP investors. For
instance, ABCP conduits usually have
255 An industry publication places the number of
active B-piece buyers in 2007 at 12, and the number
of active B-piece buyers between 2010 and the first
part of 2011 at 1. This information was taken from
S&P Credit Research. ‘‘CMBS: The Big ‘B’ Theory’’
Apr 11, 2011, https://www.standardandpoors.com/
ratings/articles/en/us/
?articleType=HTML&assetID=1245302231520.
256 DERA staff calculated these numbers using
data from Standard & Poor’s RatingsXpress.
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58009
some mix of credit support and liquidity
support equal to 100 percent of the
ABCP outstanding. This liquidity and
credit support exposes the ABCP
conduit sponsor to the quality of the
assets in an amount that far exceeds 5
percent.
vi. CLO Risk Retention Practices
Some commenters noted that
securitizers of CLOs often retain a small
portion of the residual interest and
asserted that securitizers retain risk
through subordinated management and
performance fees that have performance
components that depend on the
performance of the overall pool or
junior tranches. The proposed rule does
not allow for fees to satisfy risk
retention requirements. The
Commission is requesting comment on
any recent developments in the CLO
market whereby risk is retained as
defined by the proposed rule.257
4. Analysis of Risk Retention
Requirements
As discussed above, the agencies are
proposing rules to implement Section
15G of the Exchange Act requiring
sponsors of asset backed securitizations
to retain risk. Each of the asset classes
subject to these proposed rules have
their own particular structure and, as a
result, the implementation and impact
of risk retention will vary across asset
classes, although certain attributes of
risk retention are common to all asset
classes. In this section, the Commission
discusses those aspects of the proposed
rules that apply across asset classes: The
requirement that securitizers hold 5
percent of the credit risk of a
securitization, the use of fair value
(versus par value) of the securitization
as the method of measuring the amount
of risk retained by the securitizer, and
the length of time that a securitizer
would be required to hold its risk
exposure.
257 In the Board of Governors of the Federal
Reserve System’s ‘‘Report to the Congress on Risk
Retention’’ (October 2010), pp. 41–48, mechanisms
intended to align incentives and mitigate risk are
described, including alternatives such as
overcollateralization, subordination, guarantees,
representations and warranties, and conditional
cash flows as well as the retention of credit risk.
The Report also contains a description of the most
common incentive alignment and credit
enhancement mechanisms used in the various
securitization asset classes. The Report does not
establish the extent to which these alternatives
might be substitutes for the retention of credit risk.
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a. Level and Measurement of Risk
Retention
i. Requirement To Hold Five Percent of
Risk
Section 15G requires the agencies to
jointly prescribe regulations that require
a securitizer to retain not less than 5
percent of the credit risk of any asset
that the securitizer, through the
issuance of 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. The
agencies are proposing to apply a
minimum 5 percent base risk retention
requirement to all ABS transactions that
are within the scope of Section 15G.
As a threshold matter, the
requirement to retain risk is intended to
align the incentives of the ABS sponsors
and their investors. Sponsors of
securitizations should be motivated to
securitize assets with probabilities of
default that are accurately reflected in
the pricing of the corresponding
tranches, because they will be required
to hold some of the risk of the assets
being securitized. Risk retention may
increase investor participation rates
because investors would have assurance
that the sponsor is exposed to the same
credit risk and will suffer similar losses
if default rates are higher than
anticipated. This may increase borrower
access to capital, particularly if loan
originators are otherwise constrained in
their ability to underwrite mortgages
because more investors means more
available capital. In particular, the act of
securitizing the loans allows the lenders
to replenish their capital and continue
to make more loans, over and above
what could be made based solely on the
initial capital of the lender. When the
underlying risks are disclosed properly,
securitization should facilitate capital
formation as more money will flow to
borrowers. Higher investment may also
lead to improved price efficiency, as the
increase in securitization transactions
will provide additional information to
the market.
While risk retention is intended to
result in better incentive alignment, it is
important to consider whether a 5
percent risk retention requirement will
appropriately align the incentives of the
sponsors and investors. Establishing an
appropriate risk retention threshold
requires a tradeoff between ensuring
that the level of risk retained provides
adequate incentive alignment, while
avoiding costs that are associated with
restricting capital resources to projects
that may offer lower risk-adjusted
returns. A risk retention requirement
that is set too high could lead to
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inefficient deployment of capital as it
would require the capital to be retained
rather than further used in the market to
facilitate capital formation. On the other
hand, a risk retention requirement that
is too low could provide insufficient
alignment of incentives.
In certain cases the agencies have
proposed to exempt asset classes from
the risk retention requirements because
there already exists sufficient incentive
alignment or other features to conclude
that further constraints are unnecessary.
In particular, the securitizations of these
exempted asset classes have
characteristics that ensure that the
quality of the assets is high. For
example, if the pool of assets sponsors
can securitize is drawn from an asset
class with a low probability of default,
opportunities to exploit potentially
misaligned incentives are fewer and
investors may have a correspondingly
lesser need for the protection accorded
by risk retention requirements.
Another possibility is that excessive
required risk retention levels may
prevent capital from being used in more
valuable opportunities, leading to
potentially higher borrowing rates as
capital is diverted to required risk
retention. In this scenario the reduction
in capital formation would have a
negative impact on competition due to
the extra cost of securitizing nonqualified assets, disadvantaging them
relative to qualified assets. However, the
statute prescribes a 5 percent minimum
amount of risk be retained.
ii. Measurement of Risk Retention Using
Fair Value
The agencies have proposed to require
sponsors to measure risk retention using
a fair value framework as described in
U.S. GAAP (ASC 820). The Commission
believes that this would align the
measurement more closely with the
economics of a securitization
transaction because market valuations
more precisely reflect the securitizer’s
underlying economic exposure to
borrower default. Defining a fair value
framework also may enhance
comparability across different
securitizations and provide greater
clarity and transparency.
Use of fair value accounting as a
method of valuing risk retention also
will provide a benefit to the extent that
investors and sponsors can understand
how much risk is being held and that
the valuation methodology accurately
reflects intrinsic value. If investors
cannot understand the proposed
measurement methodology, the value of
holding risk will be reduced as investors
will be unable to determine the extent
to which risk retention aligns
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incentives. If investors cannot
determine whether incentives are
properly aligned, they may invest less in
the securitization market because there
will be uncertainty over the quality of
assets being securitized.
One benefit of fair value is investors
and sponsors generally have experience
with fair value accounting. In addition,
the use of fair value is intended to
prevent sponsors from structuring
around risk retention.
Fair value calculations are susceptible
to a range of results depending on the
key variables selected by the sponsor in
determining fair value. This could result
in costs to investors to the extent that
securitizers use assumptions resulting
in fair value estimates at the outer edge
of the range of potential values, and
thereby potentially lowering their
relative amount of risk retention. In
order to help mitigate this potential
cost, the agencies have proposed to
require the sponsor to disclose specified
information about how it calculates fair
value. While this requirement should
discourage manipulation, sponsors will
incur additional costs to prepare the
necessary disclosures. In addition,
because the proposed rule specifies that
fair value must be determined by fair
value framework as described in US
GAAP, sponsors will incur costs to
ensure that the reported valuations are
compliant with the appropriate
valuation standards.
Alternatively, the agencies could have
proposed to require risk retention be
measured using the par value of the
securitization, as in the original
proposal. Par value is easy to measure,
transparent, and would not require any
modeling or disclosure of methodology.
However, holding 5 percent of par value
may cause sponsors to hold significantly
less than 5 percent of the risk because
the risk is not spread evenly throughout
the securitization. In addition, not all
securitizations have a par value.
Another alternative considered was
premium capture cash reserve account
(PCCRA) plus par value. The agencies
took into consideration the potential
negative unintended consequences the
premium capture cash reserve account
might cause for securitizations and
lending markets. The elimination of the
premium capture cash reserve account
should reduce the potential for the
proposed rule to negatively affect the
availability and cost of credit to
consumers and businesses.
b. Duration of the Risk Retention
Requirement
Another consideration is how long the
sponsor is required to retain risk. For
example, most of the effects of poor
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underwriting practices likely would be
evident in the earlier stages of a loan’s
life. If the risk is retained for longer than
is optimal, there may be a decrease in
capital formation because capital cannot
be redeployed to more efficient uses,
resulting in higher costs to securitizers
than necessary. On the other hand, if the
risk is not retained long enough, risk
retention will not mitigate the incentive
misalignment problem. The optimal
duration of the risk retention
requirement will in large part depend
on the amount of time required for
investors to realize whether the risks of
the underlying loan pools were
accurately captured, which may vary
across asset classes. For instance, short
durations relative to maturity may be
appropriate for asset classes where a
significant fraction of the defaults occur
at the beginning of the loan life cycle,
such as in the case with RMBS, while
longer durations are more appropriate
for asset classes where performance
takes longer to evaluate, such as with
CMBS, where performance may not be
assessed until the end of the loan.
To the extent that there exists a
window where risk retention is needed
but dissipates once the securitization is
sufficiently mature, requiring a sponsor
to retain risk beyond this window could
be economically inefficient.
Consequently, the proposal includes a
sunset provision whereby the sponsor is
free to hedge or transfer the retained risk
after a specified period of time.
Allowing the risk retention requirement
to sunset will eventually free up capital
that can be redeployed elsewhere in the
business, thereby helping to promote
capital formation.
In certain instances where the sponsor
is the servicer of the loan pool, the
sunset provision may motivate the
sponsor to delay the recognition of
defaults and foreclosures until after the
sunset provision has lapsed. The
sponsor’s incentive to delay arises from
its credit exposure to the pool and its
control over the foreclosure process.
Thus, the sponsor/servicer may extend
the terms of the loans until the
expiration of the risk retention
provision.258 To the extent that sponsors
delay revealing borrowers’ nonperformance, this would decrease
economic efficiency and impair pricing
transparency.
For RMBS, the agencies have
proposed to require securitizers to retain
risk for the later of five years or until the
pool balance has been reduced to 25
258 Yingjin Hila Gan and Christopher Mayer.
Agency Conflicts, Asset Substitution, and
Securitization. NBER Working Paper No. 12359,
July 2006.
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percent (but no longer than seven years).
For all other asset classes, the agencies
have proposed to require securitizers to
retain risk for the later of two years or
until the pool balance has been reduced
to 33 percent. These methods were
chosen to balance the tradeoff between
retaining risk long enough to align the
sponsors and investors incentives and
allowing the redeployment of retained
capital for other productive uses. A
shorter duration was chosen for nonmortgage asset classes, because these
loans tend to have shorter maturities
than mortgages. Requiring a two year
holding period recognizes that it may
not be necessary to retain risk for a
longer period. The alternative
component further calibrates the
required duration of risk retention based
on the remaining balances. By the time
the loan pool balance decreases to 33
percent, the information about the loan
performance will be largely revealed, at
which point the moral hazard problem
between the sponsor and the investor is
likely to be significantly reduced.
Although, in the case where the loan
pool balance drops below the prescribed
threshold (25 percent for RMBS and 33
percent for other ABS) before the
prescribed number of years (five years
for RMBS and two years for other ABS),
the additional required duration might
be costly to the sponsor. In other words,
requiring the securitizer to continue to
retain exposure to the securitization,
once impact of the information
asymmetry has been significantly
reduced, would impose unnecessary
costs, potentially impeding allocation
efficiency. Indeed, as currently
proposed, as loan balances are paid
down the sponsor may hold more risk
relative to other investors because the
size of the credit risk retention piece is
based on the initial size of the
securitization, and does not change with
the current market value. This
heightened level of risk retention may
be unnecessary, because at that point,
there is nothing further the sponsor can
do to adversely impact investors, so that
economic efficiency would be better
served by allowing securitizers to
withdraw their risk retention
investment to utilize in new
securitizations or other credit forming
activities.259
259 See Hartman-Glaser, Piskorski and Tchistyi
(2012). In order to achieve the economic goals of
the risk retention requirement, it should be the case
that the moral hazard and information asymmetry
between the securitizer and the investors would be
fully resolved by the time that loan balances are
reduced to 25 percent (in the case of RMBS) or 33
percent (in all other asset classes). The Commission
is unaware of any empirical studies or evidence that
supports such a conclusion.
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5. Blended Pools and Buyback Provision
a. Blended Pools
Blended pools are pools that consist
of assets of the same class, some of
which qualify for an exemption from the
risk retention requirement, and some of
which do not qualify for an exemption
from the risk retention requirement. The
proposed rule permits proportional
reduction in required risk retention for
blended pools that consist of both
exempted and non-exempted assets. The
proposed rule does not allow mixing
asset classes in the same pool for the
purpose of reduction of the risk
retention requirement and has several
other restrictions to reduce potential of
structuring deals around the risk
retention requirement. Allowing
blended pools with a reduced risk
retention requirement will improve
efficiency, competition and capital
formation by allowing sponsors to
securitize more loans when it is difficult
to obtain a large enough pool of
qualifying assets to issue an ABS
consisting entirely of exempted assets.
b. Buyback Requirement
The proposal requires that, if after
issuance of a qualifying asset
securitization, it was discovered that a
loan did not meet the qualifying
underwriting criteria, the sponsor
would have to repurchase or cure the
loan (the ‘‘buyback requirement’’). The
buyback provision increases investors’
willingness to invest because it makes
sponsors of an ABS responsible for
correcting discovered underwriting
mistakes and ensures that the actual
characteristics of the underlying asset
pool conform to the promised
characteristics.
6. Forms of Risk Retention Menu of
Options
Rather than prescribe a single form of
risk retention, the proposal allows
sponsors to choose from a range of
permissible options to satisfy their risk
retention requirements. As a standard
form of risk retention available to all
asset classes, sponsors may choose
vertical risk retention, horizontal risk
retention, or any combination of those
two forms. All of these forms require the
sponsor to share the risk of the
underlying asset pool. The proposal also
includes options tailored to specific
asset classes and structures such as
revolving master trusts, CMBS, ABCP
and CLOs. Given the special
characteristics of certain asset classes,
some of these options permit the
sponsor to allocate a portion of the
shared risk to originators or specified
third parties.
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By proposing to allow sponsors
flexibility to choose how they retain
risk, the agencies’ proposal seeks to
enable sponsors to select the approach
that is most effective. Various factors are
likely to impact the securitizers
preferred method of retaining risk,
including size, funding costs, financial
condition, riskiness of the underlying
assets, potential regulatory capital
requirements, income requirements, risk
tolerances and accounting conventions.
All else being equal, sponsors may
prefer the option that involves the least
exposure to credit risk. For example, the
horizontal form of standard risk
retention essentially creates a fully
subordinated equity tranche and
represents the option that is most
exposed to credit risk. By contrast, a
vertical form of standard risk retention
is comparable to a stand-alone
securitization that is held by the
sponsor and, among the available
options, is the least exposed to credit
risk. Some sponsors may choose to
utilize the horizontal method of risk
retention or some combination of the
horizontal and vertical method in order
to meet the risk retention requirement,
while at the same time signaling the
market that the sponsor is securitizing
better quality assets.
If investors believe that the sponsor’s
choice of risk retention method results
in insufficient risk exposure to properly
align incentives, the proposed
optionality may result in less effective
risk retention. However, because
investors can observe this choice to help
inform their investment decision,
sponsors have incentive to choose the
level of risk exposure that encourages
optimal investor participation. That is,
investors may be more likely to
participate if the sponsor has more skin
in the game, which may lead sponsors
to prefer an option with a higher level
of risk retention. Alternatively if the
sponsor retains insufficient risk
exposure investors may not perceive
this as a sufficient alignment of interest
and may not invest (i.e., sponsors may
securitize bad assets if they do not have
enough exposure).
As the Commission discusses below,
a number of the options also correspond
to current market practices. By allowing
sponsors to satisfy their risk retention
requirement while still maintaining
current market practices the proposed
menu of options approach should help
to reduce costs of the required regime.
Moreover, the flexibility sponsors have
to design how they prefer to be exposed
to credit risk will allow them to
calibrate and adjust their selections
according to changing market
conditions. It also will accommodate
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evolving market practices as securitizers
and investors update preferences and
beliefs.
a. Standard Risk Retention
The standard form of risk retention
would permit sponsors to choose
vertical risk retention, horizontal risk
retention, or any combination of these
two forms.
i. Eligible Horizontal Residual Interest
One way that a sponsor may satisfy
the standard risk retention option is by
retaining an ‘‘eligible horizontal
residual interest’’ in the issuing entity in
‘‘an amount that is equal to at least 5
percent of the fair value of all ABS
interests in the issuing entity that are
issued as part of the securitization
transaction.’’ 260 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, 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.
This option may provide sponsors
with an incentive to securitize safer
assets relative to other risk retention
options because they hold the first loss
piece. If sponsors are restricted to only
holding risk retention through the
horizontal form, they may choose to
reduce their credit exposure by issuing
relatively safe loans. This would
possibly restrict the amount of capital
available for riskier but viable loans.
Alternatively, investors could require
higher loan rates to compensate for this
risk.
A number of commenters on the
original proposal generally believed that
the retention of a subordinated interest
effectively aligns the incentives of ABS
sponsors with ABS investors. Another
commenter stated that in prime RMBS
securitizations, where there is no
overcollateralization, a horizontal slice
would be the best approach. Horizontal
risk retention may improve capital
formation to the extent it makes
investors more willing to invest in the
securitization markets.
It is not clear that horizontal risk
retention will fully align sponsor
incentives with investor incentives.
Investors who are investing in the most
senior tranches will have different
incentives than the sponsor who is
holding the equity tranche. This is
similar to debt/equity issues that exist
260 Stated as an equation: The EHRI amount ≥ 5%
of the fair value of all ABS interests.
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in the corporate bond market. Several
commentators expressed concerns
regarding the horizontal risk retention
option. These commentators noted that
the retention of a subordinated tranche
by the sponsor has the potential to
create substantial conflicts of interest
between sponsors and investors.
Another commentator recommended
that the final rules remove horizontal as
an option in RMBS transactions noting
that history has already shown that
retaining the equity tranche was not
enough to align the securitizer’s
incentives with those of investors in the
securitization’s other tranches.
ii. Eligible Vertical Interest
Another way a sponsor may satisfy
the standard risk retention option is by
retaining at least 5 percent piece of each
class of interests issued in the
transaction or a single vertical security.
The proposed rules also would require
a sponsor that elects to retain risk
through the vertical form of standard
risk retention to disclose to potential
investors and regulators certain
information about the retained risks and
the assumptions and methodologies
used to determine the aggregate dollar
amount of ABS interests issued. The
vertical form of standard risk retention
aligns incentives of the sponsor with
every tranche in the securitization by
requiring the sponsor to hold a
percentage of each tranche. Several
commentators on the original proposal
noted that the vertical form of standard
risk retention was easy to calculate,
more transparent and less subject to
manipulation. Commenters also noted
that the vertical form of standard risk
retention would receive better
accounting treatment than the
horizontal form of standard risk
retention. In addition, one of these
commenters noted that because
managed structures, including CDOs,
have compensation structures that
incentivize managers to select riskier,
higher yielding assets to maximize
return and equity cash flows, the
vertical form of standard risk retention
is the only option that incentivizes
managers to act for the benefit of all
investors.
More generally, by allowing sponsors
to choose a vertical form of risk
retention, there will be increased
flexibility to choose higher yielding
assets and provide greater access to
capital to viable but higher risk
borrowers than what would otherwise
be possible through only a horizontal
form of risk retention. While the single
vertical security will have similar costs
and benefits to holding 5 percent of
each tranche, there are slight
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differences. The main difference is that
the single vertical security trading costs
may be lower than the costs of buying
5 percent of each tranche.
Alternatively, the agencies considered
allowing for loan participations as an
option that commenters raised that
would satisfy the risk retention
requirements. Ultimately, it was
determined that there would be little to
no economic benefit for allowing this
option because the option is currently
not used by the market and would
unlikely be used.
iii. L-Shaped Risk Retention
As discussed above, the horizontal
and vertical risk retention options each
present certain costs to securitizers. It is
possible that potential sponsors of
securitizations would find both of these
risk retention options costly. The
original risk retention proposal included
an option of combining equal parts (2.5
percent) of vertical and horizontal risk
retention. While this combination of
horizontal and vertical risk retention
may mitigate some of the costs related
to the horizontal only or vertical only
risk retention options, it is possible that
combinations other than equal parts
would also satisfy the objectives of the
risk retention requirements. Hence, in
an effort to provide greater flexibility to
sponsors, the agencies are proposing to
permit sponsors to hold any
combination of vertical and horizontal
risk retention. The benefit of this
flexibility is that the approach allows
sponsors to minimize costs by selecting
a customized risk retention method that
suits their individual situation and
circumstance, including relative market
demand for the various types of interest
that may be retained under the rule. To
the extent that the costs and benefits of
credit risk retention vary across time,
across asset classes, or across sponsors,
this approach would implement risk
retention in the broadest possible
manner such that sponsors may choose
the risk retention implementation that
they view as optimal. This approach
may also permit sponsors some
flexibility with regard to structuring
credit risk retention without having to
consolidate assets.
The proposed set of risk retention
alternatives would provide sponsors
with a much greater array of credit risk
retention strategies to choose from.
Because sponsors are given the choice
on how to retain risk, their chosen
shape may not be as effective in aligning
interests and mitigating risks for
investors. That is, it may create fewer
benefits or more costs for investors than
other alternatives might. Thus, the
standard risk retention option, to the
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extent that different percentages of
horizontal and vertical risk retention
create disparate benefits and costs for
sponsors and investors, may perpetuate
some of the conflicts of interest that
characterized prior securitizations. This
approach, may create flexibility, but
may also increase the complexity of
implementation of risk retention and the
measurement of compliance due to the
wide choices sponsors would enjoy.
Horizontal risk retention allows
sponsors to communicate private
information about asset quality more
efficiently, in some cases, than vertical
risk retention, but only if both forms of
risk retention are an option. A sponsor
choosing to retain risk in a horizontal
form over a vertical form may be able to
signal to the market that the sponsor’s
incentives are better aligned with
investors’. By choosing a costlier way of
retaining risk, such as the horizontal
form, a sponsor can signal to the market
the high quality of their assets. This
provides a benefit to sponsors who are
able to signal the high quality of their
assets less costly than retaining risk in
the vertical form and using another
signaling mechanism.
Alternatively, the agencies considered
allowing sponsors to retain risk through
holding a representative sample of the
loans being securitized as proposed in
the original proposal. The option was
not included, among other reasons,
because of, as noted by commenters, its
difficulty to implement.
b. Options for Specific Asset Classes
and Structures
i. Master Trust
Securitizations of revolving lines of
credit, such as credit card accounts or
dealer floor plan 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
master trust that is collateralized by
loans or other extensions of 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 sponsor.
The definitions of a seller’s interest
and a revolving master trust are
intended to be consistent with current
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. Commenters on
the original proposal supported
permitting a sponsor to satisfy its risk
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retention requirement through retention
of the seller’s interest. In this regard, a
trade association commented that the
seller’s interest, in essence, represents a
vertical slice of the risks and rewards of
all the receivables in the master trust,
and therefore operates to align the
economic interests of securitizers with
those of investors. In contrast, many
commenters raised structural (or
technical) concerns with the proposed
master trust option.
The Commission preliminarily
believes that aligning the requirements
with current market practice will
balance implementation costs for
sponsors utilizing the master trust
structure with the benefits that investors
receive through improved selection of
underlying assets by the sponsors.
Maintaining current practice will be
transparent and easy for the market to
understand and will preserve current
levels of efficiency and maintain
investor’s willingness to invest in the
market. Codification of current practice
will also provide clarity to market
participants and may encourage
additional participation given the
removal of previous uncertainty about
potential changes to current practices,
thereby increasing capital formation.
Under this option, there would be a
cost to sponsors of measuring and
disclosing the seller’s interest amount
on an ongoing basis, but since this is a
current market practice, the additional
cost should be minimal. The agencies
propose requiring the 5 percent seller’s
interest to be measured in relation to the
fair value of the outstanding investors’
interests rather than the principal
amount of assets of the issuing entity.
As discussed above this acts to make
sure the sponsors’ incentives are aligned
with the borrower and to make sure the
holdings of the sponsor are enough to
economically incentivize them.
ii. CMBS
The Commission understands that the
current market practice regarding risk
retention in the CMBS market is largely
in line with the agencies’ proposed
rules. The proposed rules allow for the
continuation of current risk retention
market practice for CMBS in the form of
the B-piece retention with additional
modifications to the current practice.
Under the agencies’ proposal, a sponsor
could satisfy the risk retention
requirements by having up to two thirdparty purchasers (provided that each
party’s interest is pari passu with the
other party’s interest) purchase an
eligible horizontal residual interest (Bpiece) in the issuing entity if at least 95
percent of the total unpaid principal
balance is commercial real estate loans.
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The third-party purchaser(s) would be
required to acquire and retain an
eligible horizontal residual interest in
the issuing entity in the same form,
amount, and manner as the sponsor
(with the same hedging, transfer and
other restrictions) except that after five
years the third-party purchaser can sell
the B-piece to another eligible thirdparty purchaser. Giving the third-party
purchaser the ability to sell the B-piece
to another qualified third-party
purchaser should not affect the costs or
benefits as the transference of the Bpiece keeps the structure of the ABS
intact and therefore the alignment of
incentives will not change. The original
third-party purchaser benefits by being
given more liquidity and making the
purchase of the B-piece not as costly,
encouraging eligible B-piece purchasers
to purchase the B-piece and increasing
competition among B-piece purchasers.
The sponsor would be responsible for
monitoring the B-piece buyer’s
compliance with the preceding
restrictions, and an independent
operating advisor with the authority to
call a vote to remove the special servicer
would be appointed.
The proposed option would not allow
for B-pieces to be further packaged into
other securitizations such as CDOs. Due
to the current limited state of the CDO
market, to the extent the proposal is
codifying the current state of the market,
there may be costs and benefits to
market perception that the Commission
cannot quantify but relative to the
current state there are no costs and
benefits. However, to be consistent with
the motivation behind the proposed
rule, prohibiting repackaging of B-pieces
incentivizes sponsors to exercise the
oversight necessary to align interests.
Consistent with the current practice
that the ‘‘B-piece’’ is the lowest rated
tranche(s) of CMBS (most junior
tranche), it accepts the first losses in the
case of defaults, and, thus, it is
equivalent to the horizontal (‘‘firstloss’’) option of the general risk
retention rule applied to CMBS.
Consequently, the costs and benefits of
the ‘‘B-piece’’ are similar to the ones for
the horizontal form of standard risk
retention. To the extent that sponsors
would continue the current market
practice that they voluntarily use, the
costs and benefits will be marginal
(since the rule proposes mandating the
size of a B-piece at the level similar to,
although slightly higher than, the
currently used) with the exception
below.
Under current market practice, Bpiece investors (who are often also
special servicers) have a conflict of
interest with investment grade tranche
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investors. This conflict could persist to
the extent that CMBS sponsors choose
to structure their risk retention
consistent with current practice. In
theory, a (special) servicer must try to
maximize recovery for all tranche
holders; however, if the servicer is also
the subordinate tranche holder, it may
not look after the borrowers’ or senior
tranche investors’ positions, but rather
may undertake actions (modification,
foreclosure, etc.) that maximize the
position of the first-loss investors at the
expense of borrowers or senior tranche
investors.261 While this potential
conflict of interest may continue to
exist, depending on how the sponsor
structures the risk retention, the
proposed rules include requirements
that may lessen the impact of the
conflict.
The proposed rule requires
appointment of an independent
operating advisor who, among other
obligations, has the authority to
recommend and call a vote for removal
of the special servicer under certain
conditions. This proposed requirement
may serve to limit the adverse effects of
the potential conflict of interest, thus
helping to ensure that the benefits of the
risk retention requirements are
preserved. There would be costs,
however, related to the appointment of
the independent operating advisor,
including, but not limited to, the
payments to the advisor.
In comparison to the current lack of
any statutorily mandated risk retention,
the primary benefit of allowing sponsors
is to maintain their current market
practices, which effectively achieve the
intended objectives of risk retention. In
a manner analogous to the discussion of
horizontal risk retention, the B-piece
sale may incentivize the sponsor
(through the intended B-piece buyer) to
securitize safer assets relative to
retaining an eligible vertical interest
under the standard risk retention
option. To the extent that safer assets
are securitized, investors may be more
willing to invest in CMBS, thus,
increasing the pool of available capital
for lending on the commercial real
estate market. If only the safest
commercial real estate loans are
securitized, however, capital formation
could potentially be negatively
impacted due to sponsors not issuing
loans they cannot securitize. Thus,
261 Yingjin Hila Gan and Christopher Mayer.
‘‘Agency Conflicts, Asset Substitution, and
Securitization’’, NBER Working Paper No. 12359,
July 2006, and Brent W. Ambrose, Anthony B.
Sanders, and Abdullah Yavas. ‘‘CMBS Special
Servicers and Adverse Selection in Commercial
Mortgage Markets: Theory and Evidence’’, 2008,
Working Paper.
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riskier loans may not be extended to
potentially viable borrowers. Since
sponsors can sell the B-piece to
specialized investors who are willing to
take risk (and able to evaluate and
manage it), sponsors can free up
additional capital. Thus, allowing the Bpiece option may lead to increased
capital formation and allocational
efficiency because the risk is transferred
to those parties that are willing and able
to bear it. Both effects could lead to a
decline in costs of borrowing for
commercial real estate buyers relative to
a situation where the B-piece is not
permitted.
To the extent that the proposed rule
allows the current market practice to
continue with minor change in the size
of the horizontal piece, and most market
participants follow it, both costs and
benefits of the proposed rule are
expected to be minimal with the
exception of the requirement of the
appointment of the independent
operating advisor discussed above.
iii. ABCP
The original proposal included a risk
retention option specifically designed
for ABCP structures. As explained in the
original proposal, ABCP is a type of
liability that is typically issued by a
special purpose vehicle (commonly
referred to as a ‘‘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
securitized assets collateralizing the
ABS interests that support the ABCP
may consist of a wide range of assets
including automobile loans, commercial
loans, trade receivables, credit card
receivables, student loans, and other
loans. Some ABCP conduits also
purchase assets that are not ABS
interests, including direct purchases of
loans and receivables and repurchase
agreements. 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. In the current
market the sponsors of the ABS interests
purchased by ABCP conduits often
retain credit risk and eventually all
sponsors of ABS will be required to
comply with the credit risk retention
rules.
Under the proposal, sponsors of ABCP
conduits could either hold 5 percent of
the risk as discussed above using the
standard risk retention option or could
rely on the ABCP option outlined
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below. To the extent that an ABCP
conduit sponsor or its majority-owned
affiliate already holds over 5 percent of
the outstanding ABCP and at least 5
percent of the residual interest in the
ABCP conduit, the costs will be
minimal. Under the current proposal,
ABCP sponsors would be provided an
ABCP conduit risk retention option. As
long as the assets held in the ABCP
conduit are not purchased in the
secondary markets and the sponsor of
every ABS interest held by the ABCP
conduit complies with the credit risk
retention requirements then the ABCP
conduit sponsor would not be required
to retain risk. Because the sponsor of the
ABS interest held by the ABCP conduit
would need to comply with the credit
risk retention requirements certain
assets such as receivables would not be
eligible for purchase by an eligible
ABCP conduit which would incentivize
ABCP conduits to hold other assets.
Another condition of the proposed
conduit option is the requirement that
the ABCP conduit have 100 percent
liquidity support and that all ABS held
in the conduit are not acquired in
secondary market transactions. Limiting
an eligible ABCP conduit to holding
ABS interests acquired in initial
issuances may allow the conduit to
negotiate the terms of the deal and have
an effect on the riskiness of the ABS
interests. This may incentivize ABCP
conduits to hold ABS interests acquired
in initial issuances over ABS interests
acquired in secondary markets, possibly
resulting in increased costs in the
secondary markets for ABS interests due
to lower liquidity and potentially
decreasing efficiency in the secondary
markets for ABS interests. At the same
time, encouraging primary market
transactions may increase capital
formation as new ABS interests will be
necessary for ABCP conduits to issue
ABCP. The liquidity support may
increase costs for ABCP conduits that
were previously unguaranteed or lacked
liquidity support that meets the
requirements in the proposal.
iv. CLOs
Collateralized Loan Obligations (CLO)
sponsors are required to retain the same
5 percent of risk as other asset classes.
Collateralized loans have longer
maturities, implying that loan balances
will not decrease much prior to the
maturity of the CLO. Under the
proposed sunset provisions, this will
require the manager to effectively retain
risk for the life of the CLO. Longer risk
retention periods could help to mitigate
concerns that managers may alter the
composition of the loan portfolio
relative to a short sunset provision. The
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agencies consider CLO managers to be
the sponsors of CLOs and thus they
would be required to meet the credit
risk retention requirements. The amount
of capital available to managers to hold
risk can vary with the size and
affiliations of the manager. To the extent
that the CLO market has different sized
managers, the relative capital costs for
managers with a small balance sheet
available to service the 5 percent of risk
retention will be greater than the capital
costs for managers with larger balance
sheets. This may induce smaller
managers to borrow capital in order to
cover holding 5 percent of the risk,
which could result in different funding
costs between smaller and larger
managers. As a result, the CLO option
may impact competition by creating an
advantage for managers with lower
funding costs, and potentially encourage
banks to start sponsoring mangers. The
Commission lacks sufficient information
on the distribution of CLO manager
characteristics, including their size,
access to capital, and funding costs, to
be able to assess such an impact.
The agencies are proposing to allow
certain types of CLO to satisfy the risk
retention requirement if the lead
arranger for the underlying loan tranche
has taken an allocation of the
syndicated credit facility under the
terms of the transaction that includes a
tranche that is designated as a CLOeligible loan tranche and such allocation
is at least equal to the greater of (a) 20
percent of the aggregate principal
balance at origination and (b) the largest
allocation taken by any other member
(or members affiliated with each other)
of the syndication group.
v. Enterprises
The proposed rules allow the
guarantee of the Enterprises under
conservatorship or receivership to count
as risk retention for purposes of the risk
retention requirements. Because of the
capital support provided by the U.S.
government for the Enterprises,
investors in Enterprise ABS are not
exposed to credit loss, and there is no
incremental benefit to be gained by
requiring the Enterprises to retain risk.
This along with the Enterprises’ capital
support creates a competitive advantage
for the Enterprises over private-sector
securitizers when purchasing loans.
Reinforcing this competitive
advantage will provide three significant
consequences. First, recognizing the
guarantee of the Enterprises as fulfilling
their risk retention requirement will
allow them to facilitate the availability
of capital to segments of the population
that might not otherwise have access
through private sector channels. In
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particular, without Enterprise programs,
borrowers that cannot qualify for loans
that are exempt from the risk retention
requirements, but could otherwise
support repayment of a loan, might not
be able to secure a loan if lenders are
unwilling or unable to underwrite and
retain such loans on their own balance
sheet. Second, the recognition of the
guarantee of the Enterprises as fulfilling
their risk retention requirement will
smooth home financing in periods when
banks curb their lending due to limited
access to capital and private-sector
securitizers are unable or unwilling to
meet excess demand. Finally,
recognizing the guarantee of the
Enterprises as fulfilling their risk
retention requirement will preserve
liquidity in the market for mortgages
that are not QRMs.
The main cost of recognizing the
Enterprises’ guarantee as fulfilling their
risk retention requirement is the
increased probability that they will
purchase riskier loans that do not meet
the QRM criteria. A riskier loan
portfolio may increase the Enterprises’
likelihood of default, which has the
potential of creating additional taxpayer
burden. Some commenters noted that by
allowing the guarantee of the
Enterprises as fulfilling their riskretention requirements and preserving
`
their competitive advantage vis-a-vis
private securitizers, our rules may result
in costs to private securitizers,
including perhaps exiting the market
because of their inability to favorably
compete with the Enterprises. This will
have the effect of reducing competition
and may impede capital formation in
segments of the market not served by
the Enterprises. However, analysis of
loans originated between 1997 and
2009, a period that spans the onset of
the financial crisis, shows that private
label loans had a much higher serious
delinquency rate than Enterprise
purchased loans, even after accounting
for different underlying loan
characteristics.262 Hence, this historical
performance-based evidence suggest
that Enterprise underwriting standards
offset any incentive to incur excess risk
because of their capital support relative,
at least in relation the incentives and
behaviors among private label
securitizers during the same period.
Furthermore, as discussed below, the
proposed rule includes a proposal to
define QRM, which would lessen the
262 See Joshua White and Scott Bauguess,
Qualified Residential Mortgage: Background Data
Analysis on Credit Risk Retention, (August 2013),
available at https://www.sec.gov/divisions/riskfin/
whitepapers/qrm-analysis-08-2013.pdf.
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potential competitive harm to private
securitizers.
vi. Alternatives
In developing the proposed rules on
the retention of risk required under
Section 15G of the Exchange Act, as
added by Section 941(b) of the DoddFrank Act, the agencies considered a
number of alternative approaches. Some
of the alternatives were suggested by
commenters following the previous rule
proposals.
For instance, commenters suggested
other forms of risk retention such as: 5
percent participation interest in each
securitized asset; for CLOs, a
performance fee-based option; lossabsorbing subordinate financing in
CMBS (such as ‘‘rake bonds’’);
‘‘contractual’’ risk retention; private
mortgage insurance as a permissible
form; overcollateralization;
subordination; third-party credit
enhancement; and conditional cash
flows. The agencies believed that the
costs and benefits of these options were
not an improvement over the now
proposed standard risk retention option.
The Commission invites public
comment regarding all aspects of the
proposed approach and potential
alternative approaches.
Alternative amounts of risk retention
include: Requiring sponsors to retain a
fixed amount of more than 5 percent;
Establishing the risk retention
percentage depending on asset class;
and establishing the risk retention
requirement on a sliding scale
depending on the (risk) characteristics
of the underlying loans observable at
origination (e.g., instead of the two level
structure of 0 percent for exempted
assets and 5 percent for the rest, to use
0 percent for exempted assets, 1 percent
for assets with low expected credit risk,
2 percent with moderate risk, etc.). The
Commission believes that these
alternatives are overly complicated and
may create undue compliance and
compliance monitoring burden on
market participants and regulators
without providing material benefits over
the proposed approaches. The
Commission requests information about
costs and benefits of these alternative
risk retention parameters, in particular,
the costs and benefits of requiring fixed
risk retention amount of more than 5
percent. Because there is no current risk
retention requirement or voluntary
compliance at levels above 5 percent,
the Commission currently lacks
sufficient data to quantitatively
determine the optimal amount of risk
retention across each asset class. The
Commission seeks, in particular, data or
other comment on the economic effects
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of the 5 percent requirement or of other
levels that the agencies have the
discretion to implement. The
Commission also requests comment on
methodologies and data that could be
used to quantitatively analyze the
appropriate level of risk retention, both
generally and for each asset class.
Alternative sunset provisions include:
requiring sponsors to hold retained
pieces until maturity of issued ABS;
making the sunset period depend on
average maturity of the underlying
loans; and making sunset gradual, i.e.,
to introduce gradual reduction in the
retained percentage. At this point, the
Commission assumes that these
alternatives create additional costs,
impose undue compliance and
compliance monitoring burden on
market participants and regulators
without adding benefits. The sunset
provision could also be implemented
with cut off horizons different from the
proposed five years for RMBS and two
years for other asset classes and with
pool balance cut offs different from the
proposed 25 percent and 33 percent
respectively. The agencies request
information about costs and benefits of
these alternative risk retention
structures, in particular, about the
currently proposed numerical
parameters of the sunset provision. The
Commission also requests comment on
methodologies and data that could be
used to quantitatively analyze the
appropriate sunset horizons, both
generally and for each asset class.
7. Exemptions
As discussed above, there are
overarching economic impacts of a risk
retention requirement. Below the
Commission describes the particular
costs and benefits relevant to each of the
asset classes included within this rule
that the agencies exempt from risk
retention.
a. Federally Insured or Guaranteed
Residential, Multifamily, and Health
Care Mortgage Loan Assets
The agencies are proposing, without
changes from the original proposal, the
exemption from the risk retention
requirements for any securitization
transaction that is collateralized solely
by residential, multifamily, or health
care facility mortgage loan assets if the
assets are insured or guaranteed in
whole or in part as to the payment of
principal and interest by the United
States or an agency of the United States.
The agencies are also proposing,
without changes from the original
proposal, the exemption from the risk
retention requirements for any
securitization transaction that involves
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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 by
residential, multifamily, or health care
facility mortgage loan assets, or interests
in such assets.
Relative to the baseline there is no
cost or benefit associated with this
exemption because risk retention is not
currently mandated. However, by
providing this exemption it will
incentivize sponsors to use federally
insured or guaranteed assets, which will
have an impact on competition with
other assets that are not federally
insured or guaranteed. The agencies
believe it is not necessary to require risk
retention for these type of assets because
investors will be sufficiently protected
from loss because of the government
guarantee and adding the cost of risk
retention would create costs to sponsors
where they are not necessary as the
incentive alignment problem is already
being addressed.
b. Securitizations of Assets Issued,
Insured or Guaranteed by the United
States or Any Agency of the United
States
The rules the agencies are proposing
today contain full exemptions from risk
retention for any securitization
transaction if the ABS issued in the
transaction were (1) collateralized solely
(excluding servicing assets) by
obligations issued by the United States
or an agency of the United States; (2)
collateralized solely (excluding
servicing assets) 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 residential, multifamily, or
health care facility mortgage loan
securitizations discussed above); or (3)
fully guaranteed as to the timely
payment of principal and interest by the
United States or any agency of the
United States.
Relative to the baseline there is no
cost or benefit associated with this
exemption because risk retention is not
currently mandated. However, by
providing this exemption it will
incentivize sponsors to use federally
insured or guaranteed assets, which will
have an impact on competition with
other assets that are not federally
insured or guaranteed. The agencies
believe it is not necessary to require risk
retention for these type of assets because
investors will be sufficiently protected
from loss because of the government
guarantee and adding the cost of risk
retention would create costs to sponsors
where they are not necessary as the
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incentive alignment problem is already
being addressed.
c. QRM
As discussed above, the rules the
agencies are re-proposing today exempt
from required risk retention any
securitization comprised of QRMs.
Section 15G requires that ABS that are
collateralized solely by QRMs be
completely exempted from risk
retention requirements, and allows the
agencies to define the terms and
conditions under which a residential
mortgage would qualify as a QRM.
Section 15G mandates 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.
Pursuant to the statutory mandate, the
agencies have proposed to exempt ABS
collateralized by QRMs, and pursuant to
the discretion permitted, have proposed
defining QRMs broadly as QMs. The
Commission believes that this definition
of QRM would achieve a number of
important benefits. First, since the
criteria used to define QMs focus on
underwriting standards, safer product
features, and affordability, the
Commission preliminarily believes that
equating QRMs with QMs is likely to
promote more prudent lending, protect
consumers, and contribute to a
sustainable, resilient and liquid
mortgage securitization market. Second,
the Commission believes that a single
mortgage quality standard (as opposed
to creating a second mortgage quality
standard) would benefit market
participants by simplifying the
requirements applicable to this market.
Third, a broader definition of QRMs
avoids the potential effect of squeezing
out certain lenders, such as community
banks and credit unions, which may not
have sufficient resources to hold the
capital associated with non-QRM
mortgages, thus enhancing competition
within this segment of the lending
market. The Commission believes that
this will increase borrower access to
capital and facilitate capital formation
in securitization markets. Finally, a
broad definition of QRMs may help
encourage the re-emergence of private
capital in securitization markets. Since
Enterprises would have a competitive
securitizing advantage because of the
proposed recognition of the guarantee of
the Enterprises as fulfilling their riskretention requirement and taxpayer
backing, less restrictive QRM criteria
would enhance the competitiveness of
private securitizations and reduce the
need to rely on low down-payment
programs offered by Enterprises.
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Aligning QRM to QM would build
into the provision certain loan product
features that data indicates results in a
lower risk of default. The Commission
acknowledges that QM does not fully
address the loan underwriting features
that are most likely to result in a lower
risk of default. However, the agencies
have considered the entire regulatory
environment, including regulatory
consistency and the possible effects on
the housing finance market. In addition,
the agencies believe that other steps
being considered may provide investors
with information that allows them to
appropriately assess this risk. The
Commission has proposed rules that
would require in registered RMBS
transactions disclosure of detailed loanlevel information at the time of issuance
and on an ongoing basis. The proposal
also would require that securitizers
provide investors with this information
in sufficient time prior to the first sale
of securities so that they can analyze
this information when making their
investment decision.263
The Commission is aware, however,
that defining QRMs broadly to equate
with QMs may result in a number of
economic costs. First, to the extent that
risk retention reduces the risk exposure
of ABS investors, a broader definition of
QRMs will leave a larger number of ABS
investors bearing more risk. Second,
securitizers will not be required to
retain an economic interest in the credit
risk of QRM loans, and thus, the
incentives between securitizers and
those bearing the credit risk of a
securitization will remain misaligned.
An analysis of historical performance
among loans securitized into privatelabel RMBS that originated between
1997 and 2009 shows that those meeting
the QM standard sustained exceedingly
high serious delinquency rates, greater
than 30 percent during that period.264
Third, the QRM exemption is based on
the premise that well-underwritten
mortgages were not the cause of the
financial crisis; however, the criteria for
QM loans do not account for all
borrower characteristics that may
provide additional information about
default rates. For instance, borrowers’
credit history, their down payment and
their loan-to-value ratio have been
shown to be significantly associated
with lower borrower default rates.265
263 See Asset-Backed Securities, SEC Release No.
33–9117, 75 FR 23328 at 23335, 23355 (May 3,
2010).
264 See Joshua White and Scott Bauguess,
Qualified Residential Mortgage: Background Data
Analysis on Credit Risk Retention, (August 2013),
available at https://www.sec.gov/divisions/riskfin/
whitepapers/qrm-analysis-08-2013.pdf
265 Id.
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Fourth, allowing securitizers to bear less
risk in their securitizations avoids
moderation of non-observable risk
factors that could substantially harm
ABS investors during contractionary
housing periods. That is, investors
would be better protected by a narrower
QRM standard. Fifth, commenters
argued that not allowing blended pools
of QRMs and non-QRMs to qualify for
a risk-retention exemption may limit
securitizations, if lenders cannot
originate enough QRMs. Although
broadening the definition of QRMs
reduces this concern, since blended
pools will still require risk retention,
mortgage liquidity may still be reduced.
d. Qualified Automobile Loans,
Qualified Commercial Real Estate Loans
and Qualified Commercial Loans
Similar to RMBS discussed above, the
agencies have proposed to exempt
securitizations containing certain
qualified loans from the risk retention
requirement. Specifically, the agencies
proposed an exemption for qualified
automobile loans, qualified commercial
real estate loans and commercial loans.
The benefit to exempted qualified loans
from risk retention is that sponsors will
have more capital available to deploy
more efficiently. The economic
consequences of exempting qualified
loans are analogous to the discussion
associated with requiring stricter
lending standards than QM in the
residential lending market. Also there
will be fewer administrative, monitoring
and compliance costs to be met due to
the lack of risk retention. Lower costs of
securitizing loans may enhance
competition in the market for qualified
auto, commercial real estate and
commercial loans by allowing more
firms to be profitable by exempting
certain type of loans, sponsors have an
incentive to misrepresent qualifications
of loans, similar to what was observed
in the financial crisis. One qualification
surrounding whether or not a loan is
qualified is that the sponsor is required
to purchase any loan that fails to meet
the underwriting criteria. The benefit of
the previous qualification is that it helps
to prevent and disincentivize sponsors
from trying to include unqualified loans
in the securitization.
e. Resecuritizations
The agencies have identified certain
resecuritizations where duplicative risk
retention requirements would not
appear to provide any added benefit.
Resecuritizations collateralized only by
existing 15G-compliant ABS and
financed through the issuance of a
single class of securities so that all
principal and interest payments
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received are evenly distributed to all
security holders, are a unique category
of resecuritizations. For such
transactions, the resecuritization
process would neither increase nor
reallocate the credit risk of the
underlying ABS. Therefore, there would
be no potential cost to investors from
possible 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
resecuritizations, the proposed rule
seeks to ensure that this misalignment is
addressed by not granting these
resecuritizations with an exemption
from risk retention. The proposed rules
may have an adverse impact on capital
formation and efficiency if they make
certain resecuritization transactions
costlier or infeasible to conduct.
f. Other Exemptions
There are a few exemptions from risk
retention included in the current
proposal that were not included in the
original proposal. They include
exemptions for utility legislative
securitizations, two options for
municipal bond ‘‘repackaging’’
securitizations, and seasoned loans.
With respect to utility legislative
securitizations, the agencies believe the
implicit state guarantee in place for
these securitizations addresses the
moral hazard problem discussed above
and adding the cost of risk retention
would create costs to sponsors where
they are not necessary as the incentive
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alignment problem is already being
addressed.
For municipal bond repackaging
securitizations, the agencies believe that
the risk retention mechanisms already
in place for these securitizations already
serve to address the moral hazard
problem discussed above and thus have
proposed two options that would reflect
current market practice.
Seasoned loans have had a sufficient
period of time to prove their
performance and the agencies believe
that providing an exemption for these
assets consistent with the sunset in
place for risk retention requirements
addresses the moral hazard problem
discussed above and adding the cost of
risk retention would create costs to
sponsors where they are not necessary
as the incentive alignment problem is
already being addressed.
Relative to the baseline there is no
cost or benefit associated with these
exemptions because risk retention is not
currently mandated. However,
providing these exemptions would
incentivize the creation of utility
legislative securitizations, municipal
bond ‘‘repackaging’’ securitizations, and
securitizations with seasoned loans,
which will have an impact on
competition with other securitizations.
g. Alternatives
Commenters asked for exemptions for
specific asset classes such as: rental car
securitization, tax lien-backed securities
sponsored by a municipal entity, ‘‘nonconduit’’ CMBS transactions, corporate
debt repackagings, and legacy loan
securitizations. The agencies chose not
to provide exemptions for these asset
classes because the cost associated with
retaining risk provided a benefit for
these asset classes by aligning the
incentive of the sponsor and the
investor. These asset classes had either
unfunded risk retention already in
practice or had loans created before the
new underwriting qualifications were in
place. In either case there exists a
misalignment between the sponsor and
investors. In order to resolve this moral
hazard risk retention is required.
8. Hedging, Transfer and Financing
Restrictions
Under the proposal, a sponsor and its
consolidated affiliates generally would
be prohibited from hedging or
transferring the risk it is required to
retain, except for currency and interest
rate hedges and some index hedging.
Additionally, the sponsor would be
prohibited from financing the retained
interest on a non-recourse basis.
The main purpose of the hedging/
transfer restrictions is to enforce the
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economic intent of the risk retention
rule. Without the hedging/transfer
restrictions, sponsors could hedge/
transfer their (credit) risk exposure to
the retained ABS pieces, thereby
eliminating the ‘‘skin in the game’’
intent of the rule. Thus, the restriction
is intended to prevent evasion of the
rule’s intent.
Costs related to the hedging/transfer
restrictions include direct
administrative costs and compliance
monitoring costs. Additionally,
according to a few commenters, there is
uncertainty about the interpretation of
the proposed rules, namely, what
constitutes permissible and
impermissible hedges. Such uncertainty
may induce strategic responses that are
designed to evade the without violating
the letter of the rule. For example,
derivative or cash instrument positions
can be used to hedge risk, but it may be
difficult to determine whether such a
hedge is designed to evade the rule.
9. Foreign Safe Harbor
The proposal includes 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 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. The
exclusion would create compliance and
monitoring cost savings compared to
universally applying the risk retention
rules to all ABS issues.
The costs of foreign safe harbor
exemptions would be small. ABS deals
with a share of U.S. assets slightly above
the threshold of 25 percent and sold
primarily to foreign investors may be
restructured by sponsors to move the
share below the threshold to avoid the
need to satisfy the risk retention
requirements. The number of such deals
will likely be small 266 and the resulting
economic costs will be minimal.
There will be negligible effect of the
exclusion on efficiency, competition
and capital formation (compared to the
universal application of the risk
retention rule) because the affected ABS
are foreign and not related to U.S.
markets. In some instances, allowed by
the foreign safe harbor provision, the
effect on capital formation in the United
266 Since 2009, only 0.26 percent of all ABS in AB
Alert database had primary location of collateral in
the U.S., but were distributed outside of the U.S.
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States would be positive. For example,
foreign sponsors which acquire less
than 25 percent of assets in the pool in
the United States and sell the ABS to
foreign investors to avoid risk retention
requirement would create capital in the
United States. The prevalence of such
situations would depend on relative
strictness of the United States and
foreign risk retention rules, tax laws,
and other relevant security regulations.
(see also footnote 36). The effect of the
same scenario on competition may be
marginally negative for the United
States sponsors involved in similar
transactions (securitizing U.S.-based
assets for sale to foreign investors)
because the U.S. sponsors have to retain
risk pieces by the virtue of being
organized under the laws of the U.S.
The proposal may have negative effect
on foreign sponsors that seek U.S.
investors because they may need to
satisfy risk retention requirements of
two countries (their home country and
the United States) and, thus, the rule
may reduce competition and investment
opportunities for U.S. investors. The
proposed rule is designed to provide
flexibility for sponsors with respect to
forms of eligible risk retention to permit
foreign sponsors seeking a material U.S.
investor base to retain risk in a format
that satisfies both home country and
U.S. regulatory requirements, without
jeopardizing protection to the U.S.
investors in the form of risk retention.
10. Request for Comment
The Commission requests comments
on the following questions:
1. Are the descriptions of the current
risk retention practices and structures or
practices that align the interests of
investors and sponsors correct with
respect to all ABS asset classes, but, in
particular, in the following: ABCP, CLO,
RMBS, automobile loan backed ABS,
and master trusts with seller’s interests?
2. With respect to current risk
retention practices: what share of ABS
interest is currently retained (less/more
than 5 percent)? What type of ABS
interest is currently retained (horizontal,
vertical, L-shaped, seller’s interest)?
When was this practice or structure
developed (before or after the crisis,
before or after the promulgation of
Dodd-Frank Act)? Is information about
risk retention (size or shape) for specific
transactions disclosed to investors? To
what extent is this practice or structure
in response to regulatory restrictions
(e.g., EU risk retention regulations or the
FDIC safe harbor)?
3. Is there a difference in historical
delinquency rates/performance of
securitizations in which the sponsor
retained ABS interests and
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securitizations in which the sponsor did
not retain ABS interests? Is there a
difference in the timing of defaults of
securitizations in which the sponsor
retained ABS interests and
securitizations in which the sponsor did
not retain ABS interests?
4. What are the estimates of the
potential costs of appointing the
independent operating advisors for the
proposed CMBS B-piece option?
5. To what extent do the sponsor and/
or its affiliates receive subordinated
performance fees with respect to a
securitization transaction? Are the
subordinated performance fees received
by the sponsor and its affiliates equal to
or greater than the economic exposure
they would get from the 5 percent risk
retention requirements? Because
subordinated performance fees only
align incentives when the assets are
performing above a certain threshold,
should there be any additional
restrictions on the use of performance
fees to satisfy risk retention
requirements?
6. To the extent not already provided,
what are the estimates of the cost
(including opportunity cost) of 5
percent risk retention and how will 5
percent retention affect the interest rates
paid by borrowers under securitized
loans?
7. What would be the costs of
establishing the risk retention level
above the statutory 5 percent? What
would be the benefits?
8. Are there any additional costs that
the agencies should consider with
respect to the risk retention?
9. Are the sunset provision
appropriate for RMBS (i.e., the latter of
(x) 5 years and (y) the reduction of the
asset pool to 25% of its original balance,
but (z) no longer than 7 years) and all
other asset classes (i.e., the latter of (x)
2 years and (y) the reduction of the asset
pool balance to 33%)? What data can be
used to support these or alternative
sunset bounds?
10. To what extent do the
requirements and/or restrictions
included in each of the risk retention
options limit the ability of sponsors to
use the option?
11. To what extent are the deals
funded by ABCP conduits included in
the deal volumes for other asset classes?
12. To the extent that a warehouse
line is funded by the issuance of
revolving ABS, is that ABS included in
the deal volume?
13. It would be helpful to receive
additional information about the fees
charged by sponsors for setting up
securitizations, sponsors interpretation
of their opportunity cost of capital, the
interaction of regulatory capital with
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cost of capital, and historical returns of
tranches of different asset classes in
particular the residual interest.
14. The Commission requests data
about master trusts that would permit it
to estimate the amount of risk currently
retained.
15. The Commission currently lacks
sufficient data to quantitatively assess
the potential impact of the proposed
minimum 5 percent retention
requirement. In connection with the reproposal, the Commission seeks data or
other comment on the economic effects
of the proposed minimum 5 percent
requirement.
The Commission also requests
comment on methodologies and data
that could be used to quantitatively
analyze the appropriate level of risk
retention, both generally and for each
asset class.
Appendix: The Impact of Required Risk
Retention on the Cost of Credit
In this section, we outline a
framework for evaluating the impact of
required risk retention on the cost of
credit, and apply it to a hypothetical
securitization of prime mortgages. While
the ultimate impact of required risk
retention depends in part on the
assumptions about how risk retention is
funded by the sponsor, we conclude
that incremental risk retention by the
sponsor is unlikely to have a significant
impact on the cost of credit. Our range
of reasonable estimates of the cost of
risk retention is between zero and 30
basis points. The former estimate is
relevant when incremental retention is
zero. The latter is relevant when the
sponsor is currently retaining nothing,
and incremental retention is funded
entirely with sponsor equity.
I. Conceptual Framework
The analysis below focuses on the
impact of risk retention on the cost of
credit through the cost of funding. If
capital markets are efficient, the cost of
funding an ABS interest directly in
capital markets should be no different
than funding the same ABS interest on
the balance sheet of the sponsor.
However, when capital markets are not
efficient, risk retention can be costly, as
the cost of funding credit through
securitization is lower than funding on
the sponsor’s balance sheet. Here, we
focus on measuring how much risk
retention can increase the cost of credit
to borrowers by forcing a sponsor to
increase the amount of retention it is
funding on its balance sheet.267
267 As this cost is driven by financial market
inefficiency, it is worth noting that financial
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The analysis starts by identifying the
marginal amount and form of retention.
In a typical securitization transaction,
the sponsor is currently holding some
risk retention without being prompted
by regulation, typically in a first-loss
position. In some circumstances, the
proposed rule will increase the overall
amount of retention by the sponsor, and
it is only this increase that will have an
impact on the cost of credit. If the
sponsor’s risk retention is already
adequate to meet the rule, the
implication is that the impact of the rule
on the cost of credit is zero. In the
analysis here, we focus first on the
marginal retention required by the
sponsor to meet the rule.268
(1) Marginal Risk Retention = Required
Risk Retention¥Current Risk Retention
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For the purposes of this example,
assume the sponsor currently holds a
first loss position equal to 3 percent of
the fair value of all ABS interests
(Current Risk Retention), and
consequently needs to hold eligible
interests with fair value of an additional
2 percent (Marginal Risk Retention) in
order to meet the 5 percent standard
(Required Risk Retention).
We assume that the sponsor has three
options to fund this Marginal Risk
Retention of 2 percent. In the first
option, the sponsor funds entirely with
new equity. In the second option, the
sponsor funds part of the marginal risk
retention with maturity-matched debt
secured by the ABS interest and
recourse to the sponsor, and the rest
with new equity. In the final option, the
sponsor funds part of the marginal risk
retention with short-term bi-lateral repo
secured by the ABS interest and
recourse to the sponsor, and the rest
with new equity.
Regardless of the funding strategy, the
framework outlined below is focused on
calculating the sponsor’s return on
marginal equity. This calculation has
three components: The Amount of
Incremental Equity by the sponsor, the
Gross Yield on the Retained ABS
Interest, and the Cost of Debt Funding.
We review each of these in turn. The
amount of incremental equity is simply
the amount of incremental funding in
innovation which reduces or eliminates this
inefficiency over time will subsequently reduce or
eliminate these costs.
268 It is possible that restrictions proposed above
on the timing of cash flow to an eligible horizontal
residual interest (EHRI) will also have an impact on
the cost of credit. In particular, an increase in the
duration of first-loss cash flows may prompt the
sponsor to increase the required yield on the EHRI.
As we have found reasonable changes in the yield
to have insignificant impact on the analysis here,
it is ignored it for simplicity.
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the form of sponsor equity, and it varies
across sponsor funding strategy.
(2) Amount of Incremental Equity =
Percent of Equity in Incremental
Funding x Marginal Risk Retention (1)
Assuming the marginal risk retention
requirement of 2 percent from the
example above, when the sponsor funds
marginal risk retention only with equity,
the Percent Equity in Incremental
Funding is 100 percent, and the Amount
of Incremental Equity is 2 percent (= 1
× 0.02). However, if the sponsor funds
with 80 percent term debt, the Percent
of Equity in Incremental Funding is 20
percent, and the Amount of Incremental
Equity is 0.4 percent (= 0.20 × 0.02).
Finally, when the sponsor funds
marginal risk retention with bi-lateral
repo of 90 percent, the Percent of Equity
in Incremental Funding would be 10
percent, and the Amount of Incremental
Equity is 0.2 percent (= 0.10 × 0.02).
The Gross Yield at Issue on the
Marginal Retained ABS interests by the
sponsor is an important input to the
calculation below, as it measures the
sponsor’s return from holding risk
retention. As the gross yield increases,
all else equal, the cost of risk retention
will decrease, as the sponsor is being
compensated more for its position.
(3) Gross Yield = Yield at Issue on
Marginal Retained ABS Interest(s)
In the motivating example here, we
assume the gross yield on marginal ABS
interests retained is 4 percent.
In order to calculate the return on
marginal equity, it is necessary to
measure the difference between Gross
Yield and the Cost of Debt Funding,
where the latter is simply the product of
the cost of incremental debt funding
times the amount of debt in the capital
structure.
(4) Cost of Debt Funding = Percent of
Debt in Incremental Funding × Cost of
Incremental Debt
When the sponsor only uses equity to
fund incremental retention, the amount
of incremental debt is 0 percent and
Cost of Debt Funding is zero. When the
sponsor uses term debt in 80 percent of
the capital structure at a cost of 5
percent, the Cost of Debt Funding is 4
percent (= 0.8 × 0.05). Finally, when the
sponsor uses bi-lateral repo in 90
percent of the capital structure at a cost
of 4 percent, the Cost of Debt Funding
is 3.6 percent (= 0.9 × 0.04).
The next step in calculating the
marginal return on equity is
measurement of the Net Yield on
marginal retention, which is equal to the
difference between the gross yield and
the cost of debt funding.
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(5) Net Yield = Gross Yield (3)¥Cost of
Debt Funding (4)
In our examples from above, the Net
Yield of the all equity funding strategy
is 4 percent (= 0.04–0), of the term debt
funding strategy is 0 percent (= 0.04–
0.04), and of the bi-lateral repo funding
strategy is 0.4 percent (= 0.04–0.036)
percent. Finally, the Return on Marginal
Equity is the ratio of the Net Yield to the
Amount of Incremental Equity. It is the
actual return to marginal sponsor
equity, taking the current cost of credit
as given.
(6) Return on Marginal Equity = Net
Yield (5)/Percent of Equity in
Incremental Funding
In our examples from above, the
Return on Marginal Equity of the all
equity funding strategy is 4 percent (=
0.04/1), of the term debt funding
strategy is 0 percent (= 0/0.2), and of the
bi-lateral repo funding strategy is 4
percent (= 0.004/0.1).
These Returns on Marginal Equity are
likely to be too low to incent the
sponsor to go forward with the
transaction. In order to remediate this
problem, we measure the ROE shortfall
as the difference, if positive, between
the sponsor’s target return on marginal
equity and the actual return on marginal
equity. This number represents how
much the sponsor’s ROE on marginal
equity needs to increase to meet the
target return.
(7) ROE Shortfall = max (0,Target Return
on Equity-Return on Marginal Equity
(6))
While we will let the target Return on
Marginal Equity vary with the funding
strategy and risk of the ABS interest
retained in the detailed example below,
for simplicity assume now that the
Target Return on Equity is 10 percent.
Following our example, this leads to an
ROE shortfall of 6 percent (= 0.10–0.04)
for the all equity strategy, of 10 percent
(= 0.10–0.0) for the term debt funding
strategy, and of 6 percent (= 0.10–0.04)
for the bi-lateral repo funding strategy.
In order to eliminate the shortfall, it
is necessary to increase the Return on
Marginal Equity, which is done by
generating more cash flow for the
sponsor. As all cash flow has been
exhausted through payments to ABS
interests, this can only be done by
increasing the yield on the underlying
assets, which is the measured increase
in the cost of credit. Note that the
incremental cash flow from the higher
mortgage coupon only needs to flow to
the sponsor.269
269 In particular, since we have valued all of the
other ABS interests at market prices, and the rule
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retained interest. The impact of the
amount of incremental equity is
ambiguous, as it depends on the cost of
incremental debt.
While it is unclear how a sponsor
might ultimately structure the
transaction to capture this incremental
cash flow, we assume for illustrative
purposes here that the sponsor creates a
senior IO strip in the amount of the
incremental yield on the assets, and
holds that IO strip along with
incremental retention.270 As the sponsor
receives 100 percent of the cash flow
from the incremental cost of credit,
small changes in the cost of credit can
have a large impact on the return on
marginal equity.271
In our example when the sponsor
funds incremental risk retention entirely
with equity, an increase in the yield on
assets by 12 basis points, when divided
by the amount of incremental equity of
2 percent, results in an additional return
to marginal equity of 6 percent (=0.12/
0.02). It follows that it would only take
a 12 basis point increase in the cost of
credit to compensate the sponsor for the
funding cost of incremental risk
retention entirely with equity when
using a Target Return on Incremental
Equity of 10 percent.
More generally, the potential impact
of risk retention on the cost of credit is
equal to the product of the ROE shortfall
and the amount of incremental equity.
(8) Impact on Cost of Credit = ROE
shortfall (7) × Amount of Incremental
Equity (2) Substituting earlier equations
into (8) results in the simple following
approximation to the impact of risk
retention on the cost of credit:
(9) Impact on the Cost of Credit = Max
{0,Target Return on Marginal Equity[Yield on Marginal Retained Interest(Cost of Incremental Debt × (1-Amount
of Incremental Equity))]/Amount of
Incremental Equity} × Amount of
Incremental Risk Retention × Amount of
Incremental Equity
The equation above demonstrates that
the impact of the proposed rule on the
cost of credit is increasing in the
following variables: (i) Target return on
marginal equity, (ii) cost of incremental
debt, (iii) amount of incremental risk
retention, and (iv) yield on marginal
The Amount and Form of Risk
Retention
with the proposed rule which we will
evaluate here: an eligible horizontal
retained interest, a vertical interest, or
an L-shaped interest. We review each of
these in turn.
and reduce the amount of incremental retention,
but for conservatism we ignore that impact here.
271 The impact of the higher coupon on the return
on marginal equity is driven by two factors. First,
a one basis point increase in the mortgage coupon
only has to be distributed to the sponsor’s
incremental ABS interest, which in this example is
only 2 percent. Second, when the sponsor uses
leverage through debt, the amount of marginal
equity is a fraction of the incremental ABS interest.
These two levels of leverage permit small changes
in the mortgage coupon to have a relatively large
impact on the return on marginal equity.
272 The analysis assumes 15 percent CPR
(constant prepayment rate), 0 percent CDR (constant
default rate), 30 percent loss severity, 24-month
recovery lag, and employs the forward interest rate
curve as of 22 May 2013.
II. Application
In order to illustrate the framework,
we will focus on the hypothetical
securitization of prime mortgage loans
illustrated below. The first column
documents class name, the second
column documents tranche NRSRO
rating, the third column documents
tranche type, the fourth column face
amount, the fifth column documents
tranche coupon, and the sixth column is
the ratio of tranche face amount (4) to
total face amount (the sum of face
amounts for all non-IO tranches). Using
cash flow assumptions consistent with
prime mortgage loans as well as the
yield assumption from (9), we compute
the price in column (7).272 The value (8)
is simply equal to the price (7)
multiplied by the balance (6) divided by
100.
does not affect investors in those interests, it is safe
to assume those tranches can continue to be sold
at the same price. It is possible that risk retention
could reduce the yield demanded by investors on
those interests, but for conservatism we ignore that
impact here.
270 It is possible that the sponsor would structure
this cash flow to be an eligible form of retention,
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There are three ways for the sponsor
of this mortgage transaction to comply
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grade part of the capital structure as
horizontal and the rest vertical. The
middle columns illustrate that the
bottom two tranches (B4 and B5),
together represent about 0.64 percent of
fair value, implying that the sponsor
needs to hold vertical interests with fair
value of 4.49 percent. The table
illustrates that holding 4.4 percent of
each of the remaining ABS interests
accomplishes this requirement,
resulting in a value-weighted yield of
4.01 percent.
Finally, under the vertical risk
retention option, the sponsor must hold
5 percent of each ABS interest, which
mechanically ensures that the fair value
of those interests is equal to 5.13
percent, and has a yield of 2.71 percent.
In the ‘‘ROE from Retained’’ row, the
table reports the actual return on equity
from the retained position, which in
every circumstance is below the target
return on equity. This difference,
measured in the next row as ‘‘ROE
shortfall,’’ measures the additional yield
which must be generated in order
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The Cost of All Equity Funding
In this section we take the
conservative approach that eligible risk
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retention is funded entirely with equity.
As finance theory suggests that the
required return on sponsor equity
should be determined largely by the risk
of asset funded by equity, we assume
that equity has a required risk-adjusted
rate of return which is increasing in the
risk of the marginal retained ABS
interest. In particular, when equity is
funding the safest form of risk
retention—the vertical form—we
assume the required yield is only 7
percent. However, when equity is
funding the L-shaped form, which is
more risky than the vertical form but not
as risky as horizontal form, we assume
the required yield increases to 9
percent. Finally, when equity is funding
the horizontal form, the most risky of all
eligible forms, we assume the required
yield is 11 percent.
compensate equity for its required
return. For example, when horizontal is
funded by full equity, the ROE is 5.24
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Under the horizontal risk retention
option, the sponsor must hold ABS
interests from the bottom of the capital
structure up until the value of those
interests is no less than 5 percent of the
fair value of ABS interests. As the value
of all ABS interests is $102.5 from
Figure A1, the value of the horizontal
form must be 5.13 percent (=$102.5 ×
5%). The table above illustrates that in
order for the sponsor to comply with the
rule, the sponsor must hold 83.92
percent of the B1 tranche, as well as 100
percent of all junior tranches, in order
to meet required retention with
horizontal. The value-weighted yield on
this interest is 5.24 percent.
Under the L-shaped risk retention
option, the sponsor can hold any
combination of horizontal and vertical
interests as long as the aggregate fair
value is 5.13 percent. We focus here on
the sponsor holding the non-investment
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58023
proposed rule on the mortgage coupon
varies between 21 and 29 basis points.
The Cost of Risk Retention With Term
Debt Funding
In the example below, we focus on
sponsor funding of incremental risk
retention using a capital structure which
varies with the risk of the underlying
incremental ABS interest: 20 percent
equity when incremental retention is
horizontal, 10 percent equity when
incremental retention is L-shaped
interest, and 5 percent equity
incremental retention is vertical. The
cost of term debt is assumed to be 30day LIBOR plus 6 percent, using the
average for a BBB-rated sponsor at a
maturity of 7–10 years. Given the
presence of leverage in the capital
structure, we assume the cost of equity
is 2 percentage points higher to fund
each type of ABS interest than when
funded entirely with equity. Using the
conceptual framework outlined above,
the measured impact of risk retention on
the cost of credit, illustrated in the last
line, varies between 12 and 18 basis
points.273
The Cost of Risk Retention With BiLateral Repo Funding
repo, with a haircut of 10 percent and
cost of 4.25 percent, and the rest is
funded with equity. The cost of repo
funding includes a cost of 30-day LIBOR
plus 2 percent to the repo counterparty
combined with a cost of 2 percent for a
fixed-for-floating rate interest rate swap,
using a maturity of seven years. As repo
involves maturity transformation and
creates unique risks to the sponsor
beyond those created just by leverage,
we further increase the cost of equity
funding by another 2 percentage points
above and beyond the equity yield used
in the term leverage example above.
Results suggest that the impact of the
proposed rule on the cost of credit,
when a sponsor funds the marginal
retained interest with bi-lateral repo, is
between 6 and 12 basis points.
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In the final approach, we permit the
sponsor to follow a more aggressive
strategy where funding eligible risk
retention is funded in part with bilateral repo. In particular, we assume
that only the investment-grade portion
of the retained interest is funded by
273 For simplicity, we do not vary the cost of debt
across the risk of the asset portfolio, as this has a
second-order impact on the result.
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percent, which is 5.76 percent below the
target return of 11 percent.
For conservatism, we assume that the
sponsor was not retaining anything
without the rule, so the ‘‘Marginal
Equity’’ is 5 percent. The last row
computes the coupon impact, which is
simply equal to the product of Marginal
Equity and the ROE shortfall, as all
additional cash flow from a higher
mortgage coupon can be directed to
equity. Overall, the table illustrates that
in a conservative funding structure,
where the sponsor had no retention
before the rule, the impact of the
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D. OCC Unfunded Mandates Reform Act
of 1995 Determination
Section 202 of the Unfunded
Mandates Reform Act of 1995, Public
Law 104–4 (UMRA) requires that an
agency prepare a budgetary impact
statement before promulgating a rule
that includes a Federal mandate that
may result in an expenditure by State,
local, and tribal governments, in the
aggregate, or by the private sector, of
$100 million, adjusted for inflation,
($150 million in 2013) or more in any
one year. 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 and
Federal savings association
securitization activity, the OCC
estimates that as of December 31, 2012,
there were 56 national banks and
Federal savings associations that
engaged in any securitization activity
during that year. These entities may be
affected by the proposed rule. Pursuant
to the proposed rule, national banks and
Federal savings associations would be
required to retain approximately $3.0
billion of credit risk, after taking into
consideration the proposed exemptions
for QRMs and other qualified assets.
This amount reflects the marginal
increase in risk retention required to be
held based on the proposed rule, that is,
the total risk retention required by the
rule less the amount of ABS interests
already held by securitizers that would
meet the definitions for eligible risk
retention.
The cost of retaining these interests
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 $3.0 billion retention amount on the
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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 2 percent of the
retained amount, or approximately $60
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 the required disclosures.
The OCC estimates that the
implementation and disclosure will
require approximately 480 hours per
institution, or at $92 per hour,
approximately $44,000 per institution.
The OCC estimates that the rule will
apply to as many as 56 national banks
and Federal savings associations. Thus,
the estimated total administrative cost
of the proposed rule is approximately
$2.5 million, and the estimated total
cost of the proposed rule applied to ABS
is $62.5 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 $150.0 million or more.
Accordingly, the OCC has not prepared
a budgetary impact statement or
specifically addressed the regulatory
alternatives considered.
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E. Commission: Small Business
Regulatory Enforcement Fairness Act
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996, or ‘‘SBREFA,’’ 274 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);
• 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.
F. 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
274 Public Law 104–121, Title II, 110 Stat. 857
(1996) (codified in various sections of 5 U.S.C., 15
U.S.C. and as a note to 5 U.S.C. 601).
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liability.275 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
ll.2
[Reserved]
Definitions.
Subpart B—Credit Risk Retention
ll.3
Base risk retention requirement.
ll.4
Standard risk retention.
ll.5
Revolving master trusts.
ll.6
Eligible ABCP conduits.
ll.7
Commercial mortgage-backed
securities.
ll.8
Federal National Mortgage
Association and Federal Home Loan
Mortgage Corporation ABS.
ll.9
Open market CLOs.
ll.10
Qualified tender option bonds.
Subpart C—Transfer of Risk Retention
ll.11
Allocation of risk retention to an
originator.
ll.12
Hedging, transfer and financing
prohibitions.
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Subpart D—Exceptions and Exemptions
ll.13
Exemption for qualified
residential mortgages.
ll.14
Definitions applicable to
qualifying commercial loans, commercial
real estate loans, and automobile loans.
ll.15
Exceptions for qualifying
commercial loans, commercial real estate
loans, and automobile loans.
ll.16
Underwriting standards for
qualifying commercial loans.
ll.17
Underwriting standards for
qualifying CRE loans.
ll.18
Underwriting standards for
qualifying automobile loans.
ll.19
General exemptions.
ll.20
Safe harbor for certain foreignrelated transactions.
ll.21
Additional exemptions.
275 See
12 U.S.C. 4513.
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Subpart A—Authority, Purpose, Scope
and Definitions
§ ll.1
[Reserved]
§ ll.2
Definitions.
For purposes of this part, the
following definitions apply:
ABS interest means:
(1) 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; and
(3) Does not include the right to
receive payments for services provided
by the holder of such right, including
servicing, trustee services and custodial
services.
An affiliate of, or a person affiliated
with, a specified person means 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.
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)(79) of the
Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(79)).
Appropriate Federal banking agency
has the same meaning as in section 3 of
the Federal Deposit Insurance Act (12
U.S.C. 1813).
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.
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 § ll.14.
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58025
Commission means the Securities and
Exchange Commission.
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
another person if the first person:
(i) Owns, controls or holds with
power to vote 25 percent or more of any
class of voting securities of the other
person; or
(ii) Controls in any manner the
election of a majority of the directors,
trustees or persons performing similar
functions of the other person.
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.
Creditor has the same meaning as in
15 U.S.C. 1602(g).
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 horizontal residual interest
means, with respect to any
securitization transaction, an ABS
interest in the issuing entity:
(1) That is an interest in a single class
or multiple classes in the issuing entity,
provided that each interest meets,
individually or in the aggregate, all of
the requirements of this definition;
(2) With respect to which, on any
payment date on which the issuing
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entity has insufficient funds to satisfy
its obligation to pay all contractual
interest or principal due, any resulting
shortfall will reduce amounts paid to
the eligible horizontal residual interest
prior to any reduction in the amounts
paid to any other ABS interest, whether
through loss allocation, operation of the
priority of payments, or any other
governing contractual provision (until
the amount of such ABS interest is
reduced to zero); and
(3) That has the most subordinated
claim to payments of both principal and
interest by the issuing entity.
Eligible vertical interest means, with
respect to any securitization transaction,
a single vertical security or an interest
in each class of ABS interests in the
issuing entity issued as part of the
securitization transaction that
constitutes the same portion of the fair
value of each such class.
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.
GAAP means generally accepted
accounting principles as used in the
United States.
Issuing entity means, with respect to
a securitization transaction, the trust or
other entity:
(1) That owns or holds the pool of
assets to be securitized; and
(2) In whose name the asset-backed
securities are issued.
Majority-owned affiliate of a sponsor
means an entity that, directly or
indirectly, majority controls, is majority
controlled by or is under common
majority control with, the sponsor. For
purposes of this definition, majority
control means ownership of more than
50 percent of the equity of an entity, or
ownership of any other controlling
financial interest in the entity, as
determined under GAAP.
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 or issuing
entity.
Residential mortgage means a
transaction that is a covered transaction
as defined in section 1026.43(b) of
Regulation Z (12 CFR 1026.43(b)(1)) and
any transaction that is exempt from the
definition of ‘‘covered transaction’’
under section 1026.43(a) of Regulation Z
(12 CFR 1026.43(a)).
Retaining sponsor means, with
respect to a securitization transaction,
the sponsor that has retained or caused
to be retained an economic interest in
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the credit risk of the securitized assets
pursuant to subpart B of this part.
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 (if the depositor is not the
sponsor); or
(2) The sponsor of the asset-backed
securities.
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
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.
Servicing assets means rights or other
assets designed to assure the timely
distribution of proceeds to ABS interest
holders and assets that are related or
incidental to purchasing or otherwise
acquiring and holding the issuing
entity’s securitized assets. Servicing
assets include amounts received by the
issuing entity as proceeds of rights or
other assets, whether as remittances by
obligors or as other recoveries.
Single vertical security means, with
respect to any securitization transaction,
an ABS interest entitling the sponsor to
specified percentages of the principal
and interest paid on each class of ABS
interests in the issuing entity (other than
such single vertical security), which
specified percentages result in the fair
value of each interest in each such class
being identical.
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.
State has the same meaning as in
Section 3(a)(16) of the Securities
Exchange Act of 1934 (15 U.S.C.
78c(a)(16)).
United States means the United States
of America, its territories and
possessions, any State of the United
States, and the District of Columbia.
Wholly-owned affiliate means an
entity (other than the issuing entity)
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that, directly or indirectly, wholly
controls, is wholly controlled by, or is
wholly under common control with, a
sponsor. For purposes of this definition,
‘‘wholly controls’’ means ownership of
100 percent of the equity of an entity.
Subpart B—Credit Risk Retention
§ ll.3
Base risk retention requirement.
(a) Base risk retention requirement.
Except as otherwise provided in this
part, the sponsor of a securitization
transaction (or majority-owned affiliate
of the sponsor) shall retain an economic
interest in the credit risk of the
securitized assets in accordance with
any one of §§ ll.4 through ll.10.
(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 (or at least one of their
majority-owned affiliates) retains an
economic interest in the credit risk of
the securitized assets in accordance
with any one of §§ ll.4 through ll
.10.
§ ll.4
Standard risk retention.
(a) Definitions. For the purposes of
this section, the following definitions
apply:
Closing Date Projected Cash Flow
Rate for any payment date shall mean
the percentage obtained by dividing:
(1) The fair value of all cash flow
projected, as of the securitization
closing date, to be paid to the holder of
the eligible horizontal residual interest
(or, if a horizontal cash reserve account
is established pursuant to this section,
released to the sponsor or other holder
of such account), through such payment
date (including cash flow projected to
be paid to such holder on such payment
date) by
(2) The fair value of all cash flow
projected, as of the securitization
closing date, to be paid to the holder the
eligible horizontal residual interest (or,
with respect to any horizontal cash
reserve account, released to the sponsor
or other holder of such account),
through the maturity of the eligible
horizontal residual interest (or the
termination of the horizontal cash
reserve account). In calculating the fair
value of cash flows and the amount of
cash flow so projected to be paid, the
issuing entity shall use the same
assumptions and discount rates as were
used in determining the fair value of the
eligible horizontal residual interest (or
the amount that must be placed in an
eligible horizontal cash reserve account,
equal to the fair value of an eligible
horizontal residual interest).
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Closing Date Projected Principal
Repayment Rate for any payment date
shall mean the percentage obtained by
dividing:
(1) The amount of principal projected,
as of the securitization closing date, to
be paid on all ABS interests through
such payment date (or released from the
horizontal cash reserve account to the
sponsor or other holder of such
account), including principal payments
projected to be paid on such payment
date by
(2) The aggregate principal amount of
all ABS interests issued in the
transaction. In calculating the projected
principal repayments, the issuing entity
shall use the same assumptions as were
used in determining the fair value of the
ABS interests in the transaction (or the
amount that must be placed in an
eligible horizontal cash reserve account,
equal to the fair value of an eligible
horizontal residual interest).
(b) General requirement. (1) Except as
provided in §§ ll.5 through ll.10,
the sponsor of a securitization
transaction must retain an eligible
vertical interest or eligible horizontal
residual interest, or any combination
thereof, in accordance with the
requirements of this section. The fair
value of the amount retained by the
sponsor under this section must equal at
least 5 percent of the fair value of all
ABS interests in the issuing entity
issued as part of the securitization
transaction, determined in accordance
with GAAP. The fair value of the ABS
interests in the issuing entity (including
any interests required to be retained in
accordance with this part) must be
determined as of the day on which the
price of the ABS interests to be sold to
third parties is determined.
(2) A sponsor retaining any eligible
horizontal residual interest (or funding
a horizontal cash reserve account)
pursuant to this section must prior to
the issuance of the eligible horizontal
residual interest (or funding of a
horizontal cash reserve account), or at
the time of any subsequent issuance of
ABS interests, as applicable:
(i) Calculate the Closing Date
Projected Cash Flow Rate and Closing
Date Projected Principal Repayment
Rate for each payment date;
(ii) Certify to investors that it has
performed the calculations required by
paragraph (b)(2)(i) of this section and
that the Closing Date Projected Cash
Flow Rate for each payment date does
not exceed the Closing Date Projected
Principal Repayment Rate for such
payment date; and
(iii) Maintain record of the
calculations and certification required
under this paragraph (b)(2) in
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accordance with paragraph (e) of this
section.
(c) Option to hold base amount in
horizontal cash reserve account. In lieu
of retaining all or any part of an eligible
horizontal residual interest under
paragraph (b) 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 equal to the fair value of such
eligible horizontal residual interest or
part thereof, 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) (A) United States Treasury
securities with maturities of one year or
less;
(B) 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; or
(ii) With respect to securitization
transactions in which the ABS interests
or the securitized assets are
denominated in a currency other than
U.S. dollars:
(A) Sovereign bonds denominated in
such other currency with maturities of
one year or less; or
(B) Fully insured deposit accounts
denominated, in such other foreign
currency and held in 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
(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 to satisfy an amount due on any
ABS interest;
(ii) No other amounts may be
withdrawn or distributed from the
account unless the sponsor has
complied with paragraphs (b)(2)(i) and
(ii) of this section and the amounts
released to the sponsor or other holder
of the horizontal cash reserve account
do not exceed, on any release date, the
Closing Date Principal Repayment Rate
as of that release date; and
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58027
(iii) Interest on investments made in
accordance with paragraph (c)(2) of this
section may be released once received
by the account.
(d) Disclosures. A sponsor relying on
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 the
disclosures in written form set forth in
this paragraph (d) under the caption
‘‘Credit Risk Retention’’:
(1) Horizontal interest. With respect to
any eligible horizontal residual interest
held under paragraph (a) of this section,
a sponsor must disclose:
(i) The fair value (expressed as a
percentage of the fair value of all of the
ABS interests issued in the
securitization transaction and dollar
amount (or corresponding amount in the
foreign currency in which the ABS are
issued, as applicable)) of the eligible
horizontal residual interest the sponsor
will retain (or did retain) at the closing
of the securitization transaction, and the
fair value (expressed as a percentage of
the fair value of all of the ABS interests
issued in the securitization transaction
and dollar amount (or corresponding
amount in the foreign currency in which
the ABS are issued, as applicable)) of
the eligible horizontal residual interest
that the sponsor is required to retain
under this section;
(ii) A description of the material terms
of the eligible horizontal residual
interest to be retained by the sponsor;
(iii) A description of the methodology
used to calculate the fair value of all
classes of ABS interests, including any
portion of the eligible horizontal
residual interest retained by the
sponsor;
(iv) The key inputs and assumptions
used in measuring the total fair value of
all classes of ABS interests, and the fair
value of the eligible horizontal residual
interest retained by the sponsor,
including but not limited to quantitative
information about each of the following,
as applicable:
(A) Discount rates;
(B) Loss given default (recovery);
(C) Prepayment rates;
(D) Defaults;
(E) Lag time between default and
recovery; and
(F) The basis of forward interest rates
used.
(v) The reference data set or other
historical information used to develop
the key inputs and assumptions
referenced in paragraph (d)(1)(iv) of this
section, including loss given default and
actual defaults.
(vi) As of a disclosed date which is no
more than sixty days prior to the closing
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date of the securitization transaction,
the number of securitization
transactions securitized by the sponsor
during the previous five-year period in
which the sponsor retained an eligible
horizontal residual interest pursuant to
this section, and the number (if any) of
payment dates in each such
securitization on which actual payments
to the sponsor with respect to the
eligible horizontal residual interest
exceeded the cash flow projected to be
paid to the sponsor on such payment
date in determining the Closing Date
Projected Cash Flow Rate.
(vii) If the sponsor retains risk
through the funding of a horizontal cash
reserve account:
(A) The amount to be placed (or that
is placed) by the sponsor in the
horizontal cash reserve account at
closing, and the fair value (expressed as
a percentage of the fair value of all of
the ABS interests issued in the
securitization transaction and dollar
amount (or corresponding amount in the
foreign currency in which the ABS are
issued, as applicable)) of the eligible
horizontal residual interest that the
sponsor is required to fund through the
cash account under this section; and
(B) A description of the material terms
of the horizontal cash reserve account;
and
(C) The disclosures required in
paragraphs (d)(1)(iii) through (vi) of this
section.
(2) Vertical interest. With respect to
any eligible vertical interest retained
under paragraph (a) of this section:
(i) Whether the sponsor will retain (or
did retain) the eligible vertical interest
as a single vertical security or as a
separate proportional interest in each
class of ABS interests in the issuing
entity issued as part of the securitization
transaction;
(ii) With respect to an eligible vertical
interest retained as a single vertical
security:
(A) The fair value amount of the
single vertical security that the sponsor
will retain (or did retain) at the closing
of the securitization transaction and the
fair value amount of the single vertical
security that the sponsor is required to
retain under this section; and
(B) Each class of ABS interests in the
issuing entity underlying the single
vertical security at the closing of the
securitization transaction and the
percentage of each class of ABS interests
in the issuing entity that the sponsor
would have been required to retain
under this section if the sponsor held
the eligible vertical interest as a separate
proportional interest in each class of
ABS interest in the issuing entity; and
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(iii) With respect to an eligible
vertical interest retained as a separate
proportional interest in each class of
ABS interests in the issuing entity, the
percentage 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
percentage of each class of ABS interests
in the issuing entity that the sponsor is
required to retain under this section;
and
(iv) The information required under
paragraphs (d)(1)(iii), (iv) and (v) of this
section with respect to the measurement
of the fair value of the ABS interests in
the issuing entity, to the extent the
sponsor is not already required to
disclose the information pursuant to
paragraph (d)(1) of this section.
(e) Record maintenance. A sponsor
must retain the certifications and
disclosures required in paragraphs (b)
and (d) of this section in written form
in its records and must provide the
disclosure upon request to the
Commission and its appropriate Federal
banking agency, if any, until three years
after all ABS interests are no longer
outstanding.
§ ll.5
Revolving master trusts.
(a) Definitions. For purposes of this
section, the following definitions apply:
Revolving master trust means an
issuing entity that is:
(1) A master trust; and
(2) Established to issue on multiple
issuance dates one or more series,
classes, subclasses, or tranches of assetbacked securities all of which are
collateralized by a common pool of
securitized assets that will change in
composition over time.
Seller’s interest means an ABS
interest or ABS interests:
(1) Collateralized by all of the
securitized assets and servicing assets
owned or held by the issuing entity
other than assets that have been
allocated as collateral only for a specific
series;
(2) That is pari passu to each series
of investors’ ABS interests issued by the
issuing entity with respect to the
allocation of all distributions and losses
with respect to the securitized assets
prior to an early amortization event (as
defined in the securitization transaction
documents); and
(3) That adjusts for fluctuations in the
outstanding principal balance of the
securitized assets in the pool.
(b) General requirement. A sponsor
satisfies the risk retention requirements
of § __.3 with respect to a securitization
transaction for which the issuing entity
is a revolving master trust if the sponsor
retains a seller’s interest of not less than
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5 percent of the unpaid principal
balance of all outstanding investors’
ABS interests issued by the issuing
entity.
(c) Measuring and retaining the
seller’s interest. The retention interest
required pursuant to paragraph (b) of
this section:
(1) Must meet the 5 percent test at the
closing of each issuance of ABS
interests by the issuing entity, and at
every seller’s interest measurement date
specified under the securitization
transaction documents, but no less than
monthly, until no ABS interest in the
issuing entity is held by any person not
affiliated with the sponsor;
(2) May be retained by one or more
wholly-owned affiliates of the sponsor,
including one or more depositors of the
revolving master trust.
(d) Multi-level trusts. (1) If one
revolving master trust issues collateral
certificates representing a beneficial
interest in all or a portion of the
securitized assets held by that trust to
another revolving trust, which in turn
issues ABS interests for which the
collateral certificates are all or a portion
of the securitized assets, a sponsor may
satisfy the requirements of paragraphs
(b) and (c) of this section by retaining
the seller’s interest for the assets
represented by the collateral certificates
through either revolving master trust, so
long as both revolving master trusts are
maintained at the direction of the same
sponsor or its wholly-owned affiliates;
and
(2) If the sponsor retains the seller’s
interest associated with the collateral
certificates at the level of the revolving
trust that issues those collateral
certificates, the proportion of the seller’s
interest required by paragraph (b) of this
section that shall be retained at that
level shall equal no less than the
proportion that the securitized assets
represented by the collateral certificates
bears to the total securitized assets in
the revolving master trust that issues the
ABS interests, as of each measurement
date required by paragraph (c) of this
section.
(e) Offset for pool-level excess funding
account. The 5 percent seller’s interest
required on each measurement date by
paragraph (c) of this section may be
reduced on a dollar-for-dollar basis by
the balance, as of such date, of an excess
funding account in the form of a
segregated account that:
(1) Is funded in the event of a failure
to meet the minimum seller’s interest
requirements under the securitization
transaction documents by distributions
otherwise payable to the holder of the
seller’s interest;
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(2) Is pari passu to each series of
investors’ ABS interests issued by the
issuing entity with respect to the
allocation of losses with respect to the
securitized assets prior to an early
amortization event; and
(3) In the event of an early
amortization, makes payments of
amounts held in the account to holders
of investors’ ABS interests in the same
manner as distributions on securitized
assets.
(f) Combined retention at trust and
series level. The 5 percent seller’s
interest required on each measurement
date by paragraph (c) of this section may
be reduced to a percentage lower than
5 percent to the extent that, for all series
of ABS interests issued by the revolving
master trust, the sponsor or whollyowned affiliate of the sponsor retains, at
a minimum, a corresponding percentage
of the fair value of all ABS interests
issued in each series, in the form of an
eligible horizontal residual interest that
meets the requirements of § __.4, or, for
so long as the revolving master trust
continues to operate by issuing, on
multiple issuance dates, one or more
series, classes, subclasses, or tranches of
asset-backed securities, all of which are
collateralized by pooled securitized
assets that change in composition over
time, a horizontal interest meeting the
following requirements:
(1) Whether certificated or
uncertificated, in a single or multiple
classes, subclasses, or tranches, the
horizontal interest meets, individually
or in the aggregate, the requirements of
this paragraph (f);
(2) Each series of the revolving master
trust distinguishes between the series’
share of the interest and fee cash flows
and the series’ share of the principal
repayment cash flows from the
securitized assets collateralizing the
revolving master trust, which may
according to the terms of the
securitization transaction documents,
include not only the series’ ratable share
of such cash flows but also excess cash
flows available from other series;
(3) The horizontal interest’s claim to
any part of the series’ share of the
interest and fee cash flows for any
interest payment period is subordinated
to all accrued and payable interest and
principal due on the payment date to
more senior ABS interests in the series
for that period, and further reduced by
the series’ share of losses, including
defaults on principal of the securitized
assets collateralizing the revolving
master trust for that period, to the extent
that such payments would have been
included in amounts payable to more
senior interests in the series;
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(4) The horizontal interest has the
most subordinated claim to any part of
the series’ share of the principal
repayment cash flows.
(g) Disclosure and record
maintenance—(1) Disclosure. A sponsor
relying on 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’’:
(i) The value (expressed as a
percentage of the unpaid principal
balance of all of the investors’ ABS
interests issued in the securitization
transaction and dollar amount (or
corresponding amount in the foreign
currency in which the ABS are issued,
as applicable)) of the seller’s interest
that the sponsor will retain (or did
retain) at the closing of the
securitization transaction, the fair value
(expressed as a percentage of the fair
value of all of the investors’ ABS
interests issued in the securitization
transaction and dollar amount (or
corresponding amount in the foreign
currency in which the ABS are issued,
as applicable)) of any horizontal risk
retention described in paragraph (f) of
this section that the sponsor will retain
(or did retain) at the closing of the
securitization transaction, and the
unpaid principal balance or fair value,
as applicable (expressed as percentages
of the values of all of the ABS interests
issued in the securitization transaction
and dollar amounts (or corresponding
amounts in the foreign currency in
which the ABS are issued, as
applicable)) that the sponsor is required
to retain pursuant to this section;
(ii) A description of the material terms
of the seller’s interest and of any
horizontal risk retention described in
paragraph (f) of this section; and
(iii) If the sponsor will retain (or did
retain) any horizontal risk retention
described in paragraph (f) of this
section, the same information as is
required to be disclosed by sponsors
retaining horizontal interests pursuant
to § l.4(d)(i).
(2) Record maintenance. A sponsor
must retain the disclosures required in
paragraph (g)(1) of this section in
written form in its records and must
provide the disclosure upon request to
the Commission and its appropriate
Federal banking agency, if any, until
three years after all ABS interests are no
longer outstanding.
(h) Early amortization of all
outstanding series. A sponsor that
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organizes a revolving master trust for
which all securitized assets
collateralizing the trust are revolving
assets, and that relies on this § l.5 to
satisfy the risk retention requirements of
§ l.3, does not violate the requirements
of this part if its seller’s interest falls
below the level required by § ll.5
after an event of default triggers early
amortization, as specified in the
securitization transaction documents, of
all series of ABS interests issued by the
trust to persons not affiliated with the
sponsor, if:
(1) The sponsor was in full
compliance with the requirements of
this section on all measurement dates
specified in paragraph (c) of this section
prior to the event of default that
triggered early amortization;
(2) The terms of the seller’s interest
continue to make it pari passu or
subordinate to each series of investors’
ABS interests issued by the issuing
entity with respect to the allocation of
all losses with respect to the securitized
assets;
(3) The terms of any horizontal
interest relied upon by the sponsor
pursuant to paragraph (f) to offset the
minimum seller’s interest amount
continue to require the interests to
absorb losses in accordance with the
terms of paragraph (f) of this section;
and
(4) The revolving master trust issues
no additional ABS interests after early
amortization is initiated to any person
not affiliated with the sponsor, either
during the amortization period or at any
time thereafter.
§ ll.6
Eligible ABCP conduits.
(a) Definitions. For purposes of this
section, the following additional
definitions apply:
100 percent liquidity coverage means
an amount equal to the outstanding
balance of all ABCP issued by the
conduit plus any accrued and unpaid
interest without regard to the
performance of the ABS interests held
by the ABCP conduit and without
regard to any credit enhancement.
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.
ABCP conduit means an issuing entity
with respect to ABCP.
Eligible ABCP conduit means an
ABCP conduit, provided that:
(1) The ABCP conduit is bankruptcy
remote or otherwise isolated for
insolvency purposes from the sponsor of
the ABCP conduit and from any
intermediate SPV;
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(2) The asset-backed securities
acquired by the ABCP conduit are:
(i) Collateralized solely by the
following:
(A) Asset-backed securities
collateralized solely by assets originated
by an originator-seller or one or more
majority-owned OS affiliates of the
originator seller, and by servicing assets;
(B) Special units of beneficial interest
or similar interests in a trust or special
purpose vehicle that retains legal title to
leased property underlying leases that
were transferred to an intermediate SPV
in connection with a securitization
collateralized solely by such leases
originated by an originator-seller or
majority-owned OS affiliate, and by
servicing assets; or
(C) Interests in a revolving master
trust collateralized solely by assets
originated by an originator-seller or
majority-owned OS affiliate and by
servicing assets; and
(ii) Not collateralized by asset-backed
securities (other than those described in
paragraphs (2)(i)(A) through (C) of this
definition), otherwise purchased or
acquired by the intermediate SPV, the
intermediate SPV’s originator-seller, or a
majority-owned OS affiliate of the
originator seller; and
(iii) Acquired by the ABCP conduit in
an initial issuance by or on behalf of an
intermediate SPV (A) directly from the
intermediate SPV, (B) from an
underwriter of the securities issued by
the intermediate SPV, or (C) from
another person who acquired the
securities directly from the intermediate
SPV;
(3) The ABCP conduit is collateralized
solely by asset-backed securities
acquired from intermediate SPVs as
described in paragraph (2) of this
definition and servicing assets; 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 ABCP conduit by
lending to, purchasing ABCP issued by,
or purchasing assets from, the ABCP
conduit in the event that funds are
required to repay maturing ABCP issued
by the ABCP conduit. With respect to
the 100 percent liquidity coverage, in
the event that the ABCP conduit is
unable for any reason to repay maturing
ABCP issued by the issuing entity, the
liquidity provider shall be obligated to
pay an amount equal to any shortfall,
and the total amount that may be due
pursuant to the 100 percent liquidity
coverage shall be equal to 100 percent
of the amount of the ABCP outstanding
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at any time plus accrued and unpaid
interest (amounts due pursuant to the
required liquidity coverage may not be
subject to credit performance of the ABS
held by the ABCP conduit or reduced by
the amount of credit support provided
to the ABCP conduit and liquidity
support that only funds performing
receivables or performing ABS interests
does not meet the requirements of this
section).
Intermediate SPV means a special
purpose vehicle that:
(1) Is a direct or indirect whollyowned affiliate of the originator-seller;
(2) Is bankruptcy remote or otherwise
isolated for insolvency purposes from
the eligible ABCP conduit, the
originator-seller, and any majorityowned OS affiliate that, directly or
indirectly, sells or transfers assets to
such intermediate SPV;
(3) Acquires assets that are originated
by the originator-seller or its majorityowned OS affiliate from the originatorseller or majority-owned OS affiliate, or
acquires asset-backed securities issued
by another intermediate SPV or the
original seller that are collateralized
solely by such assets; and
(4) Issues asset-backed securities
collateralized solely by such assets, as
applicable.
Majority-owned OS affiliate means an
entity that, directly or indirectly,
majority controls, is majority controlled
by or is under common majority control
with, an originator-seller participating
in an eligible ABCP conduit. For
purposes of this definition, majority
control means ownership of more than
50 percent of the equity of an entity, or
ownership of any other controlling
financial interest in the entity, as
determined under GAAP.
Originator-seller means an entity that
originates assets and sells or transfers
those assets directly, or through a
majority-owned OS affiliate, to an
intermediate SPV.
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.
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
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with the Capital Accord of the Basel
Committee on Banking Supervision, as
amended, and that is subject to such
standards, or a subsidiary thereof.
(b) In general. An ABCP conduit
sponsor satisfies the risk retention
requirement of § ll.3 with respect to
the issuance of ABCP by an eligible
ABCP conduit in a securitization
transaction if, for each ABS interest the
ABCP conduit acquires from an
intermediate SPV:
(1) The intermediate SPV’s originatorseller retains an economic interest in the
credit risk of the assets collateralizing
the ABS interest acquired by the eligible
ABCP conduit in accordance with
paragraph (b)(2) of this section, in the
same form, amount, and manner as
would be required under §§ ll.4 or
ll.5; and
(2) The ABCP conduit sponsor:
(i) Approves each originator-seller
and any majority-owned OS affiliate
permitted to sell or transfer assets,
directly or indirectly, to an intermediate
SPV from which an eligible ABCP
conduit acquires ABS interests;
(ii) Approves each intermediate SPV
from which an eligible ABCP conduit is
permitted to acquire ABS interests;
(iii) Establishes criteria governing the
ABS interests, and the assets underlying
the ABS interests, acquired by the ABCP
conduit;
(iv) Administers the ABCP conduit by
monitoring the ABS interests acquired
by the ABCP conduit and the assets
supporting those ABS interests,
arranging for debt placement, compiling
monthly reports, and ensuring
compliance with the ABCP conduit
documents and with the ABCP
conduit’s credit and investment policy;
and
(v) Maintains and adheres to policies
and procedures for ensuring that the
conditions in this paragraph (b) have
been met.
(c) Originator-seller compliance with
risk retention. The use of the risk
retention option provided in this section
by an ABCP conduit sponsor does not
relieve the originator-seller that
sponsors ABS interests acquired by an
eligible ABCP conduit from such
originator-seller’s obligation, if any, to
comply with its own risk retention
obligations under this part.
(d) Periodic disclosures to investors.
An ABCP conduit sponsor relying upon
this section shall provide, or cause to be
provided, to each purchaser of ABCP,
before or contemporaneously with the
first sale of ABCP to such purchaser and
at least monthly thereafter, to each
holder of commercial paper issued by
the ABCP Conduit, in writing, each of
the following items of information:
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(1) The name and form of organization
of the regulated liquidity provider that
provides liquidity coverage to the
eligible ABCP conduit, including a
description of the form, amount, and
nature of such liquidity coverage, and
notice of any failure to fund.
(2) With respect to each ABS interest
held by the ABCP conduit:
(A) The asset class or brief description
of the underlying receivables;
(B) The standard industrial category
code (SIC Code) for the originator-seller
or majority-owned OS affiliate that will
retain (or has retained) pursuant to this
section an interest in the securitization
transaction; and
(C) A description of the form, fair
value (expressed as a percentage of the
fair value of all of the ABS interests
issued in the securitization transaction
and as a dollar amount (or
corresponding amount in the foreign
currency in which the ABS are issued,
as applicable)), as applicable, and
nature of such interest in accordance
with the disclosure obligations in
§ ll.4(d).
(e) Disclosures to regulators regarding
originator-sellers and majority-owned
OS affiliates. An ABCP conduit sponsor
relying upon this section shall provide,
or cause to be provided, upon request,
to the Commission and its appropriate
Federal banking agency, if any, in
writing, all of the information required
to be provided to investors in paragraph
(d) of this section, and the name and
form of organization of each originatorseller or majority-owned OS affiliate
that will retain (or has retained)
pursuant to this section an interest in
the securitization transaction.
(f) Duty to comply. (1) The ABCP
conduit retaining sponsor shall be
responsible for compliance with this
section.
(2) An ABCP conduit 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
and any majority-owned OS affiliate
which sells assets to the eligible ABCP
conduit with the requirements of
paragraph (b)(1) of this section; and
(ii) In the event that the ABCP conduit
sponsor determines that an originatorseller or majority-owned OS affiliate no
longer complies with the requirements
of paragraph (b)(1) of this section, shall:
(A) Promptly notify the holders of the
ABCP, the Commission and its
appropriate Federal banking agency, if
any, in writing of:
(1) The name and form of organization
of any originator-seller that fails to
retain risk in accordance with paragraph
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(b)(2)(i) of this section and the amount
of asset-backed securities issued by an
intermediate SPV of such originatorseller and held by the ABCP conduit;
(2) The name and form of organization
of any originator-seller or majorityowned OS affiliate that hedges, directly
or indirectly through an intermediate
SPV, its risk retention in violation of
paragraph (b)(1) of this section and the
amount of asset-backed securities issued
by an intermediate SPV of such
originator-seller or majority-owned OS
affiliate and held by the ABCP conduit;
and
(3) Any remedial actions taken by the
ABCP conduit sponsor or other party
with respect to such asset-backed
securities; and
(B) Take other appropriate steps
pursuant to the requirements of
paragraphs (b)(2)(iv) and (b)(2)(v) of this
section which may include, as
appropriate, curing any breach of the
requirements in this section, or
removing from the eligible ABCP
conduit any asset-backed security that
does not comply with the requirements
in this section.
§ ll.7 Commercial mortgage-backed
securities.
(a) Definitions. For purposes of this
section, the following definition shall
apply:
Special servicer means, with respect
to any securitization of commercial real
estate loans, any servicer that, upon the
occurrence of one or more specified
conditions in the servicing agreement,
has the right to service one or more
assets in the transaction.
(b) Third-Party Purchaser. A sponsor
may satisfy some or all of its risk
retention requirements under § ll.3
with respect to a securitization
transaction if a third party purchases
and holds for its own account an
eligible horizontal residual interest in
the issuing entity in the same form,
amount, and manner as would be held
by the sponsor under § ll.4 and all of
the following conditions are met:
(1) Number of third-party purchasers.
At any time, there are no more than two
third-party purchasers of an eligible
horizontal residual interest. If there are
two third-party purchasers, each thirdparty purchaser’s interest must be pari
passu with the other third-party
purchaser’s interest.
(2) Composition of collateral. The
securitization transaction is
collateralized solely by commercial real
estate loans and servicing assets.
(3) Source of funds. (i) Each thirdparty purchaser pays for the eligible
horizontal residual interest in cash at
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the closing of the securitization
transaction.
(ii) No third-party purchaser obtains
financing, directly or indirectly, for the
purchase of such interest from any other
person that is a party to, or an affiliate
of a party to, the securitization
transaction (including, but not limited
to, the sponsor, depositor, or servicer
other than a special servicer affiliated
with the third-party purchaser), other
than a person that is a party to the
transaction solely by reason of being an
investor.
(4) Third-party review. Each thirdparty purchaser conducts an
independent review of the credit risk of
each securitized asset prior to the sale
of the asset-backed 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.
(5) Affiliation and control rights. (i)
Except as provided in paragraph
(b)(5)(ii) of this section, no third-party
purchaser is 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.
(ii) Notwithstanding paragraph
(b)(5)(i) of this section, a third-party
purchaser may be affiliated with:
(A) The special servicer for the
securitization transaction; or
(B) One or more originators of the
securitized assets, as 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.
(6) Operating Advisor. The underlying
securitization transaction documents
shall provide for the following:
(i) The appointment of an operating
advisor (the Operating Advisor) that:
(A) Is not affiliated with other parties
to the securitization transaction;
(B) Does not directly or indirectly
have any financial interest in the
securitization transaction other than in
fees from its role as Operating Advisor;
and
(C) Is required to act in the best
interest of, and for the benefit of,
investors as a collective whole;
(ii) Standards with respect to the
Operating Advisor’s experience,
expertise and financial strength to fulfill
its duties and responsibilities under the
applicable transaction documents over
the life of the securitization transaction;
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(iii) The terms of the Operating
Advisor’s compensation with respect to
the securitization transaction;
(iv) When the eligible horizontal
residual interest has a principal balance
of 25 percent or less of its initial
principal balance, the special servicer
for the securitized assets must consult
with the Operating Advisor in
connection with, and prior to, any
material decision in connection with its
servicing of the securitized assets,
including, without limitation:
(A) Any material modification of, or
waiver with respect to, any provision of
a loan agreement (including a mortgage,
deed of trust, or other security
agreement);
(B) Foreclosure upon or comparable
conversion of the ownership of a
property; or
(C) Any acquisition of a property.
(v) The Operating Advisor shall have
adequate and timely access to
information and reports necessary to
fulfill its duties under the transaction
documents and shall be responsible for:
(A) Reviewing the actions of the
special servicer;
(B) Reviewing all reports made by the
special servicer to the issuing entity;
(C) Reviewing for accuracy and
consistency calculations made by the
special servicer with the transaction
documents; and
(D) 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 the special servicer is
operating in compliance with any
standard required of the special servicer
as provided in the applicable
transaction documents; and
(2) With which, if any, standards the
Operating Advisor believes, in its sole
discretion exercised in good faith, the
special servicer has failed to comply.
(vi) (A) The Operating Advisor shall
have the authority to recommend that
the special servicer be replaced by a
successor special servicer if the
Operating Advisor determines, in its
sole discretion exercised in good faith,
that:
(1) The special servicer has failed to
comply with a standard required of the
special servicer as provided in the
applicable transaction documents; and
(2) Such replacement would be in the
best interest of the investors as a
collective whole; and
(B) If a recommendation described in
paragraph (b)(6)(vi)(A) of this section is
made, the special servicer shall be
replaced upon the affirmative vote of a
majority of the outstanding principal
balance of all ABS interests voting on
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the matter, with a minimum of a
quorum of ABS interests voting on the
matter. For purposes of such vote, the
holders of 5 percent of the outstanding
principal balance of all ABS interests in
the issuing entity shall constitute a
quorum.
(7) 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 under the
caption ‘‘Credit Risk Retention’’:
(i) The name and form of organization
of each initial third-party purchaser that
acquired an eligible horizontal residual
interest at the closing of a securitization
transaction;
(ii) A description of each initial thirdparty purchaser’s experience in
investing in commercial mortgagebacked securities;
(iii) Any other information regarding
each initial third-party purchaser or
each initial third-party purchaser’s
retention of the eligible horizontal
residual interest that is material to
investors in light of the circumstances of
the particular securitization transaction;
(iv) A description of the fair value
(expressed as a percentage of the fair
value of all of the ABS interests issued
in the securitization transaction and
dollar amount (or corresponding
amount in the foreign currency in which
the ABS are issued, as applicable)) of
the eligible horizontal residual interest
that will be retained (or was retained) by
each initial third-party purchaser, as
well as the amount of the purchase price
paid by each initial third-party
purchaser for such interest;
(v) The fair value (expressed as a
percentage of the fair value of all of the
ABS interests issued in the
securitization transaction and dollar
amount (or corresponding amount in the
foreign currency in which the ABS are
issued, as applicable)) of the eligible
horizontal residual interest in the
securitization transaction that the
sponsor would have retained pursuant
to § ll.4 if the sponsor had relied on
retaining an eligible horizontal residual
interest in that section to meet the
requirements of § ll.3 with respect to
the transaction;
(vi) A description of the material
terms of the eligible horizontal residual
interest retained by each initial thirdparty purchaser, including the same
information as is required to be
disclosed by sponsors retaining
horizontal interests pursuant to § ll.4;
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(vii) The material terms of the
applicable transaction documents with
respect to the Operating Advisor,
including without limitation:
(A) The name and form of
organization of the Operating Advisor;
(B) The standards required by
paragraph (b)(6)(ii) of this section and a
description of how the Operating
Advisor satisfies each of the standards;
and
(C) The terms of the Operating
Advisor’s compensation under
paragraph (b)(6)(iii) of this section; 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.
(8) Hedging, transfer and pledging—
(i) General rule. Except as set forth in
paragraph (b)(8)(ii) of this section, each
third-party purchaser must comply with
the hedging and other restrictions in
§ ll.12 as if it were the retaining
sponsor with respect to the
securitization transaction and had
acquired the eligible horizontal residual
interest pursuant to § ll.4.
(ii) Exceptions—(A) Transfer by initial
third-party purchaser or sponsor. An
initial third-party purchaser that
acquired an eligible horizontal residual
interest at the closing of a securitization
transaction in accordance with this
section, or a sponsor that acquired an
eligible horizontal residual interest at
the closing of a securitization
transaction in accordance with this
section, may, on or after the date that is
five years after the date of the closing of
a securitization transaction, transfer that
interest to a subsequent third-party
purchaser that complies with paragraph
(b)(8)(ii)(C) of this section. The initial
third-party purchaser shall provide the
sponsor with complete identifying
information for the subsequent thirdparty purchaser.
(B) Transfer by subsequent third-party
purchaser. At any time, a subsequent
third-party purchaser that acquired an
eligible horizontal residual interest
pursuant to this paragraph (b)(8)(ii)(B)
may transfer its interest to a different
third-party purchaser that complies
with paragraph (b)(8)(ii)(C) of this
section. The transferring third-party
purchaser shall provide the sponsor
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with complete identifying information
for the acquiring third-party purchaser.
(C) Requirements applicable to
subsequent third-party purchasers. A
subsequent third-party purchaser is
subject to all of the requirements of
paragraphs (b)(1), (b)(3) through (b)(5),
and (b)(8) of this section applicable to
third-party purchasers, provided that
obligations under paragraphs (b)(1),
(b)(3) through (b)(5), and (b)(8) of this
section that apply to initial third-party
purchasers at or before the time of
closing of the securitization transaction
shall apply to successor third-party
purchasers at or before the time of the
transfer of the eligible horizontal
residual interest to the successor thirdparty purchaser.
(c) Duty to comply. (1) The retaining
sponsor shall be responsible for
compliance with this section by itself
and by each initial or subsequent thirdparty purchaser that acquired an eligible
horizontal residual interest in the
securitization transaction.
(2) A sponsor relying on this section:
(A) Shall maintain and adhere to
policies and procedures to monitor each
third-party purchaser’s compliance with
the requirements of paragraphs (b)(1),
(b)(3) through (b)(5), and (b)(8) of this
section; and
(B) In the event that the sponsor
determines that a third-party purchaser
no longer complies with any of the
requirements of paragraphs (b)(1), (b)(3)
through (b)(5), or (b)(8) 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 third-party purchaser.
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§ ll.8 Federal National Mortgage
Association and Federal Home Loan
Mortgage Corporation ABS.
(a) In general. A sponsor satisfies its
risk retention requirement under this
part if 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)
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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 § ll.12(b), (c), and
(d) 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 relying on
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.
§ ll.9
Open market CLOs.
(a) Definitions. For purposes of this
section, the following definitions shall
apply:
CLO means a special purpose entity
that:
(1) Issues debt and equity interests,
and
(2) Whose assets consist primarily of
loans that are securitized assets and
servicing assets.
CLO-eligible loan tranche means a
term loan of a syndicated facility that
meets the criteria set forth in paragraph
(c) of this section.
CLO Manager means an entity that
manages a CLO, which entity is
registered as an investment adviser
under the Investment Advisers Act of
1940, as amended (15 U.S.C. 80b–1 et
seq.), or is an affiliate of such a
registered investment adviser and itself
is managed by such registered
investment adviser.
Commercial borrower means an
obligor under a corporate credit
obligation (including a loan).
Initial loan syndication transaction
means a transaction in which a loan is
syndicated to a group of lenders.
Lead arranger means, with respect to
a CLO-eligible loan tranche, an
institution that:
(1) Is active in the origination,
structuring and syndication of
commercial loan transactions (as
defined in § __.14) and has played a
primary role in the structuring,
underwriting and distribution on the
primary market of the CLO-eligible loan
tranche.
(2) Has taken an allocation of the
syndicated credit facility under the
terms of the transaction that includes
the CLO-eligible loan tranche of at least
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58033
20 percent of the aggregate principal
balance at origination, and no other
member (or members affiliated with
each other) of the syndication group at
origination has taken a greater
allocation; and
(3) Is identified at the time of
origination in the credit agreement and
any intercreditor or other applicable
agreements governing the CLO-eligible
loan tranche; represents therein to the
holders of the CLO-eligible loan tranche
and to any holders of participation
interests in such CLO-eligible loan
tranche that such lead arranger and the
CLO-eligible loan tranche satisfy the
requirements of this section; and
covenants therein to such holders that
such lead arranger will fulfill the
requirements of clause (i) of the
definition of CLO-eligible loan tranche.
Open market CLO means a CLO:
(1) Whose assets consist of senior,
secured syndicated loans acquired by
such CLO directly from the sellers
thereof in open market transactions and
of servicing assets,
(2) That is managed by a CLO
manager, and
(3) That holds less than 50 percent of
its assets, by aggregate outstanding
principal amount, in loans syndicated
by lead arrangers that are affiliates of the
CLO or originated by originators that are
affiliates of the CLO.
Open market transaction means:
(1) Either an initial loan syndication
transaction or a secondary market
transaction in which a seller offers
senior, secured syndicated loans to
prospective purchasers in the loan
market on market terms on an arm’s
length basis, which prospective
purchasers include, but are not limited
to, entities that are not affiliated with
the seller, or
(2) A reverse inquiry from a
prospective purchaser of a senior,
secured syndicated loan through a
dealer in the loan market to purchase a
senior, secured syndicated loan to be
sourced by the dealer in the loan
market.
Secondary market transaction means
a purchase of a senior, secured
syndicated loan not in connection with
an initial loan syndication transaction
but in the secondary market.
Senior, secured syndicated loan
means a loan made to a commercial
borrower that:
(1) Is not subordinate in right of
payment to any other obligation for
borrowed money of the commercial
borrower,
(2) Is secured by a valid first priority
security interest or lien in or on
specified collateral securing the
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commercial borrower’s obligations
under the loan, and
(3) The value of the collateral subject
to such first priority security interest or
lien, together with other attributes of the
obligor (including, without limitation,
its general financial condition, ability to
generate cash flow available for debt
service and other demands for that cash
flow), is adequate (in the commercially
reasonable judgment of the CLO
manager exercised at the time of
investment) to repay the loan in
accordance with its terms and to repay
all other indebtedness of equal seniority
secured by such first priority security
interest or lien in or on the same
collateral, and the CLO manager
certifies as to the adequacy of the
collateral and attributes of the borrower
under this paragraph in regular periodic
disclosures to investors.
(b) In general. A sponsor satisfies the
risk retention requirements of § ll.3
with respect to an open market CLO
transaction if:
(1) The open market CLO does not
acquire or hold any assets other than
CLO-eligible loan tranches that meet the
requirements of paragraph (c) of this
section and servicing assets;
(2) The governing documents of such
open market CLO require that, at all
times, the assets of the open market CLO
consist of senior, secured syndicated
loans that are CLO-eligible loan tranches
and servicing assets;
(3) The open market CLO does not
invest in ABS interests or in credit
derivatives other than hedging
transactions that are servicing assets to
hedge risks of the open market CLO;
(4) All purchases of CLO-eligible loan
tranches and other assets by the open
market CLO issuing entity or through a
warehouse facility used to accumulate
the loans prior to the issuance of the
CLO’s ABS interests are made in open
market transactions on an arms-length
basis;
(5) The CLO Manager of the open
market CLO is not entitled to receive
any management fee or gain on sale at
the time the open market CLO issues its
ABS interests.
(c) CLO-eligible loan tranche. To
qualify as a CLO-eligible loan tranche, a
term loan of a syndicated credit facility
to a commercial borrower must have the
following features:
(1) A minimum of 5 percent of the
face amount of the CLO-eligible loan
tranche is retained by the lead arranger
thereof until the earliest of the
repayment, maturity, involuntary and
unscheduled acceleration, payment
default, or bankruptcy default of such
CLO-eligible loan tranche, provided that
such lead arranger complies with
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limitations on hedging, transferring and
pledging in § ll.12 with respect to the
interest retained by the lead arranger.
(2) Lender voting rights within the
credit agreement and any intercreditor
or other applicable agreements
governing such CLO-eligible loan
tranche are defined so as to give holders
of the CLO-eligible loan tranche consent
rights with respect to, at minimum, any
material waivers and amendments of
such applicable documents, including
but not limited to, adverse changes to
money terms, alterations to pro rata
provisions, changes to voting
provisions, and waivers of conditions
precedent; and
(3) The pro rata provisions, voting
provisions, and similar provisions
applicable to the security associated
with such CLO-eligible loan tranches
under the CLO credit agreement and any
intercreditor or other applicable
agreements governing documents such
CLO-eligible loan tranches are not
materially less advantageous to the
obligor than the terms of other tranches
of comparable seniority in the broader
syndicated credit facility.
(d) Disclosures. A sponsor relying on
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 at least
annually with respect to the information
required by paragraph (d)(1) of this
section 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) Open market CLOs. A complete
list of every asset held by an open
market CLO (or before the CLO’s
closing, in a warehouse facility in
anticipation of transfer into the CLO at
closing), including the following
information:
(i) The full legal name and Standard
Industrial Classification (SIC) category
code of the obligor of the loan or asset;
(ii) The full name of the specific loan
tranche held by the CLO;
(iii) The face amount of the loan
tranche held by the CLO;
(iv) The price at which the loan
tranche was acquired by the CLO; and
(v) For each loan tranche, the full
legal name of the lead arranger subject
to the sales and hedging restrictions of
§ ll.12 and the; and
(2) CLO manager. The full legal name
and form of organization of the CLO
manager.
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§ ll.10
Qualified tender option bonds.
(a) Definitions. For purposes of this
section, the following definitions shall
apply:
Municipal security or municipal
securities shall have the same meaning
as municipal securities in Section
3(a)(29) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)(29)) and any
rules promulgated pursuant to such
section.
Qualified tender option bond entity
means an issuing entity with respect to
tender option bonds for which each of
the following applies:
(1) Such entity is collateralized solely
by servicing assets and municipal
securities that have the same municipal
issuer and the same underlying obligor
or source of payment (determined
without regard to any third-party credit
enhancement), and such municipal
securities are not subject to substitution.
(2) Such entity issues no securities
other than:
(i) a single class of tender option
bonds with a preferred variable return
payable out of capital that meets the
requirements of paragraph (b) of this
section and
(ii) a single residual equity interest
that is entitled to all remaining income
of the TOB issuing entity. Both of these
types of securities must constitute
‘‘asset-backed securities’’ as defined in
Section 3(a)(79) of the Exchange Act (15
U.S.C. 78c(a)(79)).
(3) The municipal securities held as
assets by such entity are issued in
compliance with Section 103 of the
Internal Revenue Code of 1986, as
amended (the ‘‘IRS Code’’, 26 U.S.C.
103), such that the interest payments
made on those securities are excludable
from the gross income of the owners
under Section 103 of the IRS Code.
(4) The holders of all of the securities
issued by such entity are eligible to
receive interest that is excludable from
gross income pursuant to Section 103 of
the IRS Code or ‘‘exempt-interest
dividends’’ pursuant to Section
852(b)(5) of the IRS Code (26 U.S.C.
852(b)(5)) in the case of regulated
investment companies under the
Investment Company Act of 1940, as
amended.
(5) Such entity has a legally binding
commitment from a regulated liquidity
provider as defined in § ll.6(a), to
provide a 100 percent guarantee or
liquidity coverage with respect to all of
the issuing entity’s outstanding tender
option bonds.
(6) Such entity qualifies for monthly
closing elections pursuant to IRS
Revenue Procedure 2003–84, as
amended or supplemented from time to
time.
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Tender option bond means a security
which:
(1) Has features which entitle the
holders to tender such bonds to the TOB
issuing entity for purchase at any time
upon no more than 30 days’ notice, for
a purchase price equal to the
approximate amortized cost of the
security, plus accrued interest, if any, at
the time of tender; and
(2) Has all necessary features so such
security qualifies for purchase by money
market funds under Rule 2a–7 under the
Investment Company Act of 1940, as
amended.
(b) Standard risk retention.
Notwithstanding anything in this
section, the sponsor with respect to an
issuance of tender option bonds by a
qualified tender option bond entity may
retain an eligible vertical interest or
eligible horizontal residual interest, or
any combination thereof, in accordance
with the requirements of § ll.4.
(c) Tender option termination event.
The sponsor with respect to an issuance
of tender option bonds by a qualified
tender option bond entity may retain an
interest that upon issuance meets the
requirements of an eligible horizontal
residual interest but that upon the
occurrence of a ‘‘tender option
termination event’’ as defined in Section
4.01(5) of IRS Revenue Procedure 2003–
84, as amended or supplemented from
time to time will meet requirements of
an eligible vertical interest.
(d) Retention of a municipal security
outside of the qualified tender option
bond entity. The sponsor with respect to
an issuance of tender option bonds by
a qualified tender option bond entity
may satisfy their risk retention
requirements under this Section by
holding municipal securities from the
same issuance of municipal securities
deposited in the qualified tender option
bond entity, the face value of which
retained municipal securities is equal to
5 percent of the face value of the
municipal securities deposited in the
qualified tender option bond entity.
(e) 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 under the
caption ‘‘Credit Risk Retention’’ the
name and form of organization of the
qualified tender option bond entity, and
a description of the form, fair value
(expressed as a percentage of the fair
value of all of the ABS interests issued
in the securitization transaction and as
a dollar amount), and nature of such
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interest in accordance with the
disclosure obligations in § ll.4(d).
(f) Prohibitions on Hedging and
Transfer. The prohibitions on transfer
and hedging set forth in § ll.12, apply
to any municipal securities retained by
the sponsor with respect to an issuance
of tender option bonds by a qualified
tender option bond entity pursuant to
paragraph (d) of this section.
Subpart C—Transfer of Risk Retention
§ ll.11 Allocation of risk retention to an
originator.
(a) In general. A sponsor choosing to
retain an eligible vertical interest or an
eligible horizontal residual interest
(including an eligible horizontal cash
reserve account), or combination thereof
under § ll.4, with respect to a
securitization transaction may offset the
amount of its risk retention
requirements under § ll.4 by the
amount of the eligible interests,
respectively, acquired by an originator
of one or more of the securitized assets
if:
(1) At the closing of the securitization
transaction:
(i) The originator acquires the eligible
interest from the sponsor and retains
such interest in the same manner as the
sponsor under § ll.4, as such interest
was held prior to the acquisition by the
originator;
(ii) The ratio of the fair value of
eligible interests acquired and retained
by the originator to the total fair value
of eligible interests otherwise required
to be retained by the sponsor pursuant
to § ll.4, 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 § ll.4; and
(iv) The originator purchases the
eligible interests 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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§ ll.4(d), 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 (or corresponding amount in the
foreign currency in which the ABS are
issued, as applicable)), and nature of the
interest, as well as the method of
payment for such interest under
paragraph (a)(1)(iv) of this section.
(3) Hedging, transferring and
pledging. The originator complies with
the hedging and other restrictions in
§ ll.12 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:
(A) 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
(B) 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.
§ ll.12 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 majorityowned affiliate of the sponsor.
(b) Prohibited hedging by sponsor and
affiliates. A retaining sponsor and its
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
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 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 ABS interests
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 ABS interests 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
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 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 issued in the securitization
transaction; or
(2) Purchasing or selling a security or
other financial instrument or entering
into an agreement, derivative, or other
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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
(or corresponding weighted average in
the currency in which the ABS is
issued, as applicable) 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 (or
corresponding weighted average in the
currency in which the ABS is issued, as
applicable) of all instruments included
in the index.
(e) Prohibited non-recourse financing.
Neither a retaining sponsor nor any of
its affiliates may pledge as collateral for
any obligation (including a loan,
repurchase agreement, or other
financing transaction) any ABS interest
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 affiliate,
respectively.
(f) Duration of the hedging and
transfer restrictions—(1) General rule.
Except as provided in paragraph (f)(2) of
this section, the prohibitions on sale
and hedging pursuant to paragraphs (a)
and (b) of this section shall expire on or
after the date that is the latest of:
(i) The date on which the total unpaid
principal balance of the securitized
assets that collateralize the
securitization transaction has been
reduced to 33 percent of the total
unpaid principal balance of the
securitized assets as of the closing of the
securitization transaction;
(ii) The date on which the total
unpaid principal obligations under the
ABS interests issued in the
securitization transaction has been
reduced to 33 percent of the total
unpaid principal obligations of the ABS
interests at closing of the securitization
transaction; or
(iii) Two years after the date of the
closing of the securitization transaction.
(2) Securitizations of residential
mortgages. (i) If all of the assets that
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collateralize a securitization transaction
subject to risk retention under this part
are residential mortgages, the
prohibitions on sale and hedging
pursuant to paragraphs (a) and (b) of
this section shall expire on or after the
date that is the later of:
(A) Five years after the date of the
closing of the securitization transaction;
or
(B) The date on which the total
unpaid principal balance of the
residential mortgages that collateralize
the securitization transaction has been
reduced to 25 percent of the total
unpaid principal balance of such
residential mortgages at the closing of
the securitization transaction.
(ii) Notwithstanding paragraph
(f)(2)(i) of this section, the prohibitions
on sale and hedging pursuant to
paragraphs (a) and (b) of this section
shall expire with respect to the sponsor
of a securitization transaction described
in paragraph (f)(2)(i) of this section on
or after the date that is seven years after
the date of the closing of the
securitization transaction.
(3) Conservatorship or receivership of
sponsor. A conservator or receiver of the
sponsor (or any other person holding
risk retention pursuant to this part) of a
securitization transaction is permitted to
sell or hedge any economic interest in
the securitization transaction if the
conservator or receiver has been
appointed pursuant to any provision of
federal or State law (or regulation
promulgated thereunder) that provides
for the appointment of the Federal
Deposit Insurance Corporation, or an
agency or instrumentality of the United
States or of a State as conservator or
receiver, including without limitation
any of the following authorities:
(i) 12 U.S.C. 1811;
(ii) 12 U.S.C. 1787;
(iii) 12 U.S.C. 4617; or
(iv) 12 U.S.C. 5382.
Subpart D—Exceptions and
Exemptions
§ ll.13 Exemption for qualified
residential mortgages.
(a) Definitions. For purposes of this
section, the following definitions shall
apply:
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.
Qualified residential mortgage means
a ‘‘qualified mortgage’’ as defined in
section 129 C of the Truth in Lending
Act (15 U.S.C. 1639c) and regulations
issued thereunder.
(b) Exemption. A sponsor shall be
exempt from the risk retention
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requirements in subpart B of this part
with respect to any securitization
transaction, if:
(1) All of the assets that collateralize
the asset-backed securities are qualified
residential mortgages or servicing assets;
(2) None of the 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 or servicing assets and has
concluded that its internal supervisory
controls are effective; and
(ii) The evaluation of the effectiveness
of the depositor’s internal supervisory
controls must 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
securities in the issuing entity, and,
upon request, to the Commission and its
appropriate Federal banking agency, if
any.
(c) 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
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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 (c)(2) of this section,
including the amount of such
repurchased loan(s) and the cause for
such repurchase.
§ ll.14 Definitions applicable to
qualifying commercial loans, qualifying
commercial real estate loans, and qualifying
automobile loans.
The following definitions apply for
purposes of §§ ll.15 through ll.18:
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 that is 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; 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
(v) Loan to finance the purchase of a
vehicle with a salvage title; or
(vi) Loan to finance the purchase of a
vehicle intended to be used for scrap or
parts.
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
§ ll.17(a)(2)(ii); or
(2) For refinancing, the estimated
market value of the real property based
on an appraisal that meets the
requirements set forth in
§ ll.17(a)(2)(ii).
Commercial loan means a secured or
unsecured loan to a company or an
individual for business purposes, other
than any:
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(1) Loan to purchase or refinance a
one-to-four family residential property;
(2) Commercial real estate loan.
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 (50 percent or more)
of repayment for which is expected to
be:
(i) The proceeds of the sale,
refinancing, or permanent financing of
the property; or
(ii) Rental income associated with the
property; and
(2) Does not include:
(i) A land development and
construction loan (including 1- to 4family residential or commercial
construction loans);
(ii) Any other land loan; or
(iii) An unsecured loan to a
developer.
Debt service coverage (DSC) ratio
means:
(1) For qualifying leased CRE loans,
qualifying multi-family loans, and other
CRE loans:
(i) The annual NOI less the annual
replacement reserve of the CRE property
at the time of origination of the CRE
loans divided by
(ii) The sum of the borrower’s annual
payments for principal and interest on
any debt obligation.
(2) For commercial loans:
(i) The borrower’s EBITDA as of the
most recently completed fiscal year
divided by
(ii) The sum of the borrower’s annual
payments for principal and interest on
all debt obligations.
Debt to income (DTI) ratio means the
borrower’s total debt, including the
monthly amount due on the automobile
loan, divided by 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 are
deducted, as determined in accordance
with 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.
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Leverage ratio means the borrower’s
total debt divided by the borrower’s
EBITDA.
Loan-to-value (LTV) ratio means, at
the time of origination, the principal
balance of a first-lien mortgage loan on
the 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 § ll
.17(a)(2)(ii); or
(2) For refinancing, the estimated
market value of the real property based
on an appraisal that meets the
requirements set forth in § ll
.17(a)(2)(ii).
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 for
the borrower after all expenses have
been deducted for federal income tax
purposes, except for depreciation, debt
service expenses, and federal and State
income taxes, and excluding any
unusual and nonrecurring items of
income.
Operating affiliate means an affiliate
of a borrower that is a lessor or similar
party with respect to the commercial
real estate securing the loan.
Payments-in-kind means payments of
principal or accrued interest that are not
paid in cash when due, and instead are
paid by increasing the principal balance
of the loan or by providing equity in the
borrowing company.
Purchase money security interest
means a security interest in property
that secures the obligation of the obligor
incurred as all or part of the price of the
property.
Purchase price means the amount
paid by the borrower for the vehicle net
of any incentive payments or
manufacturer cash rebates.
Qualified tenant means:
(1) A tenant with a lease who has
satisfied all obligations with respect to
the property in a timely manner; or
(2) A tenant who originally had a
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
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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 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):
(1) That consists of five or more
dwelling units (including apartment
buildings, condominiums, cooperatives
and other similar structures) primarily
for residential use; and
(2) Where at least 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.
Rental income means:
(1) Income derived from a lease or
other occupancy agreement between the
borrower or an operating affiliate of the
borrower and a party which is not an
affiliate of the borrower for the use of
real property or improvements serving
as collateral for the applicable loan, and
(2) Other income derived from hotel,
motel, dormitory, nursing home,
assisted living, mini-storage warehouse
or similar properties that are used
primarily by parties that are not
affiliates or employees of the borrower
or its affiliates.
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
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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
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.
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
vehicle to compensate the dealer for
some portion of the vehicle purchase
price, not to exceed the highest trade-in
value of the existing vehicle, as
determined by a nationally recognized
automobile pricing agency and based on
the manufacturer, year, model, features,
mileage, and condition of the vehicle,
less the payoff balance of any
outstanding debt collateralized by the
existing vehicle.
Uniform Standards of Professional
Appraisal Practice means the standards
issued by the Appraisal Standards
Board for the performance of an
appraisal, an appraisal review, or an
appraisal consulting assignment.
§ ll.15 Qualifying commercial loans,
commercial real estate loans, and
automobile loans.
(a) General exception for qualifying
assets. Commercial loans, commercial
real estate loans, and automobile loans
that are securitized through a
securitization transaction shall be
subject to a 0 percent risk retention
requirement under subpart B, provided
that the following conditions are met:
(1) The assets meet the underwriting
standards set forth in §§ ll.16
(qualifying commercial loans), ll.17
(qualifying CRE loans), or ll.18
(qualifying automobile loans) of this
part, as applicable;
(2) The securitization transaction is
collateralized solely by loans of the
same asset class and by servicing assets;
(3) The securitization transaction does
not permit reinvestment periods; and
(4) The sponsor provides, or causes to
be provided, to potential investors a
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reasonable period of time prior to the
sale of asset-backed securities of the
issuing entity, and, upon request, to the
Commission, and to its appropriate
Federal banking agency, if any, in
written form under the caption ‘‘Credit
Risk Retention’’:
(i) A description of the manner in
which the sponsor determined the
aggregate risk retention requirement for
the securitization transaction after
including qualifying commercial loans,
qualifying CRE loans, or qualifying
automobile loans with 0 percent risk
retention; and
(ii) Descriptions of the qualifying
commercial loans, qualifying CRE loans,
and qualifying automobile loans
(qualifying assets) and descriptions of
the assets that are not qualifying assets,
and the material differences between the
group of qualifying assets and the group
of assets that are not qualifying assets
with respect to the composition of each
group’s loan balances, loan terms,
interest rates, borrower credit
information, and characteristics of any
loan collateral.
(b) Risk retention requirement. For
any securitization transaction described
in paragraph (a) of this section, the
amount of risk retention required under
§ ll.3(b)(1) is reduced by the same
amount as the ratio of the unpaid
principal balance of the qualifying
commercial loans, qualifying CRE loans,
or qualifying automobile loans (as
applicable) to the total unpaid principal
balance of commercial loans, CRE loans,
or automobile loans (as applicable) that
are included in the pool of assets
collateralizing the asset-backed
securities issued pursuant to the
securitization transaction (the qualifying
asset ratio); provided that:
(1) The qualifying asset ratio is
measured as of the cut-off date or
similar date for establishing the
composition of the pool assets
collateralizing the asset-backed
securities issued pursuant to the
securitization transaction; and
(2) The qualifying asset ratio does not
exceed 50 percent.
(c) Exception for securitizations of
qualifying assets only. Notwithstanding
other provisions of this section, the risk
retention requirements of subpart B of
this part shall not apply to
securitization transactions where the
transaction is collateralized solely by
servicing assets and either qualifying
commercial loans, qualifying CRE loans,
or qualifying automobile loans.
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§ ll.16 Underwriting standards for
qualifying commercial loans.
(a) 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:
(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; and
(C) A DSC ratio of 1.5 or greater.
(2) Prior to, upon or promptly
following the inception of the loan, the
originator:
(i) If the loan is originated on a
secured basis, obtains a perfected
security interest (by filing, title notation
or otherwise) or, in the case of real
property, a recorded lien, on all of the
property pledged to collateralize the
loan; and
(ii) If the loan documents indicate the
purpose of the loan is to finance the
purchase of tangible or intangible
property, or to refinance such a loan,
obtains a first lien on the property.
(3) The loan documentation for the
commercial loan includes covenants
that:
(i) Require the borrower to provide to
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 or lien with
respect to any of the borrower’s property
that serves as collateral for the loan;
(B) The transfer of any of the
borrower’s assets that serve as collateral
for the loan; and
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(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 the 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 and first
lien (as applicable) of the originator or
any subsequent holder of the loan in
any collateral for the commercial loan or
the priority thereof, and to defend any
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 any
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.
(4) 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.
(5) The primary source of repayment
for the loan is revenue from the business
operations of the borrower.
(6) The loan was funded within the
six (6) months prior to the closing of the
securitization transaction.
(7) At the closing of the securitization
transaction, all payments due on the
loan are contractually current.
(8)(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 qualifying commercial loans that
collateralize the asset-backed security
and that reduce the sponsor’s risk
retention requirement under § ll.15
meet all of the requirements set forth in
paragraphs (a)(1) through (a)(7) 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 (a)(8)(i)
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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
(a)(8)(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.
(b) Cure or buy-back requirement. If a
sponsor has relied on the exception
provided in § ll.15 with respect to a
qualifying commercial loan and it is
subsequently determined that the loan
did not meet all of the requirements set
forth in paragraphs (a)(1) through (a)(7)
of this section, the sponsor shall not
lose the benefit of the exception with
respect to the commercial loan if the
depositor complied with the
certification requirement set forth in
paragraph (a)(8) of this section and:
(1) The failure of the loan to meet any
of the requirements set forth in
paragraphs (a)(1) through (a)(7) of this
section is not material; or
(2) No later than 90 days after the
determination that the loan does not
meet one or more of the requirements of
paragraphs (a)(1) through (a)(7) of this
section, the sponsor:
(i) Effectuates cure, establishing
conformity of the loan to the unmet
requirements as of the date of cure; or
(ii) 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) as of the
date of repurchase.
(3) If the sponsor cures or repurchases
pursuant to paragraph (b)(2) of this
section, the sponsor must promptly
notify, or cause 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 cured or repurchased by
the sponsor pursuant to paragraph (b)(2)
of this section, including the principal
amount of such loan(s) and the cause for
such cure or repurchase.
§ ll.17 Underwriting standards for
qualifying CRE loans.
(a) Underwriting, product and other
standards. (1) The CRE loan must be
secured by the following:
(i) An enforceable first lien,
documented and recorded appropriately
pursuant to applicable law, on the
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commercial real estate and
improvements;
(ii)(A) An assignment of:
(1) Leases and rents and other
occupancy agreements related to the
commercial real estate or improvements
or the operation thereof for which the
borrower or an operating affiliate is a
lessor or similar party and all payments
under such leases and occupancy
agreements; and
(2) All franchise, license and
concession agreements related to the
commercial real estate or improvements
or the operation thereof for which the
borrower or an operating affiliate is a
lessor, licensor, concession granter or
similar party and all payments under
such other agreements, whether the
assignments described in this paragraph
(a)(1)(ii)(A)(2) are absolute or are stated
to be made to the extent permitted by
the agreements governing the applicable
franchise, license or concession
agreements;
(B) An assignment of all other
payments due to the borrower or due to
any operating affiliate in connection
with the operation of the property
described in paragraph (a)(1)(i) of this
section; and
(C) The right to enforce the
agreements described in paragraph
(a)(1)(ii)(A) of this section and the
agreements under which payments
under paragraph (a)(1)(ii)(B) of this
section are due against, and collect
amounts due from, each lessee,
occupant or other obligor whose
payments were assigned pursuant to
paragraphs (a)(1)(ii)(A) or (a)(1)(ii)(B) of
this section upon a breach by the
borrower of any of the terms of, or the
occurrence of any other event of default
(however denominated) under, the loan
documents relating to such CRE loan;
and
(iii) A security interest:
(A) In all interests of the borrower and
any applicable operating affiliate in all
tangible and intangible personal
property of any kind, in or used in the
operation of or in connection with,
pertaining to, arising from, or
constituting, any of the collateral
described in paragraphs (a)(1)(i) or
(a)(1)(ii) of this section; and
(B) In the form of a perfected security
interest if the security interest in such
property can be perfected by the filing
of a financing statement, fixture filing,
or similar document pursuant to the law
governing the perfection of such
security interest;
(2) Prior to origination of the CRE
loan, the originator:
(i) Verified and documented the
current financial condition of the
borrower and each operating affiliate;
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(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 promulgated by the
Appraisal Standards Board and the
appraisal requirements 1 of the Federal
banking agencies; 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, not exceeding
25 years, or 30 years for a qualifying
multi-family property;
(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
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 1.25 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 1.25 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
the borrower’s financial statements and
1 12 CFR part 34, subpart C (OCC); 12 CFR part
208, subpart E, and 12 CFR part 225, subpart G
(Board); and 12 CFR part 323 (FDIC).
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supporting schedules to the servicer 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
the collateral for the CRE loan described
in paragraphs (a)(1)(i) and (a)(1)(ii)(A) of
this section, except as provided in
paragraph (a)(4) of this section;
(B) The transfer of any collateral for
the CRE loan described in paragraph
(b)(1)(i) or (b)(1)(ii)(A) of this section or
of any other collateral consisting of
fixtures, furniture, furnishings,
machinery or equipment other than any
such fixture, furniture, furnishings,
machinery or equipment that is obsolete
or surplus; and
(C) Any change to the name, location
or organizational structure of any
borrower, operating affiliate or other
pledgor unless such borrower, operating
affiliate or other pledgor shall have
given the holder of the loan at least 30
days advance notice and, pursuant to
applicable law governing perfection and
priority, the holder of the loan is able
to take all steps necessary to continue
its perfection and priority during such
30-day period.
(iii) Require each borrower and each
operating affiliate to:
(A) Maintain insurance that protects
against loss on collateral for the CRE
loan described in paragraph (a)(1)(i) of
this section 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 collateral for the CRE
loan described in paragraphs (a)(1)(i)
and (a)(1)(ii) of this section;
(C) Take any action required to:
(1) protect the security interest and
the enforceability and priority thereof in
the collateral described in paragraph
(a)(1)(i) and (a)(1)(ii)(A) of this section
and defend such collateral against
claims adverse to the originator’s or any
subsequent holder’s interest; and
(2) perfect the security interest of the
originator or any subsequent holder of
the loan in any other collateral for the
CRE loan to the extent that such security
interest is required by this section to be
perfected;
(D) Permit the originator or any
subsequent holder of the loan, and the
servicer, to inspect any collateral for the
CRE loan and the books and records of
the borrower or other party relating to
any collateral for the CRE loan;
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(E) Maintain the physical condition of
collateral for the CRE loan described in
paragraph (a)(1)(i) of this section;
(F) Comply with all environmental,
zoning, building code, licensing and
other laws, regulations, agreements,
covenants, use restrictions, and proffers
applicable to collateral for the CRE loan
described in paragraph (a)(1)(i) of this
section;
(G) Comply with leases, franchise
agreements, condominium declarations,
and other documents and agreements
relating to the operation of collateral for
the CRE loan described in paragraph
(a)(1)(i) of this section, 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 collateral for
the CRE loan described in paragraph
(a)(1)(i) of this section 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 and
each operating affiliate from obtaining a
loan secured by a junior lien on
collateral for the CRE loan described in
paragraph (a)(1)(i) or (a)(1)(ii)(A) of this
section, unless:
(i) The sum of the principal amount
of such junior lien loan, plus the
principal amount of all other loans
secured by collateral described in
paragraph (a)(1)(i) or (a)(1)(ii)(A) of this
section, does not exceed the applicable
CLTV ratio in paragraph (a)(5) of this
section, based on the appraisal at
origination of such junior lien loan; or
(ii) Such loan is a purchase money
obligation that financed the acquisition
of machinery or equipment and the
borrower or operating affiliate (as
applicable) pledges such machinery and
equipment as additional collateral for
the CRE loan.
(5) At origination, the applicable loanto-value ratios for the loan are:
(i) LTV less than or equal to 65
percent and CLTV less than or equal to
70 percent; or
(ii) LTV less than or equal to 60
percent and CLTV less than or equal to
65 percent, if the capitalization rate
used in an appraisal that meets the
requirements set forth in paragraph
(a)(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’s H.15 Report (or
any successor report) as of the date
concurrent with the effective date of an
appraisal that meets the requirements
set forth in paragraph (a)(2)(ii) of this
section; and
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58041
(B) 300 basis points.
(iii) The capitalization rate used in an
appraisal under paragraph (a)(2)(ii) of
this section must be disclosed to
potential investors in the securitization.
(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 25 years, or 30 years for
a qualifying multifamily loan; 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:
(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 qualifying CRE loans that
collateralize the asset-backed security
and that reduce the sponsor’s risk
retention requirement under § ll.15
meet all of the requirements set forth in
paragraphs (a)(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
(a)(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;
(iii) The sponsor provides, or causes
to be provided, a copy of the
certification described in paragraph
(a)(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; and
(11) Within two weeks of the closing
of the CRE loan by its originator or, if
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sooner, prior to the transfer of such CRE
loan to the issuing entity, the originator
shall have obtained a UCC lien search
from the jurisdiction of organization of
the borrower and each operating
affiliate, that does not report, as of the
time that the security interest of the
originator in the property described in
paragraph (a)(1)(iii) of this section was
perfected, other higher priority liens of
record on any property described in
paragraph (a)(1)(iii) of this section, other
than purchase money security interests.
(b) Cure or buy-back requirement. If a
sponsor has relied on the exception
provided in § lll.15 with respect to
a qualifying CRE loan and it is
subsequently determined that the CRE
loan did not meet all of the
requirements set forth in paragraphs
(a)(1) through (a)(9) and (a)(11) of this
section, the sponsor shall not lose the
benefit of the exception with respect to
the CRE loan if the depositor complied
with the certification requirement set
forth in paragraph (a)(10) of this section,
and:
(1) The failure of the loan to meet any
of the requirements set forth in
paragraphs (a)(1) through (a)(9) and
(a)(11) of this section is not material; or;
(2) No later than 90 days after the
determination that the loan does not
meet one or more of the requirements of
paragraphs (a)(1) through (a)(9) or
(a)(11) of this section, the sponsor:
(i) Effectuates cure, restoring
conformity of the loan to the unmet
requirements as of the date of cure; or
(ii) 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) as of the
date of repurchase.
(3) If the sponsor cures or repurchases
pursuant to paragraph (b)(2) of this
section, the sponsor must promptly
notify, or cause 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 cured or repurchased by
the sponsor pursuant to paragraph (b)(2)
of this section, including the principal
amount of such repurchased loan(s) and
the cause for such cure or repurchase.
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§ ll.18 Underwriting standards for
qualifying automobile loans.
(a) 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;
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(B) Within the previous 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 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 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 36 months,
the borrower has not had any personal
property repossessed;
(ii) Determined and documented that
the borrower has at least 24 months of
credit history; and
(iii) Determined and documented that,
upon the origination of the loan, the
borrower’s DTI ratio is less than or equal
to 36 percent.
(A) For the purpose of making the
determination under paragraph
(a)(1)(iii) of this section, the originator
must:
(1) Verify and document all income of
the borrower that the originator includes
in the borrower’s effective monthly
income (using payroll stubs, tax returns,
profit and loss statements, or other
similar documentation); and
(2) 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
(a)(1)(ii) of this section;
(2) An originator will be deemed to
have met the requirements of paragraph
(a)(1)(i) of this section if:
(i) The originator, no more than 30
days before the closing of the loan,
obtains a credit report regarding the
borrower from a consumer reporting
agency that compiles and maintains
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 report, the borrower meets all of
the requirements of paragraph (a)(1)(i) of
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this section, and no information in a
credit report subsequently obtained by
the originator before the closing of the
loan contains contrary information; and
(iii) The originator obtains electronic
or hard copies of the credit report.
(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;
(iii) The full cost of any additional
warranties, insurance or other products
purchased in connection with the
purchase of the vehicle; and
(iv) 10 percent of the vehicle purchase
price.
(4) The originator records a first lien
securing the loan on the purchased
vehicle in accordance with State law.
(5) The terms of the loan agreement
provide a maturity date for the loan that
does not exceed the lesser of:
(i) Six years from the date of
origination, or
(ii) 10 years minus the difference
between the current model year and the
vehicle’s model year.
(6) The terms of the loan agreement:
(i) Specify a fixed rate of interest for
the life of the loan;
(ii) Provide for a level monthly
payment amount that fully amortizes
the amount financed over the loan term;
(iii) Do not permit the borrower to
defer repayment of principal or payment
of interest; and
(iv) Require the borrower to make the
first payment on the automobile loan
within 45 days of the loan’s contract
date.
(7) At the closing of the securitization
transaction, all payments due on the
loan are contractually current; and
(8)(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 qualifying automobile loans that
collateralize the asset-backed security
and that reduce the sponsor’s risk
retention requirement under § ll.15
meet all of the requirements set forth in
paragraphs (a)(1) through (a)(7) 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 (a)(8)(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
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pool collateralizing such asset-backed
security; and
(iii) The sponsor provides, or causes
to be provided, a copy of the
certification described in paragraph
(a)(8)(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.
(b) Cure or buy-back requirement. If a
sponsor has relied on the exception
provided in § lll.15 with respect to
a qualifying automobile loan and it is
subsequently determined that the loan
did not meet all of the requirements set
forth in paragraphs (a)(1) through (a)(7)
of this section, the sponsor shall not
lose the benefit of the exception with
respect to the automobile loan if the
depositor complied with the
certification requirement set forth in
paragraph (a)(8) of this section, and:
(1) The failure of the loan to meet any
of the requirements set forth in
paragraphs (a)(1) through (a)(7) of this
section is not material; or
(2) No later than ninety (90) days after
the determination that the loan does not
meet one or more of the requirements of
paragraphs (a)(1) through (a)(7) of this
section, the sponsor:
(i) Effectuates cure, establishing
conformity of the loan to the unmet
requirements as of the date of cure; or
(ii) 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) as of the
date of repurchase.
(3) If the sponsor cures or repurchases
pursuant to paragraph (b)(2) of this
section, the sponsor must promptly
notify, or cause 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 cured or repurchased by
the sponsor pursuant to paragraph (b)(2)
of this section, including the principal
amount of such loan(s) and the cause for
such cure or repurchase.
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§ ll.19
General exemptions.
(a) Definitions. For purposes of this
section, the following definitions shall
apply:
First pay class means a class of ABS
interests for which all interests in the
class are entitled to the same priority of
payment and that, at the time of closing
of the transaction, is entitled to
repayments of principal and payments
of interest prior to or pro-rata with all
other classes of securities collateralized
by the same pool of first-lien residential
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mortgages, until such class has no
principal or notional balance remaining.
Inverse floater means an ABS interest
issued as part of a securitization
transaction for which interest or other
income is payable to the holder based
on a rate or formula that varies inversely
to a reference rate of interest.
(b) This part shall not apply to:
(1) U.S. Government-backed
securitizations. Any securitization
transaction that:
(i) Is collateralized solely by
residential, multifamily, or health care
facility mortgage loan assets that are
insured or guaranteed (in whole or in
part) as to the payment of principal and
interest by the United States or an
agency of the United States, and
servicing assets; 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 by
residential, multifamily, or health care
facility mortgage loan assets or interests
in such assets, and servicing assets.
(2) Certain agricultural loan
securitizations. Any securitization
transaction that is collateralized solely
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, and
servicing assets;
(3) State and municipal
securitizations. Any asset-backed
security that is a security issued or
guaranteed by any State, or by any
political subdivision of a State, or by
any public instrumentality of a State
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) Qualified scholarship funding
bonds. 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) Pass-through resecuritizations.
Any securitization transaction that:
(i) Is collateralized solely by servicing
assets, and by existing asset-backed
securities:
(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;
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58043
(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.
(6) First-pay-class securitizations. Any
securitization transaction that:
(i) Is collateralized solely by servicing
assets, and by first-pay classes of assetbacked securities collateralized by firstlien residential mortgages on properties
located in any state and servicing assets:
(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) Does not provide for any ABS
interest issued in the securitization
transaction to share in realized principal
losses other than pro rata with all other
ABS interests based on current unpaid
principal balance of the ABS interests at
the time the loss is realized;
(iii) Is structured to reallocate
prepayment risk;
(iv) Does not reallocate credit risk
(other than as a consequence of
reallocation of prepayment risk); and
(v) Does not include any inverse
floater or similarly structured ABS
interest.
(7) Seasoned loans. (i) Any
securitization transaction that is
collateralized solely by servicing assets,
and by seasoned loans that meet the
following requirements:
(A) The loans have not been modified
since origination; and
(B) None of the loans have been
delinquent for 30 days or more.
(ii) For purposes of this paragraph, a
seasoned loan means:
(A) With respect to asset-backed
securities backed by residential
mortgages, a loan that has been
outstanding and performing for the
longer of:
(1) A period of five years; or
(2) Until the outstanding principal
balance of the loan has been reduced to
25 percent of the original principal
balance.
(3) Notwithstanding paragraphs
(b)(7)(ii)(A)(1) and (b)(7)(ii)(A)(2) of this
section, any residential mortgage loan
that has been outstanding and
performing for a period of at least seven
years shall be deemed a seasoned loan.
(B) With respect to all other classes of
asset-backed securities, a loan that has
been outstanding and performing for the
longer of:
(1) A period of at least two years; or
(2) Until the outstanding principal
balance of the loan has been reduced to
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33 percent of the original principal
balance.
(8) Certain public utility
securitizations. (i) Any securitization
transaction where the asset-back
securities issued in the transaction are
secured by the intangible property right
to collect charges for the recovery of
specified costs and such other assets, if
any, of an issuing entity that is wholly
owned, directly or indirectly by an
investor owned utility company that is
subject to the regulatory authority of a
State public utility commission or other
appropriate State agency.
(ii) For purposes of this paragraph:
(A) Specified cost means any cost
identified by a State legislature as
appropriate for recovery through
securitization pursuant to specified cost
recovery legislation; and
(B) Specified cost recovery legislation
means legislation enacted by a State
that:
(1) Authorizes the investor owned
utility company to apply for, and
authorizes the public utility commission
or other appropriate State agency to
issue, a financing order determining the
amount of specified costs the utility will
be allowed to recover;
(2) Provides that pursuant to a
financing order, the utility acquires an
intangible property right to charge,
collect, and receive amounts necessary
to provide for the full recovery of the
specified costs determined to be
recoverable, and assures that the charges
are non-bypassable and will be paid by
customers within the utility’s historic
service territory who receive utility
goods or services through the utility’s
transmission and distribution system,
even if those customers elect to
purchase these goods or services from a
third party; and
(3) Guarantees that neither the State
nor any of its agencies has the authority
to rescind or amend the financing order,
to revise the amount of specified costs,
or in any way to reduce or impair the
value of the intangible property right,
except as may be contemplated by
periodic adjustments authorized by the
specified cost recovery legislation.
(c) Exemption for securitizations of
assets issued, insured or guaranteed by
the United States. This part shall not
apply to any securitization transaction if
the asset-backed securities issued in the
transaction are:
(1) Collateralized solely by obligations
issued by the United States or an agency
of the United States and servicing
assets;
(2) Collateralized solely 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
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States (other than those referred to in
paragraph (b)(1)(i) of this section) and
servicing assets; or
(3) Fully guaranteed as to the timely
payment of principal and interest by the
United States or any agency of the
United States;
(d) Federal Deposit Insurance
Corporation securitizations. This part
shall not apply to any securitization
transaction that is sponsored by the
Federal Deposit Insurance Corporation
acting as conservator or receiver under
any provision of the Federal Deposit
Insurance Act or of Title II of the DoddFrank Wall Street Reform and Consumer
Protection Act.
(e) Reduced requirement for certain
student loan securitizations. The 5
percent risk retention requirement set
forth in § ll.4 shall be modified as
follows:
(1) With respect to a securitization
transaction that is collateralized solely
by student loans made under the
Federal Family Education Loan Program
(‘‘FFELP loans’’) that are guaranteed as
to 100 percent of defaulted principal
and accrued interest, and servicing
assets, the risk retention requirement
shall be 0 percent;
(2) With respect to a securitization
transaction that is collateralized solely
by FFELP loans that are guaranteed as
to at least 98 percent of defaulted
principal and accrued interest, and
servicing assets, the risk retention
requirement shall be 2 percent; and
(3) With respect to any other
securitization transaction that is
collateralized solely by FFELP loans,
and servicing assets, the risk retention
requirement shall be 3 percent.
(f) 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.
§ ll.20 Safe harbor for certain foreignrelated transactions.
(a) Definitions. For purposes of this
section, the following definition shall
apply:
U.S. person means:
(1) Any of the following:
(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 any State
or of the United States;
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(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; and
(2) ‘‘U.S. person(s)’’ 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
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
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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.
(b) 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 (or equivalent amount in
the currency in which the ABS is
issued, as applicable) of all classes of
ABS interests in the securitization
transaction are sold or transferred 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
States or any State;
(ii) An unincorporated branch or
office (wherever located) of an entity
chartered, incorporated, or organized
under the laws of the United States or
any State; or
(iii) An unincorporated branch or
office located in the United States or
any State of an entity that is chartered,
incorporated, or organized under the
laws of a jurisdiction other than the
United States or any State; and
(4) If the sponsor or issuing entity is
chartered, incorporated, or organized
under the laws of a jurisdiction other
than the United States or any State, 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 majority-owned affiliate of the
sponsor or issuing entity that is
chartered, incorporated, or organized
under the laws of the United States or
any State; or
(ii) An unincorporated branch or
office of the sponsor or issuing entity
that is located in the United States or
any State.
(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) of this section, is part of
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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.
§ ll.21
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
accordance with section 15G(e) of the
Exchange Act (15 U.S.C. 78o–11(e)).
End of Common Rule
List of Subjects
12 CFR Part 43
Automobile loans, Banks and
banking, Commercial loans, Commercial
real estate, Credit risk, Mortgages,
National banks, Reporting and
recordkeeping requirements, Risk
retention, Securitization.
12 CFR Part 244
Auto loans, Banks and banking, Bank
holding companies, Commercial loans,
Commercial real estate, Credit risk, Edge
and agreement corporations, Foreign
banking organizations, Mortgages,
Nonbank financial companies,
Reporting and recordkeeping
requirements, Risk retention, Savings
and loan holding companies,
Securitization, State member banks.
12 CFR Part 373
Automobile loans, Banks and
banking, Commercial loans, Commercial
real estate, Credit risk, Mortgages,
Reporting and recordkeeping
requirements, Risk retention, Savings
associations, Securitization.
12 CFR Part 1234
Government sponsored enterprises,
Mortgages, Securities.
17 CFR Part 246
Reporting and recordkeeping
requirements, Securities.
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58045
24 CFR Part 267
Mortgages.
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:
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Chapter I
Authority and Issuance
For the reasons stated in the common
preamble and under the authority of 12
U.S.C. 93a, 1464, 5412(b)(2)(B), and 15
U.S.C. 78o–11, 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 for part 43 is added
to read as follows:
■
Authority: 12 U.S.C. 1 et seq., 93a, 161,
1464, 1818, 5412(b)(2)(B), 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:
■
§ 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, 1464, 1818, 5412(b)(2)(B),
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 savings association, a Federal
branch or agency of a foreign bank, or
a subsidiary thereof.
(d) Effective dates. This part shall
become effective:
(1) With respect to any securitization
transaction collateralized by residential
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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
(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.
Board of Governors of the Federal
Reserve System
12 CFR Chapter II
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 reads as follows:
■
Authority: 12 U.S.C. 221 et seq., 1461 et
seq., 1818, 1841 et seq., 3103 et seq., and 15
U.S.C. 78o–11.
4a. The part heading for part 244 is
revised as set forth above.
■ 5. Section 244.1 is added to read as
follows:
■
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
§ 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.); the Home
Owners’ Loan Act of 1933 (HOLA) (12
U.S.C. 1461 et seq.); section 165 of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank
Act) (12 U.S.C. 5365); 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) A savings and loan holding
company (as defined in 12 U.S.C.
1467a); and
(vi) 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.
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the
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:
SUPPLEMENTARY INFORMATION,
7. Section 373.1 is added to read as
follows:
■
§ 373.1
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. (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 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);
(3) A state savings association (as
defined in 12 U.S.C. 1813(b)(3)); or
(4) Any subsidiary of an entity
described in paragraphs (1), (2), or (3) of
this section.
Federal Housing Finance Agency
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:
Chapter XII—Federal Housing Finance
Agency
PART 373—CREDIT RISK RETENTION
Subchapter B—Entity Regulations
6. The authority citation for part 373
is added to reads as follows:
PART 1234—CREDIT RISK RETENTION
■
Authority: 12 U.S.C. 1801 et seq. and 3103
et seq., and 15 U.S.C. 78o–11.
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8. The authority citation for part 1234
is added to read as follows:
■
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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.
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
(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 [INSERT DATE
ONE YEAR AFTER DATE OF
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 § 1234.14 as follows:
■ a. Revise the heading to read as set
forth below.
■ b. In the introductory paragraph,
remove the words ‘‘§§ 1234.15 through
1234.18’’ and add in their place the
words ‘‘§§ 1234.15 and 1234.17’’.
■ c. Remove the definitions of
‘‘Automobile loan’’, ‘‘Commercial loan’’,
‘‘Debt-to-income (DTI) ratio’’, ‘‘Earnings
before interest, taxes, depreciation, and
amortization (EBITDA)’’, ‘‘Lease
financing’’, ‘‘Leverage Ratio’’,
‘‘Machinery and equipment (M&E)
collateral’’, ‘‘Model year’’, ‘‘Payment-inkind’’, ‘‘Purchase price’’, ‘‘Salvage title’’,
‘‘Total debt’’, ‘‘Total liabilities ratio’’,
and ‘‘Trade-in allowance’’.
■ d. Revise the definition of ‘‘Debt
service coverage (DSC) ratio’’ to read as
follows:
§ 1234.14 Definitions applicable to
qualifying commercial real estate loans.
*
*
*
*
*
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
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(2) The sum of the borrower’s annual
payments for principal and interest on
any debt obligation.
*
*
*
*
*
■ 11. Revise § 1234.15 to read as
follows:
§ 1234.15 Qualifying commercial real
estate loans.
(a) General exception. Commercial
real estate loans that are securitized
through a securitization transaction
shall be subject to a 0 percent risk
retention requirement under subpart B,
provided that the following conditions
are met:
(1) The CRE assets meet the
underwriting standards set forth in
§ 1234.16;
(2) The securitization transaction is
collateralized solely by CRE loans and
by servicing assets;
(3) The securitization transaction does
not permit reinvestment periods; and
(4) The sponsor provides, or causes to
be provided, to potential investors a
reasonable period of time prior to the
sale of asset-backed securities of the
issuing entity, and, upon request, to the
Commission, and to the FHFA, in
written form under the caption ‘‘Credit
Risk Retention’’:
(i) A description of the manner in
which the sponsor determined the
aggregate risk retention requirement for
the securitization transaction after
including qualifying CRE loans with 0
percent risk retention; and
(ii) Descriptions of the qualifying CRE
loans and descriptions of the CRE loans
that are not qualifying CRE loans, and
the material differences between the
group of qualifying CRE loans and CRE
loans that are not qualifying loans with
respect to the composition of each
group’s loan balances, loan terms,
interest rates, borrower credit
information, and characteristics of any
loan collateral.
(b) Risk retention requirement. For
any securitization transaction described
in paragraph (a) of this section, the
amount of risk retention required under
§ 1234.3(b)(1) is reduced by the same
amount as the ratio of the unpaid
principal balance of the qualifying CRE
loans to the total unpaid principal
balance of CRE loans that are included
in the pool of assets collateralizing the
asset-backed securities issued pursuant
to the securitization transaction (the
qualifying asset ratio); provided that;
(1) The qualifying asset ratio is
measured as of the cut-off date or
similar date for establishing the
composition of the pool assets
collateralizing the asset-backed
securities issued pursuant to the
securitization transaction; and
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(2) The qualifying asset ratio does not
exceed 50 percent.
(c) Exception for securitizations of
qualifying CRE only. Notwithstanding
other provisions of this section, the risk
retention requirements of subpart B of
this part shall not apply to
securitization transactions where the
transaction is collateralized solely by
servicing assets and qualifying CRE
loans.
§§ 1234.16 and 1234.18
Reserved]
[Removed and
12. Remove and reserve §§ 1234.16
and 1234.18.
■
Securities and Exchange Commission
For the reasons stated in the
Supplementary Information, the
Securities and Exchange Commission
proposes the amendments 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.
For the reasons set out above, title 17,
chapter II of the Code of Federal
Regulations is proposed to be amended
as follows:
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:
■
§ 246.1
Purpose, scope, and authority.
(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
E:\FR\FM\20SEP2.SGM
20SEP2
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Federal Register / Vol. 78, No. 183 / Friday, September 20, 2013 / Proposed Rules
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
antifraud provisions of the securities
laws.
Department of Housing and Urban
Development
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:
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
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: August 28, 2013.
Thomas J. Curry,
Comptroller of the Currency.
Dated: August 28, 2013.
By the Securities and Exchange
Commission.
Elizabeth M. Murphy
Secretary.
Dated: August 28, 2013.
Edward J. DeMarco,
Acting Director, Federal Housing Finance
Agency.
Dated: August 26, 2013.
By the Department of Housing and Urban
Development.
Shaun Donovan,
Secretary.
[FR Doc. 2013–21677 Filed 9–19–13; 8:45 am]
BILLING CODE 4810–33–P; 6210–01–P; 6741–01–P;
8010–01–P; 8070–01–P;
16. The authority citation for part 267
is added to read as follows:
By order of the Board of Governors of the
Federal Reserve System, August 27, 2013.
Robert deV. Frierson,
Secretary of the Board.
Authority: 15 U.S.C. 78–o–11; 42 U.S.C.
3535(d).
Dated at Washington, DC, this 28 of August
2013.
PART 267—CREDIT RISK RETENTION
■
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
VerDate Mar<15>2010
17:44 Sep 19, 2013
Jkt 229001
PO 00000
Frm 00122
Fmt 4701
Sfmt 9990
E:\FR\FM\20SEP2.SGM
20SEP2
Agencies
[Federal Register Volume 78, Number 183 (Friday, September 20, 2013)]
[Proposed Rules]
[Pages 57927-58048]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-21677]
[[Page 57927]]
Vol. 78
Friday,
No. 183
September 20, 2013
Part II
Department of the Treasury
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Office of the Comptroller of the Currency
Federal Reserve System
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Federal Deposit Insurance Corporation
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Federal Housing Finance Agency
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Securities and Exchange Commission
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Department of Housing and Urban Development
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12 CFR Parts 43, 244, 373, et al.
17 CFR Part 246
24 CFR Part 267
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Credit Risk Retention; Proposed Rule
Federal Register / Vol. 78 , No. 183 / Friday, September 20, 2013 /
Proposed Rules
[[Page 57928]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 43
[Docket No. OCC-2013-0010]
RIN 1557-AD40
FEDERAL RESERVE SYSTEM
12 CFR Part 244
[Docket No. R-1411]
RIN 7100-AD70
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 Nos. 34-70277]
RIN 3235-AK96
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 267
RIN 2501-AD53
Credit Risk Retention
AGENCY: 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 seeking comment on a joint proposed rule (the proposed rule, or the
proposal) to revise the proposed rule the agencies published in the
Federal Register on April 29, 2011, and 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 (Dodd-Frank Act).
Section 15G generally requires the securitizer of asset-backed
securities to retain not less than 5 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 October 30, 2013.
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
email, 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. Enter ``Docket ID OCC-2013-0010'' in the
Search Box and click ``Search''. Results can be filtered using the
filtering tools on the left side of the screen. Click on ``Comment
Now'' to submit public comments. Click on the ``Help'' tab on the
Regulations.gov home page to get information on using Regulations.gov.
Email: regs.comments@occ.treas.gov.
Mail: Legislative and Regulatory Activities Division,
Office of the Comptroller of the Currency, 400 7th Street SW., Suite
3E-218, Mail Stop 9W-11, Washington, DC 20219.
Fax: (571) 465-4326.
Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218,
Mail Stop 9W-11, Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket Number OCC-2013-0010'' 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, email 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. Enter ``Docket ID OCC-2013-0010'' in the Search
box and click ``Search''. Comments can be filtered by agency using the
filtering tools on the left side of the screen. Click on the ``Help''
tab on the Regulations.gov home page to get information on using
Regulations.gov, including instructions for viewing public comments,
viewing other supporting and related materials, and viewing the docket
after the close of the comment period.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 400 7th 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) 649-
6700. 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.
Email: 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 Robert deV. Frierson, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue NW., Washington, DC 20551.
[[Page 57929]]
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
9:00 a.m. and 5:00 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. Follow instructions for submitting comments on the agency Web
site.
Email: Comments@FDIC.gov. Include RIN 3064-AD74 in 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/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7:00 a.m. and 5:00 p.m.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Instructions: All comments will be posted without change to https://
www.fdic.gov/regulations/laws/federal, including any personal
information provided. Paper copies of public comments may be ordered
from the Public Information Center by telephone at (877) 275-3342 or
(703) 562-2200.
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 email 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 email 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 Web site 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
10:00 a.m. and 3:00 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:
Email: Comments to Alfred M. Pollard, General Counsel, may
be sent by email 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 email
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, Constitution Center, (OGC) Eighth Floor, 400
7th Street SW., Washington, DC 20024.
Hand Delivery/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA43,
Federal Housing Finance Agency, Constitution Center, (OGC) Eighth
Floor, 400 7th Street SW., Washington, DC 20024. A hand-delivered
package should be logged in at the Seventh Street entrance Guard Desk,
First Floor, on business days between 9:00 a.m. and 5:00 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 Web site 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. at the Federal
Housing Finance Agency, Constitution Center, 400 7th Street SW.,
Washington, DC 20024. To make an appointment to inspect comments please
call the Office of General Counsel at (202) 649-3804.
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 above docket number and title. 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 Web site 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
[[Page 57930]]
800-877-8339. Copies of all comments submitted are available for
inspection and downloading at www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
OCC: Kevin Korzeniewski, Attorney, Legislative and Regulatory
Activities Division, (202) 649-5490, Office of the Comptroller of the
Currency, 400 7th Street SW., Washington, DC 20219.
Board: Benjamin W. McDonough, Senior Counsel, (202) 452-2036; April
C. Snyder, Senior Counsel, (202) 452-3099; Brian P. Knestout, Counsel,
(202) 452-2249; David W. Alexander, Senior Attorney, (202) 452-2877; or
Flora H. Ahn, Senior Attorney, (202) 452-2317, Legal Division; Thomas
R. Boemio, Manager, (202) 452-2982; Donald N. Gabbai, Senior
Supervisory Financial Analyst, (202) 452-3358; Ann P. McKeehan, Senior
Supervisory Financial Analyst, (202) 973-6903; or Sean M. Healey,
Senior Financial Analyst, (202) 912-4611, Division of Banking
Supervision and Regulation; Karen Pence, Assistant Director, Division
of Research & Statistics, (202) 452-2342; or Nikita Pastor, Counsel,
(202) 452-3667, Division of Consumer and Community Affairs, Board of
Governors of the Federal Reserve System, 20th and C Streets NW.,
Washington, DC 20551.
FDIC: Rae-Ann Miller, Associate Director, (202) 898-3898; George
Alexander, Assistant Director, (202) 898-3718; Kathleen M. Russo,
Supervisory Counsel, (703) 562-2071; or Phillip E. Sloan, Counsel,
(703) 562-6137, Federal Deposit Insurance Corporation, 550 17th Street
NW., Washington, DC 20429.
Commission: Steven Gendron, Analyst Fellow; Arthur Sandel, Special
Counsel; David Beaning, Special Counsel; or Katherine Hsu, Chief, (202)
551-3850, in the Office of Structured Finance, Division of Corporation
Finance, 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) 649-3190; Ronald P. Sugarman, Principal
Legislative Analyst, Ron.Sugarman@fhfa.gov, (202) 649-3208; Phillip
Millman, Principal Capital Markets Specialist,
Phillip.Millman@fhfa.gov, (202) 649-3080; or Thomas E. Joseph,
Associate General Counsel, Thomas.Joseph@fhfa.gov, (202) 649-3076;
Federal Housing Finance Agency, Constitution Center, 400 7th Street
SW., Washington, DC 20024. The telephone number for the
Telecommunications Device for the Hearing Impaired is (800) 877-8339.
HUD: Michael P. Nixon, Office of Housing, Department of Housing and
Urban Development, 451 7th Street SW., Room 10226, 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
A. Background
B. Overview of the Original Proposal and Public Comment
C. Overview of the Proposed Rule
II. General Definitions and Scope
A. Overview of Significant Definitions in the Original Proposal
and Comments
1. Asset-Backed Securities, Securitization Transactions, and ABS
Interests
2. Securitizer, Sponsor, and Depositor
3. Originator
4. Servicing Assets, Collateral
B. Proposed General Definitions
III. General Risk Retention Requirement
A. Minimum Risk Retention Requirement
B. Permissible Forms of Risk Retention--Menu of Options
1. Standard Risk Retention
2. Revolving Master Trusts
3. Representative Sample
4. Asset-Backed Commercial Paper Conduits
5. Commercial Mortgage-Backed Securities
6. Government-Sponsored Enterprises
7. Open Market Collateralized Loan Obligations
8. Municipal Bond ``Repackaging'' Securitizations
9. Premium Capture Cash Reserve Account
C. Allocation to the Originator
D. Hedging, Transfer, and Financing Restrictions
IV. General Exemptions
A. Exemption for Federally Insured or Guaranteed Residential,
Multifamily, and Health Care Mortgage Loan Assets
B. Exemption for Securitizations of Assets Issued, Insured, or
Guaranteed by the United States or Any Agency of the United States
and Other Exemptions
C. Exemption for Certain Resecuritization Transactions
D. Other Exemptions From Risk Retention Requirements
1. Utility Legislative Securitizations
2. Seasoned Loans
3. Legacy Loan Securitizations
4. Corporate Debt Repackagings
5. ``Non-Conduit'' CMBS Transactions
6. Tax Lien-Backed Securities Sponsored by a Municipal Entity
7. Rental Car Securitizations
E. Safe Harbor for Foreign Securitization Transactions
F. Sunset on Hedging and Transfer Restrictions
G. Federal Deposit Insurance Corporation Securitizations
V. Reduced Risk Retention Requirements and Underwriting Standards
for ABS Backed by Qualifying Commercial, Commercial Real Estate, or
Automobile Loans
A. Qualifying Commercial Loans
B. Qualifying Commercial Real Estate Loans
1. Ability To Repay
2. Loan-to-Value Requirement
3. Collateral Valuation
4. Risk Management and Monitoring
C. Qualifying Automobile Loans
1. Ability To Repay
2. Loan Terms
3. Reviewing Credit History
4. Loan-to-Value
D. Qualifying Asset Exemption
E. Buyback Requirement
VI. Qualified Residential Mortgages
A. Overview of Original Proposal and Public Comments
B. Approach to Defining QRM
1. Limiting Credit Risk
2. Preserving Credit Access
C. Proposed Definition of QRM
D. Exemption for QRMs
E. Repurchase of Loans Subsequently Determined To Be Non-
Qualified After Closing
F. Alternative Approach to Exemptions for QRMs
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. OCC Unfunded Mandates Reform Act of 1995 Determination
E. Commission: Small Business Regulatory Enforcement Fairness
Act
F. FHFA: Considerations of Differences Between the Federal Home
Loan Banks and the Enterprises
I. Introduction
The agencies are requesting comment on a proposed rule that re-
proposes with modifications a previously proposed rule to implement the
requirements of section 941 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Act, or Dodd-Frank Act).\1\ 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 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
[[Page 57931]]
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.\2\
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\1\ Public Law 111-203, 124 Stat. 1376 (2010). Section 941 of
the Dodd-Frank Act amends the Securities Exchange Act of 1934 (the
Exchange Act) and adds a new section 15G of the Exchange Act. 15
U.S.C. 78o-11.
\2\ See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B)(ii).
---------------------------------------------------------------------------
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.\3\ In addition, section 15G provides that a
securitizer may retain less than 5 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.\4\
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\3\ See 15 U.S.C. 78o-11(c)(1)(C)(iii), (e)(4)(A) and (B).
\4\ See id. at section 78o-11(c)(1)(B)(ii) and (2).
---------------------------------------------------------------------------
In April 2011, the agencies published a joint notice of proposed
rulemaking that proposed to implement section 15G of the Exchange Act
(original proposal).\5\ The proposed rule revises the original
proposal, as described in more detail below.
---------------------------------------------------------------------------
\5\ Credit Risk Retention; Proposed Rule, 76 FR 24090 (April 29,
2011) (Original Proposal).
---------------------------------------------------------------------------
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.\6\ 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,\7\
and are authorized to adopt rules in several specific areas under
section 15G.\8\ In addition, the Federal banking agencies are jointly
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 risk retention requirement of less than 5 percent.\9\
Accordingly, when used in this Notice of Proposed Rulemaking, 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.
---------------------------------------------------------------------------
\6\ See id. at section 78o-11(b)(2), (e)(4)(A) and (B).
\7\ See id. at section 78o-11(b)(1).
\8\ See, e.g. id. at sections 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).
\9\ See id. at section 78o-11(b)(2)(B).
---------------------------------------------------------------------------
For ease of reference, the re-proposed rules of the agencies are
referenced using a common designation of Sec. ----.1 to Sec. ----.21
(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.\10\ Section ----.1 of each agency's rule
identifies the entities or transactions subject to such agency's rule.
---------------------------------------------------------------------------
\10\ 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); 12 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. Because the proposed rules would
exempt the programs and entities under HUD's jurisdiction from the
requirements of the proposed rules, HUD does not propose to codify
the rules into its title of the CFR at the time the rules are
adopted in final form.
---------------------------------------------------------------------------
The preamble to the original proposal described the agencies'
intention to jointly approve any written interpretations, written
responses to requests for no-action letters and general counsel
opinions, or other written interpretive guidance (written
interpretations) concerning the scope or terms of section 15G of the
Exchange Act and the final rules issued thereunder that are intended to
be relied on by the public generally. The agencies also intended for
the appropriate agencies to jointly approve any exemptions, exceptions,
or adjustments to the final rules. 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, exception,
or adjustment.
Consistent with section 15G of the Exchange Act, the risk retention
requirements would become effective, for securitization transactions
collateralized by residential mortgages, one year after the date on
which final rules are published in the Federal Register, and two years
after that date for any other securitization transaction.
A. Background
As the agencies observed in the preamble to the original proposal,
the securitization markets are an important link in the chain of
entities providing credit to U.S. households and businesses, and state
and local governments.\11\ When properly structured, securitization
provides economic benefits that can lower the cost of credit to
households and businesses.\12\ However, when incentives are not
properly aligned and there is a lack of discipline in the credit
origination process, securitization can result in harmful consequences
to investors, consumers, financial institutions, and the financial
system.
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\11\ 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 from a single pool of
assets that appeal to a broad range of investors. 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.
\12\ 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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During the financial crisis, securitization transactions displayed
significant vulnerabilities to informational and incentive problems
among various parties involved in the process.\13\ Investors did not
have access to the same information about the assets collateralizing
ABS as other parties in the securitization chain (such as the sponsor
of the securitization transaction or an originator of the securitized
loans).\14\ In addition, assets were resecuritized into complex
instruments, such as collateralized debt obligations (CDOs) and CDOs-
squared, which made it difficult for investors to discern the
[[Page 57932]]
true value of, and risks associated with, an investment in the
securitization.\15\ 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 loans.\16\
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\13\ See Board Report at 8-9.
\14\ See S. Rep. No. 111-176, at 128 (2010).
\15\ See id.
\16\ See id.
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Congress intended the risk retention requirements added by section
15G 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. By requiring that the
securitizer retain a portion of the credit risk of the assets being
securitized, the requirements of section 15G provide securitizers an
incentive to monitor and ensure the quality of the assets underlying a
securitization transaction, and, thus, help 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 help to ensure the assets pose
low credit risk, the statute provides or permits an exemption.\17\
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\17\ See 15 U.S.C. 78o-11(c)(1)(B)(ii), (e)(1)-(2).
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Accordingly, 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. Such
other parts include provisions that strengthen the regulation and
supervision of national recognized statistical rating organizations
(NRSROs) and improve the transparency of credit ratings; \18\ provide
for issuers of registered ABS offerings to perform a review of the
assets underlying the ABS and disclose the nature of the review; \19\
and require issuers of ABS to disclose the history of the requests they
received and repurchases they made related to their outstanding
ABS.\20\
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\18\ See, e.g. sections 932, 935, 936, 938, and 943 of the Dodd-
Frank Act (15 U.S.C. 78o-7, 78o-8).
\19\ See section 945 of the Dodd-Frank Act (15 U.S.C. 77g).
\20\ See section 943 of the Dodd-Frank Act (15 U.S.C. 78o-7).
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B. Overview of the Original Proposal and Public Comment
In developing the original proposal, the agencies took into account
the diversity of assets that are securitized, the structures
historically used in securitizations, and the manner in which
securitizers \21\ have retained exposure to the credit risk of the
assets they securitize.\22\ The original proposal provided several
options from which sponsors could choose to meet section 15G's risk
retention requirements, including, for example, retention of a 5
percent ``vertical'' interest in each class of ABS interests issued in
the securitization, retention of a 5 percent ``horizontal'' first-loss
interest in the securitization, and other options designed to reflect
the way in which market participants have historically structured
credit card receivable and asset-backed commercial paper conduit
securitizations. The original proposal also included a special
``premium capture'' mechanism designed to prevent a sponsor from
structuring a securitization transaction in a manner that would allow
the sponsor to offset or minimize its retained economic exposure to the
securitized assets by monetizing the excess spread created by the
securitization transaction.
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\21\ As discussed in the original proposal and further below,
the agencies propose that a ``sponsor,'' as defined in a manner
consistent with the definition of that term in the Commission's
Regulation AB, would be a ``securitizer'' for the purposes of
section 15G.
\22\ 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.'').
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The original proposal also included disclosure requirements that
were specifically tailored to each of the permissible forms of risk
retention. The disclosure requirements were an integral part of the
original proposal because they would have provided investors with
pertinent information concerning the sponsor's retained interests in a
securitization transaction, such as the amount and form of interest
retained by sponsors.
As required by section 15G, the original proposal provided a
complete exemption from the risk retention requirements for ABS that
are collateralized solely by QRMs and established the terms and
conditions under which a residential mortgage would qualify as a QRM.
In developing the proposed definition of a QRM, the agencies considered
the terms and purposes of section 15G, public input, and the potential
impact of a broad or narrow definition of QRM on the housing and
housing finance markets. In addition, the agencies developed the QRM
proposal to be consistent with the requirement of section 15G 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, \23\ and regulations adopted
thereunder.\24\
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\23\ See 15 U.S.C. 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.'').
\24\ See 78 FR 6408 (January 30, 2013), as amended by 78 FR
35430 (June 12, 2013). These two final rules were preceded by a
proposed rule defining QM, issued by the Board and published in the
Federal Register. See 76 FR 27390 (May 11, 2011). The Board had
initial responsibility for administration and oversight of TILA
prior to transfer to the Consumer Financial Protection Bureau.
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The original proposal would generally have prohibited QRMs from
having product features that were observed to contribute significantly
to the high levels of delinquencies and foreclosures since 2007. These
included features permitting negative amortization, interest-only
payments, or significant interest rate increases. The QRM definition in
the original proposal also included other underwriting standards
associated with lower risk of default, including a down payment
requirement of 20 percent in the case of a purchase transaction,
maximum loan-to-value ratios of 75 percent on rate and term refinance
loans and 70 percent for cash-out refinance loans, as well as credit
history criteria (or requirements). The QRM standard in the original
proposal also included maximum front-end and back-end debt-to-income
ratios. As explained in the original proposal, the agencies intended
for the QRM proposal to reflect very high quality underwriting
standards, and the agencies expected that a large market for non-QRM
loans would continue to exist, providing ample liquidity to mortgage
lenders.
Consistent with the statute, the original proposal also provided
that sponsors would not have to hold risk retention for securitized
commercial, commercial real estate, and automobile loans that met
proposed underwriting
[[Page 57933]]
standards that incorporated features and requirements historically
associated with very low credit risk in those asset classes.
With respect to securitization transactions sponsored by the
Federal National Mortgage Association (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac) (jointly, the Enterprises), the
agencies proposed to recognize the 100 percent guarantee of principal
and interest payments by the Enterprises on issued securities as
meeting the risk retention requirement. However, this recognition would
only remain in effect for as long as the Enterprises operated under the
conservatorship or receivership of FHFA with capital support from the
United States.
In response to the original proposal, the agencies received
comments from over 10,500 persons, institutions, or groups, including
nearly 300 unique comment letters. The agencies received a significant
number of comments regarding the appropriate amount and measurement of
risk retention. Many commenters generally supported the proposed menu-
based approach of providing sponsors flexibility to choose from a
number of permissible forms of risk retention, although several argued
for more flexibility in selecting risk retention options, including
using multiple options simultaneously. Comments on the disclosure
requirements in the original proposal were limited.
Many commenters expressed significant concerns with the proposed
standards for horizontal risk retention and the premium capture cash
reserve account (PCCRA), which were intended to ensure meaningful risk
retention. Many commenters asserted that these proposals would lead to
significantly higher costs for sponsors, possibly discouraging them
from engaging in new securitization transactions. However, some
commenters supported the PCCRA concept, arguing that the more
restrictive nature of the account would be offset by the requirement's
contribution to more conservative underwriting practices.
Other commenters expressed concerns with respect to standards in
the original proposal for specific asset classes, such as the proposed
option for third-party purchasers to hold risk retention in commercial
mortgage-backed securitizations instead of sponsors (as contemplated by
section 15G). Many commenters also expressed concern about the
underwriting standards for non-residential asset classes, generally
criticizing them as too conservative to be utilized effectively by
sponsors. Several commenters criticized application of the original
proposal to managers of certain collateralized loan obligation (CLO)
transactions and argued that the original proposal would lead to more
concentration in the industry and reduce access to credit for many
businesses.
An overwhelming majority of commenters criticized the agencies'
proposed QRM standard. Many of these commenters asserted that the
proposed definition of QRM, particularly the 20 percent down payment
requirement, would significantly increase the costs of credit for most
home buyers and restrict access to credit. Some of these commenters
asserted that the proposed QRM standard would become a new
``government-approved'' standard, and that lenders would be reluctant
to originate mortgages that did not meet the standard. Commenters also
argued that this proposed standard would make it more difficult to
reduce the participation of the Enterprises in the mortgage market.
Commenters argued that the proposal was inconsistent with legislative
intent and strongly urged the agencies to eliminate the down payment
requirement, make it substantially smaller, or allow private mortgage
insurance to substitute for the requirement within the QRM standard.
Commenters also argued that the agencies should align the QRM
definition with the definition of QM, as implemented by the Consumer
Financial Protection Bureau (CFPB).\25\
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\25\ See 78 FR 6407 (January 30, 2013), as amended by 78 FR
35429 (June 12, 2013) and 78 FR 44686 (July 24, 2013).
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Various commenters also criticized the agencies' proposed treatment
of the Enterprises. A commenter asserted that the agencies' recognition
of the Enterprises' guarantee as retained risk (while in
conservatorship or receivership with capital support from the United
States) would impede the policy goal of reducing the role of the
Enterprises and the government in the mortgage securitization market
and encouraging investment in private residential mortgage
securitizations. A number of other commenters, however, supported the
proposed approach for the Enterprises.
The preamble to the original proposal described the agencies'
intention to jointly approve certain types of written interpretations
concerning the scope of section 15G and the final rules issued
thereunder. Several commenters on the original proposal expressed
concern about the agencies' processes for issuing written
interpretations jointly and the possible uncertainty about the rules
that may arise due to this process.
The agencies have endeavored to provide specificity and clarity in
the proposed rule to avoid conflicting interpretations or uncertainty.
In the future, if the heads of the agencies determine that further
guidance would be beneficial for market participants, they may jointly
publish interpretive guidance documents, as the federal banking
agencies have done in the past. In addition, the agencies note that
market participants can, as always, seek guidance concerning the rules
from their primary federal banking regulator or, if such market
participant is not a depository institution or a government-sponsored
enterprise, the Commission. In light of the joint nature of the
agencies' rule writing authority, the agencies continue to view the
consistent application of the final rule as a benefit and intend to
consult with each other when adopting staff interpretations or guidance
on the final rule that would be shared with the public generally. The
agencies are considering whether to require that such staff
interpretations and guidance be jointly issued by the agencies with
rule writing authority and invite comment.\26\
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\26\ These items would not include interpretation and guidance
in staff comment letters and other staff guidance directed to
specific institutions that is not intended to be relied upon by the
public generally. Nor would it include interpretations and guidance
contained in administrative or judicial enforcement proceedings by
the agencies, or in an agency report of examination or inspection or
similar confidential supervisory correspondence.
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The specific provisions of the original proposal and public
comments received thereon are discussed in further detail below.
C. Overview of the Proposed Rule
The agencies have carefully considered the many comments received
on the original proposal as well as engaged in further analysis of the
securitization and lending markets in light of the comments. As a
result, the agencies believe it would be appropriate to modify several
important aspects of the original proposal and are issuing a new
proposal incorporating these modifications. The agencies have concluded
that a new proposal would give the public the opportunity to review and
provide comment on the agencies' revised design of the risk retention
regulatory framework and assist the agencies in determining whether the
revised framework is appropriately structured.
The proposed rule takes account of the comments received on the
original proposal. In developing the proposed
[[Page 57934]]
rule, the agencies consistently have sought to ensure that the amount
of credit risk required of a sponsor would be meaningful, consistent
with the purposes of section 15G. The agencies have also sought to
minimize the potential for the proposed rule to negatively affect the
availability and costs of credit to consumers and businesses.
As described in detail below, the proposed rule would significantly
increase the degree of flexibility that sponsors would have in meeting
the risk retention requirements of section 15G. For example, the
proposed rule would permit a sponsor to satisfy its obligation by
retaining any combination of an ``eligible vertical interest'' and an
``eligible horizontal residual interest'' to meet the 5 percent minimum
requirement. The agencies are also proposing that horizontal risk
retention be measured by fair value, reflecting market practice, and
are proposing a more flexible treatment for payments to a horizontal
risk retention interest than that provided in the original proposal. In
combination with these changes, the agencies propose to remove the
PCCRA requirement.\27\ The agencies have incorporated proposed
standards for the expiration of the hedging and transfer restrictions
and proposed new exemptions from risk retention for certain
resecuritizations, seasoned loans, and certain types of securitization
transactions with low credit risk. In addition, the agencies propose a
new risk retention option for CLOs that is similar to the allocation to
originator concept proposed for sponsors generally.
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\27\ The proposal would also eliminate the ``representative
sample'' option, which commenters had argued would be impractical.
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Furthermore, the agencies are proposing revised standards with
respect to risk retention by a third-party purchaser in commercial
mortgage-backed securities (CMBS) transactions and an exemption that
would permit transfer (by a third-party purchaser or sponsor) of a
horizontal interest in a CMBS transaction after five years, subject to
standards described below.
The agencies have carefully considered the comments received on the
QRM standard in the original proposal as well as various ongoing
developments in the mortgage markets, including mortgage regulations.
For the reasons discussed more fully below, the agencies are proposing
to revise the QRM definition in the original proposal to equate the
definition of a QRM with the definition of QM adopted by the CFPB.\28\
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\28\ See 78 FR 6407 (January 30, 2013), as amended by 78 FR
35429 (June 12, 2013) and 78 FR 44686 (July 24, 2013).
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The agencies invite comment on all aspects of the proposed rule,
including comment on whether any aspects of the original proposal
should be adopted in the final rule. Please provide data and
explanations supporting any positions offered or changes suggested.
II. General Definitions and Scope
A. Overview of Significant Definitions in the Original Proposal and
Comments
1. Asset-Backed Securities, Securitization Transactions, and ABS
Interests
The original proposal provided that the proposed risk retention
requirements would have applied to sponsors in securitizations that
involve the issuance of ``asset-backed securities'' and defined the
terms ``asset-backed security'' and ``asset'' consistent with the
definitions of those terms in the Exchange Act. The original proposal
noted that 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. It further noted that the
proposed definition of ABS, which would have been broader than that of
the Commission's Regulation AB,\29\ included securities that are
typically sold in transactions that are exempt from registration under
the Securities Act, such as CDOs and securities issued or guaranteed by
an Enterprise. As a result, the proposed risk retention requirements
would have applied to securitizers of ABS offerings regardless of
whether the offering was registered with the Commission under the
Securities Act.
---------------------------------------------------------------------------
\29\ See 17 CFR 229.1100 through 17 CFR 229.1123.
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Under the original proposal, risk retention requirements would have
applied to the securitizer in each ``securitization transaction,''
defined as a transaction involving the offer and sale of ABS by an
issuing entity. The original proposal also explained that the term
``ABS interest'' would 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, but would not include interests, such as common or preferred
stock, in an issuing entity that are issued primarily to evidence
ownership of the issuing entity, and the payments, if any, which are
not primarily dependent on the cash flows of the collateral held by the
issuing entity.
With regard to these three definitions, some commenters were
critical of what they perceived to be the overly broad scope of the
terms and advocated for express exemptions or exclusions from their
application. Some commenters expressed concern that the definition of
``asset-backed securities'' could be read to be broader than intended
and requested clarification as to the precise contours of the
definition. For example, certain commenters were concerned that the
proposed ABS definition could unintentionally include securities that
do not serve the same purpose or present the same set of risks as
``asset-backed securities,'' such as securities which are, either
directly or through a guarantee, full-recourse corporate obligations of
a creditworthy entity that is not a special-purpose vehicle (SPV), but
are also secured by a pledge of financial assets. Other commenters
suggested that the agencies provide a bright-line safe harbor that
defines conditions under which risk retention is not required even if a
security is collateralized by self-liquidating assets and advocated
that certain securities be expressly excluded from the proposed rule's
definition of ABS.
Similarly, a number of commenters requested clarification with
regard to the scope of the definition of ``ABS interest,'' stating that
its broad definition could potentially capture a number of items not
traditionally considered ``interests'' in a securitization, such as
non-economic residual interests, servicing and special servicing fees,
and amounts payable by the issuing entity under a derivatives contract.
With regard to the definition of ``securitization transaction,'' a
commenter recommended that transactions undertaken solely to manage
financial guarantee insurance related to the underlying obligations not
be considered ``securitizations.''
2. Securitizer, Sponsor, and Depositor
Section 15G stipulates that its risk retention requirements be
applied to a ``securitizer'' of an ABS and, in turn, that a securitizer
is both an issuer of an ABS or a person who organizes and initiates a
securitization transaction by selling or transferring assets, either
directly or indirectly, including through an affiliate or issuer. The
original proposal noted that the second prong of this definition is
substantially identical to the definition of a ``sponsor'' of a
securitization transaction in the
[[Page 57935]]
Commission's Regulation AB.\30\ Accordingly, the original proposal
would have defined the term ``sponsor'' in a manner consistent with the
definition of that term in the Commission's Regulation AB.\31\
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\30\ 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.'').
\31\ As discussed in the original proposal, when used in the
federal securities laws, the term ``issuer'' may have different
meanings depending on the context in which it is used. For the
purposes of section 15G, the original proposal provided that the
agencies would have interpreted an ``issuer'' of an asset-back
security to refer to the ``depositor'' of an ABS, consistent with
how that term has been defined and used under the federal securities
laws in connection with an ABS.
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Other than issues concerning CLOs, which are discussed in Part
III.B.7 of this Supplementary Information, comments with regard to
these terms were generally limited to requests that the final rules
provide that certain specified persons--such as underwriting sales
agents--be expressly excluded from the definition of securitizer or
sponsor for the purposes of the risk retention requirements.
3. Originator
The original proposal would have defined the term ``originator'' in
the same manner as section 15G, namely, as a person who, through the
extension of credit or otherwise, creates a financial asset that
collateralizes an ABS, and sells the asset directly or indirectly to a
securitizer (i.e., a sponsor or depositor). The original proposal went
on to note that 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--would have been an originator of the loan or receivable for
purposes of section 15G.
4. Securitized Assets, Collateral
The original proposal referred to the assets underlying a
securitization transaction as the ``securitized assets,'' meaning
assets that are transferred to the SPV that issues the ABS interests
and that stand as collateral for those ABS interests. ``Collateral''
would be defined as the property that provides the cash flow for
payment of the ABS interests issued by the issuing entity. Taken
together, these definitions were meant to suggest coverage of the
loans, leases, or similar assets that the depositor places into the
issuing SPV at the inception of the transaction, though it would have
also included other assets such as pre-funded cash reserve accounts.
Commenters pointed out that, in addition to this property, the issuing
entity may hold other assets. For example, the issuing entity may
acquire interest rate derivatives to convert floating rate interest
income to fixed rate, or the issuing entity may accrete cash or other
liquid assets in reserve funds that accumulate cash generated by the
securitized assets. As another example, commenters noted that an asset-
backed commercial paper conduit may hold a liquidity guarantee from a
bank on some or all of its securitized assets.
B. Proposed General Definitions
The agencies have carefully considered all of the comments raised
with respect to the general definitions of the original proposal. The
agencies do not believe that significant changes to these definitions
are necessary and, accordingly, are proposing to maintain the general
definitions in substantially the same form as they were presented in
the original proposal, with one exception.\32\
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\32\ Regarding comments about what securities constitutes an ABS
interest under the proposed definition, the agencies preliminarily
believe that non-economic residual interests would constitute ABS
interests. However, as the proposal makes clear, fees for services
such as servicing fees would not fall under the definition of an ABS
interest.
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To describe the additional types of property that could be held by
an issuing entity, the agencies are proposing a definition of
``servicing assets,'' which would be any rights or other assets
designed to assure the servicing, timely payment, or timely
distribution of proceeds to security holders, or assets related or
incidental to purchasing or otherwise acquiring and holding the issuing
entity's securitized assets. These may include cash and cash
equivalents, contract rights, derivative agreements of the issuing
entity used to hedge interest rate and foreign currency risks, or the
collateral underlying the securitized assets. As noted in the rule
text, it also includes proceeds of assets collateralizing the
securitization transactions, whether in the form of voluntary payments
from obligors on the assets or otherwise (such as liquidation
proceeds). The agencies are proposing this definition in order to
ensure that the provisions of the proposal appropriately accommodate
the need, in administering a securitization transaction on an ongoing
basis, to hold various assets other than the loans or similar assets
that are transferred into the asset pool by the securitization
depositor. The proposed definition is similar to elements of the
definition of ``eligible assets'' in Rule 3a-7 under the Investment
Company Act of 1940, which specifies conditions under which the issuer
of non-redeemable fixed-income securities backed by self-liquidating
financial assets will not be deemed to be an investment company.
To facilitate the agencies revised proposal for the QRM definition,
the agencies are proposing to define the term ``residential mortgage''
by reference to the definition of ``covered transaction'' to be found
in the CFPB's Regulation Z.\33\ Accordingly, for purposes of the
proposed rule, a residential mortgage would mean a consumer credit
transaction that is secured by a dwelling, as such term is also defined
in Regulation Z \34\ (including any real property attached to a
dwelling) and any transaction that is exempt from the definition of
``covered transaction'' under the CFPB's Regulation Z.\35\ Therefore,
the term ``residential mortgage'' would include home equity lines of
credit, reverse mortgages, mortgages secured by interests in timeshare
plans, and temporary loans. By defining residential mortgage in this
way, the agencies seek to ensure that relevant definitions in the
proposed rule and in the CFPB's rules on and related to QM are
harmonized to reduce compliance burden and complexity, and the
potential for conflicting definitions and interpretations where the
proposed rule and the QM standard intersect. Additionally, the agencies
are proposing to include those loans excluded from the definition of
``covered transaction'' in the definition of ``residential mortgage''
for purposes of risk retention so that those categories of loans would
be subject to risk retention requirements that are applied to
residential mortgage securitizations under the proposed rule.
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\33\ See 78 FR 6584 (January 30, 2013), to be codified at 12 CFR
1026.43.
\34\ 12 CFR 1026.2(a)(19).
\35\ Id.
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III. General Risk Retention Requirement
A. Minimum Risk Retention Requirement
Section 15G of the Exchange Act generally requires that the
agencies jointly prescribe regulations that require a securitizer to
retain not less than 5 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
[[Page 57936]]
by QRMs). Consistent with the statute, the original proposal generally
required that a sponsor retain an economic interest equal to at least 5
percent of the aggregate credit risk of the assets collateralizing an
issuance of ABS (the base risk retention requirement). Under the
original proposal, the base risk retention requirement would have
applied to all securitization transactions that are within the scope of
section 15G, regardless of whether the sponsor were an insured
depository institution, a bank holding company or subsidiary thereof, a
registered broker-dealer, or other type of entity.\36\
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\36\ Synthetic securitizations and securitizations that meet the
requirements of the foreign safe harbor are examples of
securitization transactions that are not within the scope of section
15G.
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The agencies requested comment on whether the minimum 5 percent
risk retention requirement was appropriate or whether a higher risk
retention requirement should be established. Several commenters
expressed support for the minimum 5 percent risk retention requirement,
with some commenters supporting a higher risk retention requirement.
However, other commenters suggested tailoring the risk retention
requirement to the specific risks of distinct asset classes.
Consistent with the original proposal, the proposed rule would
apply a minimum 5 percent base risk retention requirement to all
securitization 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 entity, and regardless of whether the sponsor
is a supervised entity.\37\ The agencies continue to believe that this
exposure should provide a sponsor with an incentive to monitor and
control the underwriting of assets being securitized and help align the
interests of the sponsor with those of investors in the ABS. In
addition, the sponsor also would be prohibited from hedging or
otherwise transferring its retained interest prior to the applicable
sunset date, as discussed in Part III.D of this SUPPLEMENTARY
INFORMATION.
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\37\ See proposed rule at Sec. Sec. ----.3 through ----.10.
Similar to the original proposal, the proposed rule, in some
instances, would permit a sponsor to allow another person to retain
the required amount of credit risk (e.g., originators, third-party
purchasers in commercial mortgage-backed securities transactions,
and originator-sellers 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, 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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The agencies note that the base risk retention requirement under
the proposed rule would be a regulatory minimum. The sponsor,
originator, or other party to a securitization may retain additional
exposure to the credit risk of assets that the sponsor, originator, or
other party helps securitize beyond that required by the proposed rule,
either on its own initiative or in response to the demands or
requirements of private market participants.
B. Permissible Forms of Risk Retention--Menu of Options
Section 15G expressly provides the agencies the authority to
determine the permissible forms through which the required amount of
risk retention must be held.\38\ Accordingly, the original proposal
provided sponsors with multiple options to satisfy the risk retention
requirements of section 15G. The flexibility provided in the original
proposal's menu of options for complying with the risk retention
requirement was 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. The menu of options approach was
designed to be consistent with the various ways in which a sponsor or
other entity, in historical market practices, may have retained
exposure to the credit risk of securitized assets.\39\ Historically,
whether or 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 and regulatory capital considerations, and whether there was
a market for the type of interest that might ordinarily be retained (at
least initially by the sponsor).
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\38\ 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.'').
\39\ 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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The agencies requested comment on the appropriateness of the menu
of options in the original proposal and the permissible forms of risk
retention that were proposed. Commenters generally supported the menu-
based approach of providing sponsors with the flexibility to choose
from a number of permissible forms of risk retention. Many commenters
requested that sponsors be permitted to use multiple risk retention
options in any percentage combination, as long as the aggregate
percentage of risk retention would be at least 5 percent.
The agencies continue to believe that providing options for risk
retention is appropriate in order to accommodate the variety of
securitization structures that would be subject to the proposed rule.
Accordingly, subpart B of the proposed rule would maintain a menu of
options approach to risk retention. Additionally, the agencies have
considered commenters' concerns about flexibility in combining forms of
risk retention and are proposing modifications to the various forms of
risk retention, and how they may be used, to increase flexibility and
facilitate different circumstances that may accompany various
securitization transactions. Additionally, the permitted forms of risk
retention in the proposal would be 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 5 percent of the
credit risk of the securitized assets. Each of the forms of risk
retention being proposed by the agencies is described below.
1. Standard Risk Retention
a. Overview of Original Proposal and Public Comments
In the original proposal, to fulfill risk retention for any
transactions (standard risk retention), the agencies proposed to allow
sponsors to use one of three methods: (i) Vertical risk retention; (ii)
horizontal risk retention; and (iii) L-shaped risk retention.
Under the vertical risk retention option in the original proposal,
a sponsor could satisfy its risk retention requirement by retaining at
least 5 percent of each class of ABS interests issued as part of the
securitization transaction. As discussed in the original proposal, this
would provide the sponsor with an interest in the entire securitization
transaction. The agencies received numerous comments supporting the
vertical risk retention option as an appropriate way to align the
interests of the sponsor with those of the investors in the ABS in a
manner that would be easy to calculate. However, some commenters
expressed concern that the vertical risk retention option would expose
the sponsor to
[[Page 57937]]
substantially less risk of loss than if the sponsor had retained risk
under the horizontal risk retention option, thereby making risk
retention less effective.
Under the horizontal risk retention option in the original
proposal, a sponsor could satisfy its risk retention obligations by
retaining a first-loss ``eligible horizontal residual interest'' in the
issuing entity in an amount equal to at least 5 percent of the par
value of all ABS interests in the issuing entity that were issued as
part of the securitization transaction. In lieu of holding an eligible
horizontal residual interest, the original proposal allowed a sponsor
to cause to be established and funded, in cash, a reserve account at
closing (horizontal cash reserve account) in an amount equal to at
least 5 percent of the par value of all the ABS interests issued as
part of the transaction (i.e., the same dollar amount (or corresponding
amount in the foreign currency in which the ABS are issued, as
applicable) as would be required if the sponsor held an eligible
horizontal residual interest).
Under the original proposal, an interest qualified as an eligible
horizontal residual interest only if it was an ABS interest that was
allocated all losses on the securitized assets until the par value of
the class was reduced to zero and had the most subordinated claim to
payments of both principal and interest by the issuing entity. While
the original proposal would have permitted the eligible horizontal
residual interest to receive its pro rata share of scheduled principal
payments on the underlying assets in accordance with the relevant
transaction documents, the eligible horizontal residual interest
generally could not receive any other payments of principal made on a
securitized asset (including prepayments) until all other ABS interests
in the issuing entity were paid in full.
The agencies solicited comment on the structure of the eligible
horizontal residual interest, including the proposed approach to
measuring the size of the eligible horizontal residual interest and the
proposal to restrict unscheduled payments of principal to the sponsor
holding horizontal risk retention. Several commenters expressed support
for the horizontal risk retention option and believed that it would
effectively align the interests of the sponsor with those of the
investors in the ABS. However, many commenters raised concerns about
the agencies' proposed requirements for the eligible horizontal
residual interest. Many commenters requested clarification as to the
definition of ``par value'' and how sponsors should calculate the
eligible horizontal residual interest when measuring it against 5
percent of the par value of the ABS interests. Moreover, several
commenters recommended that the agencies use different approaches to
the measurement of the eligible horizontal residual interest. A few of
these commenters recommended the agencies take into account the ``fair
value'' of the ABS interests as a more appropriate economic measure of
risk retention.
Several commenters pointed out that the restrictions in the
original proposal on principal payments to the eligible horizontal
residual interest would be impractical to implement. For example, some
commenters expressed concern that the restriction would prevent the
normal operation of a variety of ABS structures, where servicers do not
distinguish which part of a monthly payment is interest or principal
and which parts of principal payments are scheduled or unscheduled.
The original proposal also contained an ``L-shaped'' risk retention
option, whereby a sponsor, subject to certain conditions, could use an
equal combination of vertical risk retention and horizontal risk
retention to meet its 5 percent risk retention requirement.\40\
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\40\ Specifically, the original proposal would have allowed a
sponsor to meet its risk retention obligations under the rules by
retaining: (1) 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 (2) 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).
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The agencies requested comment on whether a higher proportion of
the risk retention held by a sponsor under this option should be
composed of a vertical component or a horizontal component. Many
commenters expressed general support for the L-shaped option, but
recommended that the agencies allow sponsors to utilize multiple risk
retention options in different combinations or in any percentage
combination as long as the aggregate percentage of risk retained is at
least 5 percent. Commenters suggested that the flexibility would permit
sponsors to fulfill the risk retention requirements by selecting a
method that would minimize the costs of risk retention to sponsors and
any resulting increase in costs to borrowers.
b. Proposed Combined Risk Retention Option
The agencies carefully considered all of the comments on the
horizontal, vertical, and L-shaped risk retention with respect to the
original proposal.
In the proposed rule, to provide more flexibility to accommodate
various sponsors and securitization transactions and in response to
comments, the agencies are proposing to combine the horizontal,
vertical, and L-shaped risk retention options into a single risk
retention option with a flexible structure.\41\ Additionally, to
provide greater clarity for the measurement of risk retention and to
help prevent sponsors from structuring around their risk retention
requirement by negating or reducing the economic exposure they are
required to maintain, the proposal would require sponsors to measure
their risk retention requirement using fair value, determined in
accordance with U.S. generally accepted accounting principles
(GAAP).\42\
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\41\ See proposed rule at Sec. ----.4.
\42\ Cf. Financial Accounting Standards Board Accounting
Standards Codification Topic 820.
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The proposed rule would provide for a combined standard risk
retention option that would permit a sponsor to satisfy its risk
retention obligation by retaining an ``eligible vertical interest,'' an
``eligible horizontal residual interest,'' or any combination thereof,
in a total amount equal to no less than 5 percent of the fair value of
all ABS interests in the issuing entity that are issued as part of the
securitization transaction. The eligible horizontal residual interest
may consist of either a single class or multiple classes in the issuing
entity, provided that each interest qualifies, individually or in the
aggregate, as an eligible horizontal residual interest.\43\ In the case
of multiple classes, this requirement would mean that the classes must
be in consecutive order based on subordination level. For example, if
there were three levels of subordinated classes and the two most
subordinated classes had a combined fair value equal to 5 percent of
all ABS interests, the sponsor would be required to retain these two
most subordinated classes if it were going to discharge its risk
retention obligations by holding only eligible horizontal residual
interests. As discussed below, the agencies are proposing to refine the
definitions of the eligible vertical interest and the eligible
horizontal residual interest as well.
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\43\ See proposed rule at Sec. ----.2 (definition of ``eligible
horizontal residual interest'').
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This standard risk retention option would provide sponsors with
greater flexibility in choosing how to structure their retention of
credit risk in a manner compatible with the practices of the
securitization markets. For example, in
[[Page 57938]]
securitization transactions where the sponsor would typically retain
less than 5 percent of an eligible horizontal residual interest, the
standard risk retention option would permit the sponsor to hold the
balance of the risk retention as a vertical interest. In addition, the
flexible standard risk retention option should not in and of itself
result in a sponsor having to consolidate the assets and liabilities of
a securitization vehicle onto its own balance sheet because the
standard risk retention option does not mandate a particular proportion
of horizontal to vertical interest or require retention of a minimum
eligible horizontal residual interest. Under the proposed rule, a
sponsor would be free to hold more of an eligible vertical interest in
lieu of an eligible horizontal residual interest. The inclusion of more
of a vertical interest could reduce the significance of the risk
profile of the sponsor's economic exposure to the securitization
vehicle. The significance of the sponsor's exposure is one of the
characteristics the sponsor evaluates when determining whether to
consolidate the securitization vehicle for accounting purposes.
As proposed, a sponsor may satisfy its risk retention requirements
with respect to a securitization transaction by retaining at least 5
percent of the fair value of each class of ABS interests issued as part
of the securitization transaction. A sponsor using this approach must
retain at least 5 percent of the fair value 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 interest-only class, and a residual interest--a
sponsor using this approach with respect to the transaction would have
to retain at least 5 percent of the fair value of each such class or
interest.
A sponsor may also satisfy its risk retention requirements under
the vertical option by retaining a ``single vertical security.'' A
single vertical security would be an ABS interest entitling the holder
to a specified percentage (e.g., 5 percent) of the principal and
interest paid on each class of ABS interests in the issuing entity
(other than such single vertical security) that result in the security
representing the same percentage of fair value of each class of ABS
interests. By permitting the sponsor to hold the vertical form of risk
retention as a single security, the agencies intend to provide sponsors
an option that is simpler than carrying multiple securities
representing a percentage share of every series, tranche, and class
issued by the issuing entity, each of which might need to be valued by
the sponsor on its financial statements every financial reporting
period. The single vertical security option provides the sponsor with
the same principal and interest payments (and losses) as the vertical
stack, in the form of one security to be held on the sponsor's books.
The agencies considered the comments on the measurement of the
eligible horizontal residual interest in the original proposal and are
proposing a fair value framework for calculating the standard risk
retention because it uses methods more consistent with market
practices. The agencies' use of par value in the original proposal
sought to establish a simple and transparent measure, but the PCCRA
requirement, which the agencies proposed to ensure that the eligible
horizontal residual interest had true economic value, tended to
introduce other complexities. In addition, the use of fair value as
defined in GAAP provides a consistent framework for calculating
standard risk retention across very different securitization
transactions and different classes of interests within the same type of
securitization structure.
However, fair value is a methodology susceptible to yielding a
range of results depending on the key variables selected by the sponsor
in determining fair value. Accordingly, as part of the agencies'
proposal to rely on fair value as a measure that will adequately
reflect the amount of a sponsor's economic ``skin in the game,'' the
agencies propose to require disclosure of the sponsor's fair value
methodology and all significant inputs used to measure its eligible
horizontal residual interest, as discussed below in this section.
Sponsors that elect to utilize the horizontal risk retention option
must disclose the reference data set or other historical information
which would meaningfully inform third parties of the reasonableness of
the key cash flow assumptions underlying the measure of fair value. For
the purposes of this requirement, key assumptions may include default,
prepayment, and recovery. The agencies believe these key metrics will
help investors assess whether the fair value measure used by the
sponsor to determine the amount of its risk retention are comparable to
market expectations.
The agencies are also proposing limits on payments to holders of
the eligible horizontal residual interest, but the limits differ from
those in the original proposal, based on the fair value measurement.
The agencies continue to believe that limits are necessary to establish
economically meaningful horizontal risk retention that better aligns
the sponsor's incentives with those of investors. However, the agencies
also intend for sponsors to be able to satisfy their risk retention
requirements with the retention of an eligible horizontal residual
interest in a variety of ABS structures, including those structures
that, in contrast to mortgage-backed securities transactions, do not
distinguish between principal and interest payments and between
principal losses and other losses.
The proposed restriction on projected cash flows to be paid to the
eligible horizontal residual interest would limit how quickly the
sponsor can recover the fair value amount of the eligible horizontal
residual interest in the form of cash payments from the securitization
(or, if a horizontal cash reserve account is established, released to
the sponsor or other holder of such account). The proposed rule would
prohibit the sponsor from structuring a deal where it receives such
amounts at a faster rate than the rate at which principal is paid to
investors in all ABS interests in the securitization, measured for each
future payment date. Since the cash flows projected to be paid to
sponsors (or released to the sponsor or other holder of the horizontal
cash reserve account) and all ABS interests would already be calculated
at the closing of the transactions as part of the fair value
calculation, it should not be unduly complex or burdensome for sponsors
to project the cash flows to be paid to the eligible horizontal
residual interest (or released to the sponsor or other holder of the
horizontal cash reserve account) and the principal to be paid to all
ABS interests on each payment date. To compute the fair value of
projected cash flows to be paid to the eligible horizontal residual
interest (or released to the sponsor or other holder of the horizontal
cash reserve account) on each payment date, the sponsor would discount
the projected cash flows to the eligible horizontal residual interest
on each payment date (or released to the sponsor or other holder of the
horizontal cash reserve account) using the same discount rate that was
used in the fair value calculation (or the amount that must be placed
in an eligible horizontal cash reserve account, equal to the fair value
of an eligible horizontal residual
[[Page 57939]]
interest). To compute the cumulative fair value of cash flows projected
to be paid to the eligible horizontal residual interest through each
payment date, the sponsor would add the fair value of cash flows to the
eligible horizontal residual interest (or released to the sponsor or
other holder of the horizontal cash reserve account) from issuance
through each payment date (or the termination of the horizontal cash
reserve account). The ratio of the cumulative fair value of cash flows
projected to be paid to the eligible horizontal residual interest (or
released to the sponsor or other holder of the horizontal cash reserve
account) at each payment date divided by the fair value of the eligible
horizontal residual interest (or the amount that must be placed in an
eligible horizontal cash reserve account, equal to the fair value of an
eligible horizontal residual interest) at issuance (the EHRI recovery
percentage) measures how quickly the sponsor can be projected to
recover the fair value of the eligible horizontal residual interest. To
measure how quickly investors as a whole are projected to be repaid
principal through each payment date, the sponsor would divide the
cumulative amount of principal projected to be paid to all ABS
interests through each payment date by the total principal of ABS
interests at issuance (ABS recovery percentage).
In order to comply with the proposed rule, the sponsor, prior to
the issuance of the eligible horizontal residual interest (or funding a
horizontal cash reserve account), or at the time of any subsequent
issuance of ABS interests, as applicable, would have to certify to
investors that it has performed the calculations required by section
4(b)(2)(i) of the proposed rule and that the EHRI recovery percentages
are not expected to be larger than the ABS recovery percentages for any
future payment date.\44\ In addition, the sponsor would have to
maintain record of such calculations and certifications in written form
in its records and must provide disclosure upon request to the
Commission and its appropriate Federal banking agency, if any, until
three years after all ABS interests are no longer outstanding. If this
test fails for any payment date, meaning that the eligible horizontal
residual interest is projected to recover a greater percentage of its
fair value than the percentage of principal projected to be repaid to
all ABS interests with respect to such future payment date, the
sponsor, absent provisions in the cash flow waterfall that prohibit
such excess projected payments from being made on such payment date,
would not be in compliance with the requirements of section 4(b)(2) of
the proposed rule. For example, the schedule of target
overcollateralization in an automobile loan securitization might need
to be adjusted so that the sponsor's retained interest satisfies the
eligible horizontal residual interest repayment restriction.
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\44\ See proposed rule at Sec. ----.4(b).
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The cash flow projection would be a one-time calculation performed
at issuance on projected cash flows. This is in part to limit
operational burdens and to allow for sponsors to receive the upside
from a transaction performing above expectations in a timely fashion.
It should also minimize increases in the cost of credit to borrowers as
a result of the risk retention requirement. At the same time, the
restriction that a sponsor cannot structure a transaction in which the
sponsor is projected to recover the fair value of the eligible
horizontal residual interest any faster than all investors are repaid
principal should help to maintain the alignment of interests of the
sponsor with those of investors in the ABS, while providing flexibility
for various types of securitization structures. Moreover, the
restriction would permit a transaction to be structured so that the
sponsor could receive a large, one-time payment, which is a feature
common in deals where certain cash flows that would otherwise be paid
to the eligible horizontal residual interest are directed to pay other
classes, such as a money market tranche in an automobile loan
securitization, provided that such payment did not cause a failure to
satisfy the projected payment test.
On the other hand, the restriction would prevent the sponsor from
structuring a transaction in which the sponsor is projected to be paid
an amount large enough to increase the leverage of the transaction by
more than the amount which existed at the issuance of the asset-backed
securities. In other words, the purpose of the restriction is to
prevent sponsors from structuring a transaction in which the eligible
horizontal residual interest is projected to receive such a
disproportionate amount of money that the sponsor's interests are no
longer aligned with investors' interests. For example, if the sponsor
has recovered all of the fair value of an eligible horizontal residual
interest, the sponsor effectively has no retained risk if losses on the
securitized assets occur later in the life of the transaction.
In addition, in light of the fact that the EHRI recovery percentage
calculation is determined one time, before closing of the transaction,
based on the sponsor's projections, the agencies are proposing to
include an additional disclosure requirement about the sponsor's past
performance in respect to the EHRI recovery percentage calculation. For
each transaction that includes an EHRI, the sponsor will be required to
make a disclosure that looks back to all other EHRI transactions the
sponsor has brought out under the requirements of the risk retention
rules for the previous five years, and disclose the number of times the
actual payments made to the sponsor under the EHRI exceeded the amounts
projected to be paid to the sponsor in determining the Closing Date
Projected Cash Flow Rate (as defined in section 4(a) of the proposed
rule).
Similar to the original proposal, the proposed rule would allow a
sponsor, in lieu of holding all or part of its risk retention in the
form of an eligible horizontal residual interest, to cause to be
established and funded, in cash, a reserve account at closing
(horizontal cash reserve account) in an amount equal to the same dollar
amount (or corresponding amount in the foreign currency in which the
ABS are issued, as applicable) as would be required if the sponsor held
an eligible horizontal residual interest.\45\
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\45\ See proposed rule at Sec. ----.4(c).
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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. Some commenters on the original proposal
recommended relaxing the investment restrictions on the horizontal cash
reserve account to accommodate foreign transactions. The proposed rule
includes several important restrictions and limitations on such a
horizontal cash reserve account to ensure that a sponsor that
establishes a horizontal cash reserve account would be exposed to the
same amount and type of credit risk on the underlying assets as would
be the case if the sponsor held an eligible horizontal residual
interest. For securitization transactions where the underlying loans or
the ABS interests issued are denominated in a foreign currency, the
amounts in the account may be invested in sovereign bonds issued in
that foreign currency or in fully insured deposit accounts denominated
in the foreign currency in a foreign bank (or a subsidiary thereof)
whose home country supervisor (as defined in section 211.21 of the
Board's Regulation K) \46\ has adopted capital standards consistent
with the Capital Accord of the Basel Committee on Banking Supervision,
as amended, provided the foreign bank is
[[Page 57940]]
subject to such standards.\47\ In addition, amounts that could be
withdrawn from the account to be distributed to a holder of the account
would be restricted to the same degree as payments to the holder of an
eligible horizontal residual interest (such amounts to be determined as
though the account was an eligible horizontal residual interest), and
the sponsor would be required to comply with all calculation
requirements that it would have to perform with respect to an eligible
horizontal residual interest in order to determine permissible
distributions from the cash account.
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\46\ 12 CFR 211.21.
\47\ Otherwise, as in the original proposal, amounts in a
horizontal cash reserve account may only be invested in: (1) United
States Treasury securities with remaining maturities of one year or
less; and (2) 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 rule at Sec. ----.4(c)(2).
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Disclosure requirements would also be required with respect to a
horizontal cash reserve account, including the fair value and
calculation disclosures required with respect to an eligible horizontal
residual interest, as discussed below.
The original proposal included tailored disclosure requirements for
the vertical, horizontal, and L-shaped risk retention options. A few
commenters recommended deleting the proposed requirement that the
sponsor disclose the material assumptions and methodology used in
determining the aggregate dollar amount of ABS interests issued by the
issuing entity in the securitization. In the proposed rule, the
agencies are proposing disclosure requirements similar to those in the
original proposal, with some modifications, and are proposing to add
new requirements for the fair value measurement and to reflect the
structure of the proposed standard risk retention option.
The proposed rule would require sponsors to provide or cause to be
provided to potential investors a reasonable 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)
disclosure of:
The fair value (expressed as a percentage of the fair
value of all ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS are issued, as applicable)) of the eligible horizontal residual
interest that will be retained (or was retained) by the sponsor at
closing, and the fair value (expressed as a percentage of the fair
value of all ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS are issued, as applicable)) 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 to be retained by the sponsor;
A description of the methodology used to calculate the
fair value of all classes of ABS interests;
The key inputs and assumptions used in measuring the total
fair value of all classes of ABS interests and the fair value of the
eligible horizontal residual interest retained by the sponsor
(including the range of information considered in arriving at such key
inputs and assumptions and an indication of the weight ascribed
thereto) and the sponsor's technique(s) to derive the key inputs;
For sponsors that elect to utilize the horizontal risk
retention option, the reference data set or other historical
information that would enable investors and other stakeholders to
assess the reasonableness of the key cash flow assumptions underlying
the fair value of the eligible horizontal residual interest. Examples
of key cash flow assumptions may include default, prepayment, and
recovery;
Whether any retained vertical interest is retained as a
single vertical security or as separate proportional interests;
Each class of ABS interests in the issuing entity
underlying the single vertical security at the closing of the
securitization transaction and the percentage of each class of ABS
interests in the issuing entity that the sponsor would have been
required to retain if the sponsor held the eligible vertical interest
as a separate proportional interest in each class of ABS interest in
the issuing entity; and
The fair value (expressed as a percentage of the fair
value of all ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS are issued, as applicable)) of any single vertical security or
separate proportional interests that will be retained (or was retained)
by the sponsor at closing, and the fair value (expressed as a
percentage of the fair value of all ABS interests issued in the
securitization transaction and dollar amount (or corresponding amount
in the foreign currency in which the ABS are issued, as applicable)) of
the single vertical security or separate proportional interests
required to be retained by the sponsor in connection with the
securitization transaction.
Consistent with the original proposal, 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
1(a). Should the agencies require a minimum proportion of risk
retention held by a sponsor under the standard risk retention option to
be composed of a vertical component or a horizontal component? 1(b).
Why or why not?
2(a). The agencies observe that horizontal risk retention, as
first-loss residual position, generally would impose the most economic
risk on a sponsor. Should a sponsor be required to hold a higher
percentage of risk retention if the sponsor retains only an eligible
vertical interest under this option or very little horizontal risk
retention? 2(b). Why or why not?
3. Are the disclosures proposed sufficient to provide investors
with all material information concerning the sponsor's retained
interest in a securitization transaction and the methodology used to
calculate fair value, as well as enable investors and the agencies to
monitor whether the sponsor has complied with the rule?
4(a). Is the requirement for sponsors that elect to utilize the
horizontal risk retention option to disclose the reference data set or
other historical information that would enable investors and other
stakeholders to assess the reasonableness of the key cash flow
assumptions underlying the fair value of the eligible horizontal
residual interest useful? 4(b). Would the requirement to disclose this
information impose a significant cost or undue burden to sponsors?
4(c). Why or why not? 4(d). If not, how should proposed disclosures be
modified to better achieve those objectives?
5(a). Does the proposal require disclosure of any information that
should not be made publicly available? 5(b). If so, should such
information be made available to the Commission and Federal banking
agencies upon request?
6. Are there any additional factors that the agencies should
consider with respect to the standard risk retention?
7. To what extent would the flexible standard risk retention option
address concerns about a sponsor having to consolidate a securitization
vehicle for accounting purposes due to the risk retention requirement
itself, given that
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the standard risk retention option does not require a particular
proportion of horizontal to vertical interest?
8(a). Is the proposed approach to measuring risk retention
appropriate? 8(b). Why or why not?
9(a). Would a different measurement of risk retention be more
appropriate? 9(b). Please provide details and data supporting any
alternative measurement methodologies.
10(a). Is the restriction on certain projected payments to the
sponsor with respect to the eligible horizontal residual interest
appropriate and sufficient? 10(b). Why or why not?
11(a). The proposed restriction on certain projected payments to
the sponsor with respect to the eligible horizontal residual interest
compares the rate at which the sponsor is projected to recover the fair
value of the eligible horizontal residual interest with the rate which
all other investors are projected to be repaid their principal. Is this
comparison of two different cash flows an appropriate means of
providing incentives for sound underwriting of ABS? 11(b). Could it
increase the cost to the sponsor of retaining an eligible horizontal
residual interest? 11(c). Could sponsors or issuers manipulate this
comparison to reduce the cost to the sponsor of retaining an eligible
horizontal residual interest? How? 11(d). If so, are there adjustments
that could be made to this requirement that would reduce or eliminate
such possible manipulation? 11(e). Would some other cash flow
comparison be more appropriate? 11(f). If so, which cash flows should
be compared? 11(g). Does the proposed requirement for the sponsor to
disclose, for previous ABS transactions, the number of times the
sponsor was paid more than the issuer predicted for such transactions
reach the right balance of incremental burden to the sponsor while
providing meaningful information to investors? 11(h). If not, how
should it be modified to better achieve those objectives?
12(a). Does the proposed form of the single vertical security
accomplish the agencies' obje