Enterprise Regulatory Capital Framework-Prescribed Leverage Buffer Amount and Credit Risk Transfer, 14764-14772 [2022-04529]
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Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Rules and Regulations
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Part 1240
RIN 2590–AB17
Enterprise Regulatory Capital
Framework—Prescribed Leverage
Buffer Amount and Credit Risk
Transfer
Federal Housing Finance
Agency.
ACTION: Final rule.
AGENCY:
The Federal Housing Finance
Agency (FHFA or the Agency) is
adopting a final rule (final rule) that
amends the Enterprise Regulatory
Capital Framework (ERCF) by refining
the prescribed leverage buffer amount
(PLBA or leverage buffer) and credit risk
transfer (CRT) securitization framework
for the Federal National Mortgage
Association (Fannie Mae) and the
Federal Home Loan Mortgage
Corporation (Freddie Mac, and with
Fannie Mae, each an Enterprise). The
final rule also makes technical
corrections to various provisions of the
ERCF that was published on December
17, 2020.
DATES: This rule is effective May 16,
2022.
FOR FURTHER INFORMATION CONTACT:
Andrew Varrieur, Senior Associate
Director, Office of Capital Policy, (202)
649–3141, Andrew.Varrieur@fhfa.gov;
Christopher Vincent, Senior Financial
Analyst, Office of Capital Policy, (202)
649–3685, Christopher.Vincent@
fhfa.gov; or Ming-Yuen Meyer-Fong,
Associate General Counsel, Office of
General Counsel, (202) 649–3078, MingYuen.Meyer-Fong@fhfa.gov. These are
not toll-free numbers. For TTY/TRS
users with hearing and speech
disabilities, dial 711 and ask to be
connected to any of the contact numbers
above.
SUPPLEMENTARY INFORMATION:
SUMMARY:
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Table of Contents
I. Introduction
II. Overview of the Final Rule
A. Amendments to the ERCF
B. Effective Date
III. General Comments on the Proposed Rule
A. 20 Percent Risk Weight Floor
B. Multifamily Countercyclical Adjustment
IV. Leverage Buffer
V. Credit Risk Transfer
VI. ERCF Technical Corrections
VII. Paperwork Reduction Act
VIII. Regulatory Flexibility Act
IX. Congressional Review Act
I. Introduction
On September 27, 2021, FHFA
published in the Federal Register a
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notice of proposed rulemaking
(proposed rule) seeking comments on
amendments to the ERCF that would
refine the leverage buffer and the riskbased capital treatment for retained CRT
exposures.1 FHFA proposed these
amendments to ensure that the ERCF
appropriately reflects the risks inherent
to the Enterprises’ business models and
contains proper incentives for the
Enterprises to distribute acquired credit
risk to private investors rather than to
buy and hold that risk. In meeting these
objectives, the proposed amendments
would help restore FHFA’s intended
paradigm of having the Enterprises’
leverage capital requirements and buffer
provide a credible backstop to their riskbased capital requirements and buffers,
enhancing the safety and soundness of
the Enterprises. FHFA is now adopting
in this final rule the proposed
amendments, substantially as proposed.
FHFA published the ERCF on
December 17, 2020 2 with the purpose of
implementing a going-concern
regulatory capital standard to ensure
that each Enterprise operates in a safe
and sound manner and is positioned to
fulfill its statutory mission to provide
stability and ongoing assistance to the
secondary mortgage market across the
economic cycle.3 The ERCF, which
became effective on February 16, 2021,
aimed to address issues that arose
during the notice and comment period
such as the pro-cyclicality of the singlefamily risk-based capital requirements,
the quality of Enterprise capital used to
meet the capital requirements, and the
1 86
FR 53230.
FR 82150.
3 In conservatorships, the Enterprises are
supported by Senior Preferred Stock Purchase
Agreements (PSPAs) between the U.S. Department
of the Treasury (Treasury) and each Enterprise,
through FHFA as its conservator (Fannie Mae’s
Amended and Restated Senior Preferred Stock
Purchase Agreement with Treasury (September 26,
2008), https://www.fhfa.gov/Conservatorship/
Documents/Senior-Preferred-Stock-Agree/FNM/
SPSPA-amends/FNM-Amend-and-Restated-SPSPA_
09-26-2008.pdf; Freddie Mac’s Amended and
Restated Senior Preferred Stock Purchase
Agreement with Treasury (September 26, 2008),
https://www.fhfa.gov/Conservatorship/Documents/
Senior-Preferred-Stock-Agree/FRE/SPSPA-amends/
FRE-Amended-and-Restated-SPSPA_09-262008.pdf). The PSPAs, as amended by letter
agreements executed by the parties on January 14,
2021 (2021 Fannie Mae Letter Agreement, https://
home.treasury.gov/system/files/136/ExecutedLetter-Agreement-for-Fannie-Mae.pdf; 2021 Freddie
Mac Letter Agreement, https://home.treasury.gov/
system/files/136/Executed-Letter-Agreement-forFreddie%20Mac.pdf), include a covenant at section
5.15 which states: ‘‘[The Enterprise] shall comply
with the Enterprise Regulatory Capital Framework
[published in the Federal Register at 85 FR 82150
on December 17, 2020] disregarding any subsequent
amendment or other modifications to that rule.’’
Modifying that covenant will require agreement
between the Treasury and FHFA under section 6.3
of the PSPAs.
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quantity of required capital at the
Enterprises. Accordingly, the ERCF is
significantly stronger than the statutory
framework which governed the
Enterprises’ capital requirements prior
to entering conservatorships.
However, after finalizing the ERCF,
FHFA identified specific aspects of the
framework that might incentivize risk
taking in certain economic
environments and create disincentives
to the Enterprises’ CRT programs.
Together, these features of the ERCF
could result in an excessive buildup of
risk accruing to taxpayers and the
housing finance market, particularly
because the Enterprises presently are
severely undercapitalized and lack the
resources on their own to safely absorb
the credit risk associated with their
normal operations.
FHFA views the transfer of risk,
particularly credit risk, to a broad set of
investors as an important tool to reduce
taxpayer exposure to the risks posed by
the Enterprises and to mitigate systemic
risk caused by the size and monoline
nature of the Enterprises’ businesses.
Since their development began in 2013,
the CRT programs have been the
Enterprises’ primary mechanism to
successfully effectuate reliable risk
transfer to the private sector. Through
these programs, the Enterprises have
shed a significant amount of credit risk
to help protect against potential losses
while the PSPAs have significantly
limited the Enterprises’ ability to hold
capital and withstand losses through
normal operations. During this current
period where the Enterprises are
building capital, CRT remains an
important risk mitigation tool to protect
taxpayers against the heightened risk of
potential PSPA draws in the event of a
significant stress to the housing sector.
It is therefore crucial that the
Enterprises’ capital requirements are
appropriately sized, where the leverage
capital framework is a credible backstop
to the risk-based capital framework and
where responsible and effective risk
transfer is not unduly discouraged.
II. Overview of the Final Rule
A. Amendments to the ERCF
After carefully considering the
comments on the proposed rule, and as
described in this preamble, FHFA is
adopting, substantially as proposed,
amendments to the leverage buffer and
risk-based capital treatment of CRT
exposures. FHFA continues to believe
that the amendments in this final rule
will lessen the potential deterrents to
Enterprise risk transfer by properly
aligning incentives in the ERCF and will
position the Enterprises to operate in a
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safe and sound manner to fulfill their
statutory mission throughout the
economic cycle, both during and after
conservatorships. Specifically, the final
rule will:
• Replace the fixed leverage buffer
equal to 1.5 percent of an Enterprise’s
adjusted total assets with a dynamic
leverage buffer equal to 50 percent of
the Enterprise’s stability capital buffer
as calculated in accordance with 12 CFR
1240.400;
• Replace the prudential floor of 10
percent on the risk weight assigned to
any retained CRT exposure with a
prudential floor of 5 percent on the risk
weight assigned to any retained CRT
exposure; and
• Remove the requirement that an
Enterprise must apply an overall
effectiveness adjustment to its retained
CRT exposures in accordance with 12
CFR 1240.44(f) and (i).
In addition, the final rule will
implement technical corrections to
various provisions of the ERCF that was
published on December 17, 2020,
highlighted by a significant
typographical error in the definition of
the long-term HPI trend that constitutes
the basis for calculating the singlefamily countercyclical adjustment.
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B. Effective Date
Under the rule published on
December 17, 2020 establishing the
ERCF, an Enterprise will not be subject
to any requirement in the ERCF until
the compliance date for the requirement
as detailed in the ERCF. The effective
date for the ERCF was February 16,
2021. The effective date for the ERCF
amendments and technical corrections
in this final rule will be 60 days after
the day of publication of this final rule
in the Federal Register.
III. General Comments on the Proposed
Rule
FHFA received 89 public comment
letters on the proposed rule from a
variety of interested parties, including
private individuals, trade associations,
consumer advocacy groups, think-tanks
and institutes, and financial
institutions.4 In general, and as
discussed in greater detail below in the
relevant sections of this preamble,
commenters were supportive of FHFA’s
proposed amendments to both the
leverage buffer and the risk-based
capital treatment of retained CRT
4 See comments on Amendments to the Enterprise
Regulatory Capital Framework Rule—Prescribed
Leverage Buffer Amount and Credit Risk Transfer,
available at https://www.fhfa.gov/
SupervisionRegulation/Rules/Pages/CommentList.aspx?RuleID=708. The comment period for the
proposed rule closed on November 26, 2021.
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exposures. Overall, most commenters
supported FHFA’s efforts to restore the
intended paradigm between leverage
capital and risk-based capital at the
Enterprises and to properly incentivize
risk transfer within the ERCF. However,
as discussed in the relevant sections of
this preamble, FHFA also received a
number of comments indicating concern
over various aspects of the proposed
amendments.
Over half of the 89 comments FHFA
received during this notice and
comment period focused on issues not
directly related to the proposed
amendments or technical corrections. In
these letters, commenters offered views
on important topics such as loan-level
pricing adjustments, incorporating
guarantee fees into capital requirements,
the ERCF grids and risk multipliers, the
magnitude of single-family and
multifamily risk weights, various other
aspects of the CRT securitization
framework, the costs of CRT
transactions, and the overall complexity
of the ERCF, among others. In addition,
commenters offered views on housing
finance reform and on matters relating
to the Enterprises’ conservatorships,
including issues related to the
Enterprises’ consent to conservatorships
in 2008, subsequent actions by FHFA or
the U.S. Department of the Treasury
(Treasury), the magnitude of funds
remitted to Treasury by the Enterprises
relative to cumulative draws, Treasury’s
financial interests in the Enterprises,
and the PSPAs. FHFA acknowledges the
importance of these topics and will
thoroughly consider the public’s
feedback on these issues when relevant
rulemakings and policy decisions are
under consideration.
In addition to soliciting comments on
the proposed amendments and technical
corrections, FHFA also sought feedback
on two additional topics related to the
ERCF: The 20 percent risk weight floor
on single-family and multifamily
mortgage exposures and potential
options for a countercyclical adjustment
for multifamily mortgage exposures.
FHFA received feedback on both topics.
A. 20 Percent Risk Weight Floor
FHFA asked the public whether, in
light of the proposed changes to the
leverage buffer and the risk-based
capital requirements for retained CRT
exposures, the prudential risk weight
floor of 20 percent on single-family and
multifamily mortgage exposures was
appropriately calibrated. FHFA did not
propose a change to the risk weight floor
on single-family and multifamily
mortgage exposures. Nine commenters
provided feedback on this question, and
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the opinions expressed by commenters
were varied.
Some commenters recommended
reducing or eliminating the 20 percent
risk weight floor. Among these
commenters, some suggested that
lowering the floor is appropriate due to
the Enterprises’ improved balance
sheets and mortgage lending standards
relative to pre-crisis economics. Others
suggested that the 20 percent risk
weight floor in the ERCF is not
appropriately calibrated. Another
commenter suggested that the 20
percent floor distorts market signals
about risk and incentivizes risk taking
by the Enterprises.
Conversely, some commenters
recommended maintaining the 20
percent risk weight floor. Among these
commenters, some suggested that such a
floor is prudent to ensuring the safety
and soundness of the Enterprises. One
commenter suggested that the risk
weight floor is useful as an incentive for
the Enterprises to transfer credit risk on
lower-risk exposures. Another
commenter suggested that the risk
weight floor is important to mitigate the
model risks inherent in the risksensitive methodology FHFA used to
calibrate risk weights for mortgage
exposures. One commenter suggested
that reducing this risk weight floor
could significantly increase the gap
between the credit risk capital
requirements of the Enterprises and
other market participants.
One of the key objectives FHFA cited
for proposing amendments to the ERCF
was to ensure the leverage capital
framework was a credible backstop to
the risk-based capital framework.
Despite changes to the 2020 ERCF
proposed rule 5 that increased risk-based
capital under the 2020 ERCF final rule,
including raising the 15 percent risk
weight floor on single-family and
multifamily mortgage exposures to 20
percent and changing the dataset on
which the single-family countercyclical
adjustment is calculated, tier 1 leverage
capital remains greater than tier 1 riskbased capital at each Enterprise in the
absence of the leverage buffer and CRT
amendments in the proposed rule.
Should FHFA materially reduce the 20
percent floor on single-family and
multifamily mortgage exposures without
taking additional action, the likelihood
that the leverage framework would once
again be the binding capital constraint
for the Enterprises would significantly
increase. For this reason, and given the
commenters’ diverse feedback, FHFA
has determined not to take action
related to the 20 percent risk weight
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FR 39274.
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floor on single-family and multifamily
mortgage exposures at this time.
B. Multifamily Countercyclical
Adjustment
FHFA also asked the public to
recommend an approach for mitigating
the pro-cyclicality of the credit risk
capital requirements for multifamily
mortgage exposures that relies only on
non-proprietary data or indices. Eight
commenters provided feedback on this
question, recommending three different
types of approach. The first group of
commenters suggested solutions
following the same principles as FHFA’s
single-family countercyclical
adjustment, where risk attributes such
as the loan-to-value (LTV) ratio would
be adjusted up or down depending on
deviations from a long-term trend. For
use in this approach, commenters
recommended FHFA consider the
property index published by the
National Council of Real Estate
Investment Fiduciaries (NCREIF), longterm vacancy rates, long-term property
value and income growth rates, and
adjusted cap rates. The second group of
commenters recommended FHFA
consider an approach where the
countercyclical adjustment is based on
ratios of index peaks to current values.
Commenters suggested FHFA could use
the NCREIF property index for property
values and Enterprise investor reporting
for net operating income (NOI). This
approach would assume that the
multifamily risk weights already
account for a 35 percent shock to
property values and a 15 percent shock
to NOI, so an adjustment would be
made only to the extent that the
property value and/or NOI index ratios
suggest a further adjustment is
necessary. Finally, one commenter
suggested that FHFA should address
pro-cyclicality for multifamily mortgage
exposures by replacing mark-to-market
LTV with original LTV and mark-tomarket debt service coverage ratio
(DSCR) with original DSCR.
FHFA appreciates the public’s
feedback on this topic and is committed
to addressing the pro-cyclicality in the
capital required for multifamily
mortgage exposures. However, given the
complexity of potential solutions and
the diversity of suggestions provided by
commenters, FHFA has determined that
this topic requires further consideration,
potentially in a future rulemaking.
Therefore, FHFA has determined not to
take action related to a multifamily
countercyclical adjustment at this time.
IV. Leverage Buffer
The proposed rule would amend the
ERCF by replacing the fixed tier 1
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capital leverage buffer equal to 1.5
percent of an Enterprise’s adjusted total
assets with a dynamic tier 1 capital
leverage buffer equal to 50 percent of
the Enterprise’s stability capital buffer.6
In the proposed rule, FHFA presented
several benefits to this approach.
First, a properly calibrated leverage
ratio requirement and leverage buffer
are critical aspects of a sound regulatory
capital framework. The purpose of
leverage capital is to promote financial
stability by establishing a robust capital
floor that persists throughout the
economic cycle and by limiting risk
taking when risk-based capital may
otherwise fall to unduly low levels.
Recalibrating the 1.5 percent leverage
buffer will promote safety and
soundness and financial stability at the
Enterprises by lessening the likelihood
that leverage capital will drive
Enterprise decision-making in the
majority of economic environments and
reduce the frequency in which an
Enterprise has an incentive to take on
more risk in a capital optimization
strategy. Furthermore, restoring leverage
capital to a position of a credible
backstop will allow other aspects of the
ERCF, namely the risk-based capital
requirements, including the singlefamily countercyclical adjustment, to
work as intended. Second, the proposed
leverage buffer amendment will
encourage the Enterprises to transfer
risk rather than to buy and hold risk.
Third, a leverage framework with a
dynamic buffer that grows and shrinks
as an Enterprise grows and shrinks,
respectively, will function as a better
backstop to a risk-based capital
framework that includes a stability
capital buffer linked to an Enterprise’s
size. And fourth, a dynamic leverage
buffer that is tied to the stability capital
buffer will further align the ERCF with
Basel III standards. Internationally,
under the latest Basel framework
adopted by the Bank for International
Settlements, global systemically
important banks (G–SIBs) are required
to hold a leverage buffer equal to 50
percent of their higher loss-absorbency
risk-based requirements—a measure
akin to the G–SIB surcharge in the U.S.
banking framework—to tailor an
institution’s leverage ratio to its
business activities and risk profile.
The vast majority of comments FHFA
received supported decreasing the tier 1
capital leverage buffer from a fixed 1.5
percent of adjusted total assets. Many
commenters supported FHFA’s
proposed approach, while some
supported decreasing the leverage buffer
without tying it to the stability capital
6 12
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buffer and others favored eliminating
the leverage buffer altogether.
Many commenters who recommended
decreasing the leverage buffer suggested
doing so because it is preferrable for
risk-based capital metrics to be the
binding capital constraint more
frequently than non-risk-based capital
floors such as leverage. Commenters
suggested that this paradigm helps
eliminate incentives for the Enterprises
to increase risk taking and risk retention
while providing flexibility to the
Enterprises as they manage risk and
rebuild robust levels of capital. In
addition, commenters agreed with
FHFA that a smaller leverage buffer
would encourage the transfer of
mortgage credit risk from the
Enterprises to private investors. Another
commenter stated that the 1.5 percent
leverage buffer is unnecessary relative to
the Enterprises’ recent stress test results,
and that such a high buffer would likely
be excessive to the point of impairing
the Enterprises’ ability to support the
market and meet their mission.
Many commenters expressed their
general support for FHFA’s proposed
approach of tying the leverage buffer to
the stability capital buffer. Commenters
contended that a dynamic leverage
buffer that expands and contracts with
an Enterprise as its size and strategy
evolve would more accurately reflect
the Enterprise’s risk and thereby help
facilitate the Enterprises’ ability to carry
out their missions through all economic
cycles. Thus, commenters reasoned that
the proposed approach would help
leverage serve as a credible backstop to
the risk-based capital framework and
allow the Enterprises to withstand
losses in excess of those experienced
during the great financial crisis. Other
commenters supported FHFA’s effort to
move toward a dynamic leverage buffer
to better reflect the spirit and intent of
the leverage ratio, and also because
dynamic buffers have proven to be an
effective tool for managing capital at the
global systemically important banks.
Another commenter suggested that the
proposed approach will help provide
stability in the mortgage market and
increase investor confidence in the
Enterprises and overall economy
throughout the economic cycle, helping
stave off the need for emergency
taxpayer intervention. Another
commenter stated that basing the
leverage buffer on a risk-based capital
metric is preferrable because it better
reflects the varying levels of risk within
an Enterprise’s particular pool of total
assets.
Some commenters expressed more
reserved support for setting the leverage
buffer equal to 50 percent of the stability
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capital buffer. Several commenters
expressed concern that tying the
leverage buffer to the stability capital
buffer could have pro-cyclical
implications in the sense that an
Enterprise’s market share tends to grow
during a stress when other market
participants are growing slowly or
shrinking. Thus, requiring an Enterprise
to increase its leverage buffer during the
period when the Enterprise is fulfilling
its countercyclical role could limit the
Enterprise’s ability to supply market
liquidity when it is most needed. In
contrast to these commenters’ concern,
FHFA anticipates that setting the
leverage buffer equal to 50 percent of
the stability capital buffer will actually
reduce the pro-cyclicality of the
leverage framework because increases to
an Enterprise’s adjusted total assets are
reflected in the fixed 1.5 percent
leverage buffer immediately whereas
increases to an Enterprise’s share of the
overall mortgage market are reflected in
the stability capital buffer with up to a
two-year delay.7 FHFA believes this
delayed need to raise capital relative to
the current ERCF will facilitate the
Enterprises’ abilities to provide liquidity
to the mortgage market during a stress,
even if an Enterprise grows its portfolio
as a result of fulfilling its
countercyclical mission.
A few other commenters supported
FHFA’s proposed amendments but
recommended that FHFA: i. Continue to
study the relationship between leverage,
risk-based capital, and the stability
capital buffer to determine definitively
that the leverage buffer should be linked
to the stability capital buffer; and ii.
provide historical data affirming the
proposed approach and demonstrating
that under the proposed amendments
leverage will rarely exceed risk-based
capital.
Another commenter recommended
that FHFA must ensure that its
regulatory capital framework avoids
discriminatory outcomes and promotes
equitable treatment of borrowers and
communities of color. One commenter
supported FHFA’s proposed
amendments but expressed a desire for
FHFA to be more anticipatory and
expansive in the list of provisions it
chooses to reconsider.
Some commenters recommended
decreasing the leverage buffer but not
tying it to the stability capital buffer.
One commenter expressed concern that
the stability capital buffer was itself
arbitrarily determined, so by association
a leverage buffer equal to 50 percent of
the stability capital buffer is also
arbitrarily determined. This commenter
7 Id.
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recommended that FHFA consider
alternative methods of the setting the
leverage buffer that are more closely tied
to an Enterprise’s risk. One commenter
recommended that FHFA decrease an
Enterprise’s leverage buffer by some
estimate of future guarantee fees.
Similarly, another commenter
recommended that FHFA decrease an
Enterprise’s leverage buffer to reflect
risk transferred through CRT in the
same way that the risk-based capital
framework provides capital relief for
CRT. Several commenters recommended
FHFA simply reduce the leverage buffer
from 1.5 percent of adjusted total assets
to a lower percentage of adjusted total
assets, such as 0.5 percent, because
market share is not a reasonable
representation of Enterprise risk.
Some commenters recommended
FHFA eliminate the leverage buffer
completely. These commenters
generally viewed the leverage buffer as
not necessary for the leverage
framework to be a credible backstop to
the risk-based capital framework. Two
commenters suggested the 2.5 percent
leverage capital requirement is itself
sufficient as a credible backstop to riskbased capital in the ERCF. Another
commenter suggested the leverage buffer
is unnecessary because: i. Stress losses
on a new month of originations are
lower than the capital required by the
ERCF; and ii. future guarantee fees
provide a significant source of claimspaying resources, which are not
considered as a source of capital in the
framework. One commenter suggested
FHFA eliminate the leverage buffer
rather than decrease it because a future
FHFA director can just as easily
increase it again.
Finally, some commenters
recommended that FHFA maintain the
fixed 1.5 percent leverage buffer. One
commenter claimed that FHFA does not
provide evidence that the existing ERCF
leverage-based requirements would be
binding throughout the economic cycle,
and that it is difficult to envision any
realistic scenario in which the proposed
amendments to the leverage buffer
would result in a leverage-based
requirement that could exceed the riskbased requirement, violating the
concept of being a credible backstop.
FHFA disagrees with the premise of this
argument because the argument
compares tier 1 leverage capital to
adjusted total risk-based capital, which
includes tier 2 capital. When looking
only at tier 1 capital, one can readily
construct realistic scenarios where tier 1
risk-based capital at an Enterprise
decreases due to a period of sustained
house price appreciation such that tier
1 leverage capital exceeds tier 1 risk-
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14767
based capital and therefore leverage
becomes the binding capital constraint.
The commenter also suggests that
FHFA fails to explain how the
calibration of the 1.5 percent leverage
buffer is flawed and how the proposed
leverage buffer is analogous to the riskweighted-asset-based Basel leverage
buffer for international G–SIBs. In the
proposed rule, FHFA discussed how the
leverage framework unduly
disincentivizes risk transfer
predominately due to the outsized
leverage buffer, and how a fixed
leverage buffer may not concurrently be
appropriate for both a large and a small
Enterprise. FHFA views these
characteristics as flaws in the
calibration of the leverage buffer
because the design could result in
taxpayers bearing excessive undue risk
for as long as the Enterprises are in
conservatorships and excessive risk to
the housing finance market both during
and after conservatorships. In addition,
FHFA discussed how the proposed
leverage buffer is similar to the Basel
leverage buffer in that both are derived
from measures that attempt to quantify
the amount of systemic risk posed by
the Enterprises and G–SIBs,
respectively—the stability capital buffer
in the ERCF and the G–SIB surcharge in
the Basel framework. There are, of
course, structural differences between
the two buffers in both derivation and
application, as is appropriate given that
the Enterprises and the other financial
institutions have different business
models.
Furthermore, two commenters noted
that the Financial Stability Oversight
Council’s (FSOC) review of the 2020
ERCF proposed rule found that capital
requirements ‘‘that are materially less
than those contemplated by [the
proposed rule] would likely not
adequately mitigate the potential
stability risk posed by the Enterprises,’’
and that the proposed rule would result
in a material two-thirds reduction to the
leverage buffer, increasing risks to
taxpayers and financial stability. FHFA
generally agrees with the findings
presented in FSOC’s activities-based
review of the secondary mortgage
market.8 However, similar to
approaches followed by other financial
regulators, FHFA intends to periodically
review the ERCF and adjust various
elements as necessary to ensure the
safety and soundness of the Enterprises
so they can carry out their mission
throughout the economic cycle. In
addition, FHFA notes that Federal
Reserve officials have publicly
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identified binding leverage capital
requirements under the Supplementary
Leverage Ratio (SLR) framework as an
important issue that must be addressed
so that banks’ incentives are not skewed
to increase risk-taking. FHFA continues
to agree with this guiding principle for
the Enterprises under the ERCF.
The final rule adopts the dynamic tier
1 capital leverage buffer equal to 50
percent of the stability capital buffer as
proposed. In consideration of the public
comments on the proposed rule, FHFA
continues to believe that such a leverage
buffer determined in this manner will
best position the Enterprises to fulfil
their mission in a safe and sound
manner throughout the economic cycle
by ensuring that the leverage framework
acts as a credible backstop to the riskbased capital framework and by
encouraging the Enterprises to transfer
credit risk rather than to buy and hold
risk.
FHFA notes that the final rule will not
change the tier 1 leverage capital
requirement, which will remain at 2.5
percent of adjusted total assets. This
requirement, plus other features of the
ERCF such as the single-family
countercyclical adjustment and the risk
weight floor on single-family and
multifamily mortgage exposures, will
continue to mitigate the potential
stability risk posed by the Enterprises
and will ensure an Enterprise maintains
robust capital even during the best
economic conditions when risk-based
capital requirements might fall due to
significant house price appreciation.
In addition, FHFA continues to
believe that the leverage buffer plays an
important role in the ERCF, despite the
recommendations of several
commenters to eliminate the buffer. The
leverage buffer represents a cushion
above an Enterprise’s 2.5 percent
leverage ratio requirement that can be
drawn down in a stress scenario without
violating prompt corrective action,
providing an Enterprise with flexibility
to continue its normal operations
without risk of breaching a requirement.
V. Credit Risk Transfer
The proposed rule would replace the
prudential floor of 10 percent on the
risk weight assigned to any retained
CRT exposure with a prudential floor of
5 percent on the risk weight assigned to
any retained CRT exposure and would
remove the requirement that an
Enterprise must apply an overall
effectiveness adjustment to its retained
CRT exposures.9
Many commenters expressed the view
that CRT is an effective means by which
9 12
CFR 1240.44(f) and (i).
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to transfer risk to private markets,
protect taxpayers, and stabilize the
Enterprises and housing finance more
generally. Consequently, the vast
majority of comments FHFA received on
the proposed amendments to the riskbased capital requirements for retained
CRT exposures were generally
supportive of the amendments.
However, a minority of comments
questioned the efficacy of CRT and
noted that the amendments would
weaken the Enterprises’ financial
resilience. Several other commenters
offered broad critiques of and
suggestions for the risk-based capital
approach to CRT and the Enterprises’
CRT programs more generally. While
FHFA appreciates and considers all
comments, the following discussion
focuses on comments directly pertaining
to the amendments put forward in the
proposed rule.
CRT Risk Weight Floor
In the proposed rule, FHFA
contended that amending the CRT risk
weight floor was necessary for two
reasons. First, the 10 percent floor on
the risk weight assigned to a retained
CRT exposure unduly decreases the
capital relief provided by CRT and
reduces an Enterprise’s incentives to
engage in risk transfer. This occurs in
part because the aggregate credit risk
capital required for a retained CRT
exposure is often greater than the
aggregate credit risk capital required for
the underlying exposures, especially
when the credit risk capital
requirements on the underlying whole
loans and guarantees are low or the CRT
is seasoned. Second, the 10 percent risk
weight floor discourages CRT through
its duplicative nature. The operational
criteria for CRT, which state that FHFA
must approve each transaction as being
effective in transferring the credit risk,
as well as the Enterprises’ own ability
to mitigate unknown risks through their
underwriting standards and servicing
and loss mitigation programs, lessen the
need for a tranche-level risk weight floor
as high as 10 percent.
Commenters were generally very
supportive of the proposed amendment
to the CRT risk weight floor.
Commenters suggested that reducing the
risk weight floor on retained CRT
exposures from 10 percent to 5 percent
raises the regulatory value of risk
transfer closer to its economic value.
Commenters stated that the change
would restore the incentive for the
Enterprises to engage in CRT to disperse
credit risk among private investors and
thereby lessen the systemic risk posed
by the Enterprises. Commenters also
suggested that transferring credit risk
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away from the Enterprises strengthens
their safety and soundness and supports
the overall mortgage market, including
by promoting greater private market
participation without an adverse impact
on affordability. Several commenters
supported the 5 percent floor because it
represents a more market-sensitive
treatment of CRT and better aligns
capital to risk. In this regard, one
commenter suggested that unduly high
capital requirements will hamper an
Enterprise’s ability to fulfill its statutory
mission of facilitating loans to lowincome and very low-income borrowers
and communities. In addition,
commenters suggested that the 5 percent
floor would provide reasonable
protection from model risk while
maintaining a conservative discount to
equity capital, which has flexibility and
fungibility advantages.
Furthermore, several commenters
recommended lowering the CRT risk
weight floor below 5 percent or
eliminating it altogether. Commenters
suggested that the floor is not
analytically supported and provides
excessive protection against CRT-related
risks. One commenter’s analysis
suggested that CRT requirements are too
stringent even if the floor is removed
and recommended that FHFA calibrate
the risk-based capital requirements for
retained CRT exposures to be consistent
with the economics of CRT transactions.
A few commenters recommended
rejecting the proposed amendment in
favor of the 10 percent risk weight floor.
Several commenters claimed that the
proposed amendment weakens the
financial resilience of the Enterprises.
These commenters suggested that the
amendments will increase leverage at
the Enterprises which will increase
insolvency risk, and that FHFA should
not balance incentivizing CRT with
safety and soundness when considering
capital standards.
Some commenters generally
supported FHFA’s proposal to lower the
CRT risk weight floor but offered
alternatives to the 5 percent floor in the
proposed rule. A few commenters
recommended that FHFA apply the CRT
risk weight floor on a sliding scale such
that the risk weight floor decreases as
credit risk becomes more remote. A few
commenters suggested that the floor
should reflect an exposure-level
analysis and perhaps be functionally
related to economic variables such as
seasoning or house price appreciation.
One commenter recommended
removing the floor and using an
econometric approach that requires
capital above the risk-based capital
amount and provides a marginal benefit
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to risk reduction activities beyond stress
loss.
The final rule adopts the prudential
floor of 5 percent on the risk weight
assigned to any retained CRT exposure
as proposed. In consideration of the
public comments on the proposed rule,
FHFA continues to believe that a
prudential risk weight of 5 percent
sufficiently ensures the viability of
CRTs while mitigating their safety and
soundness, mission, and housing
stability risks. The final rule does not
eliminate the CRT risk weight floor, as
recommended by some commenters,
because the prudential floor for a
retained CRT exposure avoids treating
that exposure as posing no credit risk,
which continues to be an important
policy objective for FHFA. In addition,
FHFA has determined to finalize the 5
percent risk weight floor as proposed
rather than adopting one of the
alternatives suggested by commenters in
order to maintain consistency with
other aspects of the CRT securitization
framework that were designed with a
static risk weight floor in mind.
Overall Effectiveness Adjustment
In the proposed rule, FHFA presented
rationale for eliminating the overall
effectiveness adjustment due to the
duplicative nature of the adjustment
within the risk-based capital
requirements for retained CRT
exposures. Unlike the counterparty and
loss-timing effectiveness adjustments in
the CRT securitization framework, the
overall effectiveness adjustment does
not target specific risks. Rather, similar
to the risk weight floor on retained CRT
exposures and the CRT operational
criteria, the overall effectiveness
adjustment was designed to address
risks that are difficult to measure, such
as model risk and the loss-absorbing
benefits of equity capital relative to
CRT. FHFA reasoned that, considering
the additional elements of the CRT
securitization framework that also target
these difficult-to-measure risks, the
overall effectiveness adjustment is
duplicative and creates an unnecessary
disincentive for the Enterprises to
engage in CRT.
The vast majority of comments
supported FHFA’s proposed
amendment to eliminate the overall
effectiveness adjustment from the CRT
securitization framework. Several
commenters contended that the overall
effectiveness adjustment was redundant
and was not analytically supported.
Commenters also reasoned that the
proposed amendment produces a CRT
treatment that better recognizes the risk
reduction in CRT through improved
CRT economics, provides appropriate
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incentives for the transfer of credit risk,
and that even after removing the overall
effectiveness adjustment, the capital
relief provided by the framework is
conservative. One commenter
maintained that the overall effectiveness
adjustment can be removed without
sacrificing the Enterprises’ safety and
soundness. Multiple commenters
suggested that the elimination of the
overall effectiveness adjustment would
encourage the Enterprises to disperse
credit risk among investors rather than
retaining that risk where taxpayers are
ultimately liable, and that the proposed
amendment would facilitate the
Enterprises to carry out their mission
throughout the economic cycle.
Several commenters supported
keeping the overall effectiveness
adjustment. These commenters
contended that the proposal to eliminate
the overall effectiveness adjustment
further weakens the financial resilience
of the Enterprises to withstand future
credit losses that may occur during an
economic stress and that FHFA should
keep the adjustment because it accounts
for differences in loss-absorbing
capacity between CRT and equity
capital. Several other commenters
recommended FHFA keep the overall
effectiveness adjustment in the CRT
securitization framework, but their
support for this aspect of the framework
was conditional on either eliminating
the CRT risk weight floor or making
substantive reductions to the proposed
risk weight floor.
The final rule adopts the removal of
the overall effectiveness adjustment as
proposed. In consideration of the public
comments on the proposed rule, FHFA
continues to believe that the overall
effectiveness adjustment should be
eliminated from the risk-based capital
requirements for retained CRT
exposures. FHFA believes that the risk
weight floor, loss timing effectiveness
adjustment, counterparty effectiveness
adjustments, and CRT operational
criteria, including FHFA’s authority to
review and approve CRT transactions as
effective in transferring credit risk,
sufficiently protect the Enterprises from
the potential safety and soundness risks
posed by CRT.
VI. ERCF Technical Corrections
The proposed rule would make
technical corrections to the ERCF
related to definitions, variable names,
the single-family countercyclical
adjustment, and CRT formulas that were
not accurately reflected in the final rule
published on December 17, 2020. These
technical corrections would revise the
ERCF for the following items:
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14769
• In § 1240.2, the definition of
‘‘Multifamily mortgage exposure’’
would be moved from its current
location to a location that follows
alphabetical order relative to the other
definitions within the section. The
definition of a multifamily mortgage
exposure would not change.
• In § 1240.33, the definition of
‘‘Long-term HPI trend’’ would be
updated to correct a typographical error
that resulted in only the coefficient of
the trendline formula, 0.66112295,
being published. The corrected
trendline formula would be
0.66112295e (0.002619948*t). The
Enterprises use the long-term HPI trend
as the basis for calculating the singlefamily countercyclical adjustment. As
published in the ERCF, the trendline
would be a time-invariant horizontal
line rather than a time-varying
exponential function.
• In § 1240.33, the definition of OLTV
for single-family mortgage exposures
would be amended to include the
parenthetical (original loan-to-value)
after the acronym to provide additional
clarity as to the meaning of OLTV.
Single-family OLTV would continue to
be based on the lesser of the appraised
value and the sale price of the property
securing the single-family mortgage.
• In § 1240.37, the second paragraph
(d)(3)(iii) would be redesignated as
(d)(3)(iv) to correct a typographical
error.
• In § 1240.43(b)(1), the term ‘‘KG’’
would be replaced to correct a
typographical error.
• In § 1240.44 we correct the
following typographical errors:
Æ In paragraph (b)(9)(i)(C), the term
‘‘(LTFUPB%)’’;
Æ In paragraph (b)(9)(i)(D), the term
‘‘LTF%’’;
Æ In paragraph (b)(9)(ii), the term
‘‘LTF%’’;
Æ In paragraph (b)(9)(ii)(B), the term
‘‘(CRTF15%)’’;
Æ In paragraph (b)(9)(ii)(C), the term
‘‘(CRT80NotF15%)’’;
Æ In paragraph (b)(9)(ii)(E)(2)(i), the
equation would be revised to correct
typographical errors in the names of two
variables within the equation;
Æ In paragraph (b)(9)(ii)(E)(2)(iii), the
term ‘‘LTF%’’;
Æ In paragraph (c) introductory text,
the term ‘‘RW%’’;
Æ In paragraph (c)(1), the term
‘‘AggEL%’’;
Æ In paragraph (g), the first three
equations would be combined into one
equation to correct a typographical error
that erroneously split the equation into
three distinct parts.
The final rule adopts the ERCF
technical corrections as proposed.
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Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Rules and Regulations
CHAPTER XII—FEDERAL HOUSING
FINANCE AGENCY
VII. Paperwork Reduction Act
The Paperwork Reduction Act (PRA)
(44 U.S.C. 3501 et seq.) requires that
regulations involving the collection of
information receive clearance from the
Office of Management and Budget
(OMB). The final rule contains no such
collection of information requiring OMB
approval under the PRA. Therefore, no
information has been submitted to OMB
for review.
VIII. Regulatory Flexibility Act
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) requires that a
regulation that has a significant
economic impact on a substantial
number of small entities, small
businesses, or small organizations must
include an initial regulatory flexibility
analysis describing the regulation’s
impact on small entities. FHFA need not
undertake such an analysis if the agency
has certified that the regulation will not
have a significant economic impact on
a substantial number of small entities. 5
U.S.C. 605(b). FHFA has considered the
impact of the final rule under the
Regulatory Flexibility Act. The General
Counsel of FHFA certifies that the final
rule will not have a significant
economic impact on a substantial
number of small entities because the
final rule is applicable only to the
Enterprises, which are not small entities
for purposes of the Regulatory
Flexibility Act.
IX. Congressional Review Act
In accordance with the Congressional
Review Act (5 U.S.C. 801 et seq.), FHFA
has determined that this final rule is a
major rule and has verified this
determination with the Office of
Information and Regulatory Affairs of
OMB.
List of Subjects for 12 CFR Part 1240
Capital, Credit, Enterprise,
Investments, Reporting and
recordkeeping requirements.
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Authority and Issuance
For the reasons stated in the
Preamble, under the authority of 12
U.S.C. 4511, 4513, 4513b, 4514, 4515–
17, 4526, 4611–4612, 4631–36, FHFA
amends part 1240 of Title 12 of the Code
of Federal Regulation as follows:
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SUBCHAPTER C—ENTERPRISES
PART 1240—CAPITAL ADEQUACY OF
ENTERPRISES
1. The authority citation for part 1240
is revised to read as follows:
■
Authority: 12 U.S.C. 4511, 4513, 4513b,
4514, 4515, 4517, 4526, 4611–4612, 4631–36.
2. Amend § 1240.2 by removing the
definition of ‘‘Multifamily mortgage
exposure’’ and adding a new definition
of ‘‘Multifamily mortgage exposure’’ in
alphabetical order to read as follows:
■
§ 1240.2
Definitions.
*
*
*
*
*
Multifamily mortgage exposure means
an exposure that is secured by a first or
subsequent lien on a property with five
or more residential units.
*
*
*
*
*
■ 3. Revise § 1240.11(a)(6) as follows:
§ 1240.11 Capital conservation buffer and
leverage buffer.
(a) * * *
(6) Prescribed leverage buffer amount.
An Enterprise’s prescribed leverage
buffer amount is 50 percent of the
Enterprise’s stability capital buffer
calculated in accordance with subpart G
of this part.
*
*
*
*
*
■ 4. Amend § 1240.33(a) by:
■ a. In the definition of ‘‘Long-term HPI
trend’’, removing ‘‘0.66112295’’ and
adding ‘‘0.66112295e (0.002619948*t)’’ in its
place; and
■ b. Revising the definition of ‘‘OLTV’’.
The revision reads as follows:
§ 1240.33 Single-family mortgage
exposures.
(a) * * *
OLTV (original loan-to-value) means,
with respect to a single-family mortgage
exposure, the amount equal to:
(i) The unpaid principal balance of
the single-family mortgage exposure at
origination; divided by
(ii) The lesser of:
(A) The appraised value of the
property securing the single-family
mortgage exposure; and
(B) The sale price of the property
securing the single-family mortgage
exposure.
*
*
*
*
*
§ 1240.37
[Amended]
5. Amend § 1240.37 by redesignating
the second paragraph (d)(3)(iii) as
(d)(3)(iv).
■
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§ 1240.43
[Amended]
6. Amend § 1240.43(b)(1) by removing
the term ‘‘KG’’ and adding the term
‘‘KG’’ in its place.
■ 7. Amend § 1240.44 by:
■ a. In paragraph (b)(9)(i)(C), removing
the term ‘‘(LTFUPB%)’’ and adding the
term ‘‘(LTFUPB%)’’ in its place;
■ b. In paragraph (b)(9)(i)(D), removing
the term ‘‘LTF%’’ and adding the term
‘‘LTF%’’ in its place;
■ c. In paragraph (b)(9)(ii) introductory
text removing the term ‘‘LTF%’’ and
adding the term ‘‘LTF%’’ in its place;
■ d. In paragraph (b)(9)(ii)(B), removing
the term ‘‘(CRTF15%)’’ and adding the
term ‘‘(CRTF15%)’’ in its place;
■ e. In paragraph (b)(9)(ii)(C), removing
the term ‘‘(CRT80NotF15%)’’ and
adding the term ‘‘(CRT80NotF15%)’’ in
its place;
■ f. Revising the equation in paragraph
(b)(9)(ii)(E)(2)(i);
■ g. In paragraph (b)(9)(ii)(E)(2)(iii),
removing the term ‘‘LTF%’’ and adding
the term ‘‘LTF%,’’ in its place;
■ h. In paragraph (c) introductory text:
■ i. Removing the term ‘‘RW%’’ and
adding the term ‘‘RW%’’ in its place; and
■ ii. Removing the term ‘‘10 percent’’
and adding the term ‘‘5 percent’’ in its
place;
■ i. In paragraph (c)(1), removing the
term ‘‘AggEL%’’ and adding the term
‘‘AggEL%’’ in its place;
■ j. In paragraphs (c)(2) and (c)(3)(ii),
removing the term ‘‘10 percent’’ and
adding the term ‘‘5 percent’’ in its place;
■ k. Revising the first equation in
paragraph (d);
■ l. In paragraph (e), removing the term
‘‘10 percent’’ and adding the term ‘‘5
percent’’ in its place;
■ m. Revising paragraph (f)(2)(i);
■ n. In paragraph (g), revising the first
three equations;
■ o. Revising the first equation in
paragraph (h); and
■ p. Removing and reserving paragraph
(i).
The revisions read as follows:
■
§ 1240.44
(CRTA).
*
Credit risk transfer approach
*
*
(b) * * *
(9) * * *
(ii) * * *
(E) * * *
(2) * * *
(i) * * *
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*
Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Rules and Regulations
*
*
*
*
*
*
*
*
(f) * * *
*
*
14771
(d) * * *
of an Enterprise with respect to a
retained CRT exposure is as follows:
loss sharing effectiveness adjustment
(LSEA) for a retained CRT exposure is
determined under paragraph (h) of this
section.
*
*
*
*
*
(g) * * *
*
*
*
(h) * * *
ER16MR22.002
*
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*
ER16MR22.003
ER16MR22.004
Where the loss timing effectiveness
adjustments (LTEA) for a retained CRT
exposure are determined under
paragraph (g) of this section, and the
(2) Inputs—(i) Enterprise adjusted
exposure. The adjusted exposure (EAE)
14772
*
*
*
*
Sandra L. Thompson,
Acting Director, Federal Housing Finance
Agency.
[FR Doc. 2022–04529 Filed 3–15–22; 8:45 am]
BILLING CODE 8070–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2020–1120; Project
Identifier 2019–SW–056–AD; Amendment
39–21962; AD 2022–05–10]
RIN 2120–AA64
Airworthiness Directives; Goodrich
Externally-Mounted Hoist Assemblies
Federal Aviation
Administration (FAA), DOT.
ACTION: Final rule.
AGENCY:
The FAA is adopting a new
airworthiness directive (AD) for various
model helicopters with certain partnumbered Goodrich externally-mounted
hoist assemblies (hoists) installed. This
AD was prompted by hoists failing
lower load limit inspections. This AD
requires replacing unmodified hoists,
installing placards, revising the existing
Rotorcraft Flight Manual (RFM) for your
helicopter, deactivating or removing a
hoist if a partial peel out occurs,
reviewing the helicopter’s hoist slip
load test records, repetitively inspecting
the hoist cable and overload clutch
(clutch), and reporting information to
the manufacturer. This AD also requires
establishing operating limitations on the
hoist and prohibits installing an
unmodified hoist. The FAA is issuing
this AD to address the unsafe condition
on these products.
DATES: This AD is effective April 20,
2022.
The Director of the Federal Register
approved the incorporation by reference
of a certain document listed in this AD
as of April 20, 2022.
ADDRESSES: For Goodrich service
information identified in this final rule,
contact Collins Aerospace; 2727 E
Imperial Hwy., Brea, CA 92821;
telephone (714) 984–1461; email GHW@
collins.com; or at https://
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SUMMARY:
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www.collinsaerospace.com/. You may
view the referenced service information
at the FAA, Office of the Regional
Counsel, Southwest Region, 10101
Hillwood Pkwy., Room 6N–321, Fort
Worth, TX 76177. For information on
the availability of this material at the
FAA, call (817) 222–5110. It is also
available at https://www.regulations.gov
by searching for and locating Docket No.
FAA–2020–1120.
Examining the AD Docket
You may examine the AD docket at
https://www.regulations.gov by
searching for and locating Docket No.
FAA–2020–1120; or in person at Docket
Operations between 9 a.m. and 5 p.m.,
Monday through Friday, except Federal
holidays. The AD docket contains this
final rule, the European Union Aviation
Safety Agency (EASA) AD, any
comments received, and other
information. The street address for
Docket Operations is U.S. Department of
Transportation, Docket Operations, M–
30, West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE,
Washington, DC 20590.
FOR FURTHER INFORMATION CONTACT:
Kristi Bradley, Program Manager, COS
Program Management Section,
Operational Safety Branch, Compliance
& Airworthiness Division, FAA, 10101
Hillwood Pkwy., Fort Worth, TX 76177;
telephone (817) 222–5110; email
kristin.bradley@faa.gov.
SUPPLEMENTARY INFORMATION:
Background
The FAA issued a notice of proposed
rulemaking (NPRM) to amend 14 CFR
part 39 by adding an AD that would
apply to various model helicopters with
certain part-numbered externallymounted Goodrich hoists installed. The
NPRM published in the Federal
Register on December 11, 2020 (85 FR
79930). In the NPRM, the FAA proposed
to require replacing unmodified hoists,
installing placards, revising the existing
RFM for your helicopter, deactivating or
removing a hoist if a partial peel out
occurs, reviewing the helicopter’s hoist
slip load test records, repetitively
inspecting the hoist cable and clutch,
and reporting information to the
manufacturer. The NPRM was prompted
by a series of EASA ADs, the most
recent at that time being EASA AD
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2015–0226R5, Revision 5, dated July 23,
2020 (EASA AD 2015–0226R5), to
correct an unsafe condition for various
model helicopters with a Goodrich
externally-mounted hoist with one of
the following part numbers (P/Ns) or
base P/Ns installed: 42315, 42325,
44301–10–1, 44301–10–2, 44301–10–4,
44301–10–5, 44301–10–6, 44301–10–7,
44301–10–8, 44301–10–9, 44301–10–10,
44301–10–11, 44311, 44312, 44314,
44315, 44316, or 44318. EASA advised
of an initial incident of a rescue hoist
containing a dummy test load of 552 lbs.
that reeled-out without command of the
operator and impacted the ground
during a maintenance check flight
because the overload clutch had failed.
EASA stated that this condition, if not
detected and corrected, could lead to
further cases of in-flight loss of the hoist
load, possibly resulting in injury to
persons on the ground or in a hoisting
accident.
Accordingly, EASA AD 2015–0226R5
required a records review to determine
if the cable had exceeded the allowable
limit in previous load testing, a
repetitive load check and test of the
clutch slip value, removal or
deactivation of a hoist that could not be
tested due to lack of approved
instructions, replacement of the old
clutch P/N with a new clutch developed
by Goodrich to mitigate some of the
factors resulting in clutch degradation,
periodic replacement of the hoist,
reduction of the maximum allowable
load on the hoist, addition of
operational limitations to the RFM, and
replacement of the hoist after a partial
peel out. EASA AD 2015–0226R5 also
prohibited the installation of a
replacement cable that has exceeded the
allowable limit in previous load testing.
EASA considered AD 2015–0226R5 to
be interim action and advised further
AD action may follow.
The FAA issued a supplemental
notice of proposed rulemaking (SNPRM)
to amend 14 CFR part 39 by adding an
AD that would apply to various model
helicopters with certain part-numbered
externally-mounted Goodrich hoists
installed. The SNPRM published in the
Federal Register on September 30, 2021
(86 FR 54129). The SNPRM proposed to
revise the NPRM by adding a figure and
revising certain requirements, including
changes to the temperatures in the
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Federal Register / Vol. 87, No. 51 / Wednesday, March 16, 2022 / Rules and Regulations
Agencies
[Federal Register Volume 87, Number 51 (Wednesday, March 16, 2022)]
[Rules and Regulations]
[Pages 14764-14772]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-04529]
[[Page 14764]]
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FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1240
RIN 2590-AB17
Enterprise Regulatory Capital Framework--Prescribed Leverage
Buffer Amount and Credit Risk Transfer
AGENCY: Federal Housing Finance Agency.
ACTION: Final rule.
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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is
adopting a final rule (final rule) that amends the Enterprise
Regulatory Capital Framework (ERCF) by refining the prescribed leverage
buffer amount (PLBA or leverage buffer) and credit risk transfer (CRT)
securitization framework for the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac, and with Fannie Mae, each an Enterprise). The final rule also
makes technical corrections to various provisions of the ERCF that was
published on December 17, 2020.
DATES: This rule is effective May 16, 2022.
FOR FURTHER INFORMATION CONTACT: Andrew Varrieur, Senior Associate
Director, Office of Capital Policy, (202) 649-3141,
[email protected]; Christopher Vincent, Senior Financial
Analyst, Office of Capital Policy, (202) 649-3685,
[email protected]; or Ming-Yuen Meyer-Fong, Associate
General Counsel, Office of General Counsel, (202) 649-3078, [email protected]. These are not toll-free numbers. For TTY/TRS
users with hearing and speech disabilities, dial 711 and ask to be
connected to any of the contact numbers above.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Overview of the Final Rule
A. Amendments to the ERCF
B. Effective Date
III. General Comments on the Proposed Rule
A. 20 Percent Risk Weight Floor
B. Multifamily Countercyclical Adjustment
IV. Leverage Buffer
V. Credit Risk Transfer
VI. ERCF Technical Corrections
VII. Paperwork Reduction Act
VIII. Regulatory Flexibility Act
IX. Congressional Review Act
I. Introduction
On September 27, 2021, FHFA published in the Federal Register a
notice of proposed rulemaking (proposed rule) seeking comments on
amendments to the ERCF that would refine the leverage buffer and the
risk-based capital treatment for retained CRT exposures.\1\ FHFA
proposed these amendments to ensure that the ERCF appropriately
reflects the risks inherent to the Enterprises' business models and
contains proper incentives for the Enterprises to distribute acquired
credit risk to private investors rather than to buy and hold that risk.
In meeting these objectives, the proposed amendments would help restore
FHFA's intended paradigm of having the Enterprises' leverage capital
requirements and buffer provide a credible backstop to their risk-based
capital requirements and buffers, enhancing the safety and soundness of
the Enterprises. FHFA is now adopting in this final rule the proposed
amendments, substantially as proposed.
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\1\ 86 FR 53230.
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FHFA published the ERCF on December 17, 2020 \2\ with the purpose
of implementing a going-concern regulatory capital standard to ensure
that each Enterprise operates in a safe and sound manner and is
positioned to fulfill its statutory mission to provide stability and
ongoing assistance to the secondary mortgage market across the economic
cycle.\3\ The ERCF, which became effective on February 16, 2021, aimed
to address issues that arose during the notice and comment period such
as the pro-cyclicality of the single-family risk-based capital
requirements, the quality of Enterprise capital used to meet the
capital requirements, and the quantity of required capital at the
Enterprises. Accordingly, the ERCF is significantly stronger than the
statutory framework which governed the Enterprises' capital
requirements prior to entering conservatorships.
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\2\ 85 FR 82150.
\3\ In conservatorships, the Enterprises are supported by Senior
Preferred Stock Purchase Agreements (PSPAs) between the U.S.
Department of the Treasury (Treasury) and each Enterprise, through
FHFA as its conservator (Fannie Mae's Amended and Restated Senior
Preferred Stock Purchase Agreement with Treasury (September 26,
2008), https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/FNM/SPSPA-amends/FNM-Amend-and-Restated-SPSPA_09-26-2008.pdf; Freddie Mac's Amended and Restated Senior
Preferred Stock Purchase Agreement with Treasury (September 26,
2008), https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/FRE/SPSPA-amends/FRE-Amended-and-Restated-SPSPA_09-26-2008.pdf). The PSPAs, as amended by letter agreements
executed by the parties on January 14, 2021 (2021 Fannie Mae Letter
Agreement, https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Fannie-Mae.pdf; 2021 Freddie Mac Letter
Agreement, https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Freddie%20Mac.pdf), include a covenant at
section 5.15 which states: ``[The Enterprise] shall comply with the
Enterprise Regulatory Capital Framework [published in the Federal
Register at 85 FR 82150 on December 17, 2020] disregarding any
subsequent amendment or other modifications to that rule.''
Modifying that covenant will require agreement between the Treasury
and FHFA under section 6.3 of the PSPAs.
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However, after finalizing the ERCF, FHFA identified specific
aspects of the framework that might incentivize risk taking in certain
economic environments and create disincentives to the Enterprises' CRT
programs. Together, these features of the ERCF could result in an
excessive buildup of risk accruing to taxpayers and the housing finance
market, particularly because the Enterprises presently are severely
undercapitalized and lack the resources on their own to safely absorb
the credit risk associated with their normal operations.
FHFA views the transfer of risk, particularly credit risk, to a
broad set of investors as an important tool to reduce taxpayer exposure
to the risks posed by the Enterprises and to mitigate systemic risk
caused by the size and monoline nature of the Enterprises' businesses.
Since their development began in 2013, the CRT programs have been the
Enterprises' primary mechanism to successfully effectuate reliable risk
transfer to the private sector. Through these programs, the Enterprises
have shed a significant amount of credit risk to help protect against
potential losses while the PSPAs have significantly limited the
Enterprises' ability to hold capital and withstand losses through
normal operations. During this current period where the Enterprises are
building capital, CRT remains an important risk mitigation tool to
protect taxpayers against the heightened risk of potential PSPA draws
in the event of a significant stress to the housing sector. It is
therefore crucial that the Enterprises' capital requirements are
appropriately sized, where the leverage capital framework is a credible
backstop to the risk-based capital framework and where responsible and
effective risk transfer is not unduly discouraged.
II. Overview of the Final Rule
A. Amendments to the ERCF
After carefully considering the comments on the proposed rule, and
as described in this preamble, FHFA is adopting, substantially as
proposed, amendments to the leverage buffer and risk-based capital
treatment of CRT exposures. FHFA continues to believe that the
amendments in this final rule will lessen the potential deterrents to
Enterprise risk transfer by properly aligning incentives in the ERCF
and will position the Enterprises to operate in a
[[Page 14765]]
safe and sound manner to fulfill their statutory mission throughout the
economic cycle, both during and after conservatorships. Specifically,
the final rule will:
Replace the fixed leverage buffer equal to 1.5 percent of
an Enterprise's adjusted total assets with a dynamic leverage buffer
equal to 50 percent of the Enterprise's stability capital buffer as
calculated in accordance with 12 CFR 1240.400;
Replace the prudential floor of 10 percent on the risk
weight assigned to any retained CRT exposure with a prudential floor of
5 percent on the risk weight assigned to any retained CRT exposure; and
Remove the requirement that an Enterprise must apply an
overall effectiveness adjustment to its retained CRT exposures in
accordance with 12 CFR 1240.44(f) and (i).
In addition, the final rule will implement technical corrections to
various provisions of the ERCF that was published on December 17, 2020,
highlighted by a significant typographical error in the definition of
the long-term HPI trend that constitutes the basis for calculating the
single-family countercyclical adjustment.
B. Effective Date
Under the rule published on December 17, 2020 establishing the
ERCF, an Enterprise will not be subject to any requirement in the ERCF
until the compliance date for the requirement as detailed in the ERCF.
The effective date for the ERCF was February 16, 2021. The effective
date for the ERCF amendments and technical corrections in this final
rule will be 60 days after the day of publication of this final rule in
the Federal Register.
III. General Comments on the Proposed Rule
FHFA received 89 public comment letters on the proposed rule from a
variety of interested parties, including private individuals, trade
associations, consumer advocacy groups, think-tanks and institutes, and
financial institutions.\4\ In general, and as discussed in greater
detail below in the relevant sections of this preamble, commenters were
supportive of FHFA's proposed amendments to both the leverage buffer
and the risk-based capital treatment of retained CRT exposures.
Overall, most commenters supported FHFA's efforts to restore the
intended paradigm between leverage capital and risk-based capital at
the Enterprises and to properly incentivize risk transfer within the
ERCF. However, as discussed in the relevant sections of this preamble,
FHFA also received a number of comments indicating concern over various
aspects of the proposed amendments.
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\4\ See comments on Amendments to the Enterprise Regulatory
Capital Framework Rule--Prescribed Leverage Buffer Amount and Credit
Risk Transfer, available at https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=708. The
comment period for the proposed rule closed on November 26, 2021.
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Over half of the 89 comments FHFA received during this notice and
comment period focused on issues not directly related to the proposed
amendments or technical corrections. In these letters, commenters
offered views on important topics such as loan-level pricing
adjustments, incorporating guarantee fees into capital requirements,
the ERCF grids and risk multipliers, the magnitude of single-family and
multifamily risk weights, various other aspects of the CRT
securitization framework, the costs of CRT transactions, and the
overall complexity of the ERCF, among others. In addition, commenters
offered views on housing finance reform and on matters relating to the
Enterprises' conservatorships, including issues related to the
Enterprises' consent to conservatorships in 2008, subsequent actions by
FHFA or the U.S. Department of the Treasury (Treasury), the magnitude
of funds remitted to Treasury by the Enterprises relative to cumulative
draws, Treasury's financial interests in the Enterprises, and the
PSPAs. FHFA acknowledges the importance of these topics and will
thoroughly consider the public's feedback on these issues when relevant
rulemakings and policy decisions are under consideration.
In addition to soliciting comments on the proposed amendments and
technical corrections, FHFA also sought feedback on two additional
topics related to the ERCF: The 20 percent risk weight floor on single-
family and multifamily mortgage exposures and potential options for a
countercyclical adjustment for multifamily mortgage exposures. FHFA
received feedback on both topics.
A. 20 Percent Risk Weight Floor
FHFA asked the public whether, in light of the proposed changes to
the leverage buffer and the risk-based capital requirements for
retained CRT exposures, the prudential risk weight floor of 20 percent
on single-family and multifamily mortgage exposures was appropriately
calibrated. FHFA did not propose a change to the risk weight floor on
single-family and multifamily mortgage exposures. Nine commenters
provided feedback on this question, and the opinions expressed by
commenters were varied.
Some commenters recommended reducing or eliminating the 20 percent
risk weight floor. Among these commenters, some suggested that lowering
the floor is appropriate due to the Enterprises' improved balance
sheets and mortgage lending standards relative to pre-crisis economics.
Others suggested that the 20 percent risk weight floor in the ERCF is
not appropriately calibrated. Another commenter suggested that the 20
percent floor distorts market signals about risk and incentivizes risk
taking by the Enterprises.
Conversely, some commenters recommended maintaining the 20 percent
risk weight floor. Among these commenters, some suggested that such a
floor is prudent to ensuring the safety and soundness of the
Enterprises. One commenter suggested that the risk weight floor is
useful as an incentive for the Enterprises to transfer credit risk on
lower-risk exposures. Another commenter suggested that the risk weight
floor is important to mitigate the model risks inherent in the risk-
sensitive methodology FHFA used to calibrate risk weights for mortgage
exposures. One commenter suggested that reducing this risk weight floor
could significantly increase the gap between the credit risk capital
requirements of the Enterprises and other market participants.
One of the key objectives FHFA cited for proposing amendments to
the ERCF was to ensure the leverage capital framework was a credible
backstop to the risk-based capital framework. Despite changes to the
2020 ERCF proposed rule \5\ that increased risk-based capital under the
2020 ERCF final rule, including raising the 15 percent risk weight
floor on single-family and multifamily mortgage exposures to 20 percent
and changing the dataset on which the single-family countercyclical
adjustment is calculated, tier 1 leverage capital remains greater than
tier 1 risk-based capital at each Enterprise in the absence of the
leverage buffer and CRT amendments in the proposed rule. Should FHFA
materially reduce the 20 percent floor on single-family and multifamily
mortgage exposures without taking additional action, the likelihood
that the leverage framework would once again be the binding capital
constraint for the Enterprises would significantly increase. For this
reason, and given the commenters' diverse feedback, FHFA has determined
not to take action related to the 20 percent risk weight
[[Page 14766]]
floor on single-family and multifamily mortgage exposures at this time.
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\5\ 85 FR 39274.
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B. Multifamily Countercyclical Adjustment
FHFA also asked the public to recommend an approach for mitigating
the pro-cyclicality of the credit risk capital requirements for
multifamily mortgage exposures that relies only on non-proprietary data
or indices. Eight commenters provided feedback on this question,
recommending three different types of approach. The first group of
commenters suggested solutions following the same principles as FHFA's
single-family countercyclical adjustment, where risk attributes such as
the loan-to-value (LTV) ratio would be adjusted up or down depending on
deviations from a long-term trend. For use in this approach, commenters
recommended FHFA consider the property index published by the National
Council of Real Estate Investment Fiduciaries (NCREIF), long-term
vacancy rates, long-term property value and income growth rates, and
adjusted cap rates. The second group of commenters recommended FHFA
consider an approach where the countercyclical adjustment is based on
ratios of index peaks to current values. Commenters suggested FHFA
could use the NCREIF property index for property values and Enterprise
investor reporting for net operating income (NOI). This approach would
assume that the multifamily risk weights already account for a 35
percent shock to property values and a 15 percent shock to NOI, so an
adjustment would be made only to the extent that the property value
and/or NOI index ratios suggest a further adjustment is necessary.
Finally, one commenter suggested that FHFA should address pro-
cyclicality for multifamily mortgage exposures by replacing mark-to-
market LTV with original LTV and mark-to-market debt service coverage
ratio (DSCR) with original DSCR.
FHFA appreciates the public's feedback on this topic and is
committed to addressing the pro-cyclicality in the capital required for
multifamily mortgage exposures. However, given the complexity of
potential solutions and the diversity of suggestions provided by
commenters, FHFA has determined that this topic requires further
consideration, potentially in a future rulemaking. Therefore, FHFA has
determined not to take action related to a multifamily countercyclical
adjustment at this time.
IV. Leverage Buffer
The proposed rule would amend the ERCF by replacing the fixed tier
1 capital leverage buffer equal to 1.5 percent of an Enterprise's
adjusted total assets with a dynamic tier 1 capital leverage buffer
equal to 50 percent of the Enterprise's stability capital buffer.\6\ In
the proposed rule, FHFA presented several benefits to this approach.
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\6\ 12 CFR 1240.400.
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First, a properly calibrated leverage ratio requirement and
leverage buffer are critical aspects of a sound regulatory capital
framework. The purpose of leverage capital is to promote financial
stability by establishing a robust capital floor that persists
throughout the economic cycle and by limiting risk taking when risk-
based capital may otherwise fall to unduly low levels. Recalibrating
the 1.5 percent leverage buffer will promote safety and soundness and
financial stability at the Enterprises by lessening the likelihood that
leverage capital will drive Enterprise decision-making in the majority
of economic environments and reduce the frequency in which an
Enterprise has an incentive to take on more risk in a capital
optimization strategy. Furthermore, restoring leverage capital to a
position of a credible backstop will allow other aspects of the ERCF,
namely the risk-based capital requirements, including the single-family
countercyclical adjustment, to work as intended. Second, the proposed
leverage buffer amendment will encourage the Enterprises to transfer
risk rather than to buy and hold risk. Third, a leverage framework with
a dynamic buffer that grows and shrinks as an Enterprise grows and
shrinks, respectively, will function as a better backstop to a risk-
based capital framework that includes a stability capital buffer linked
to an Enterprise's size. And fourth, a dynamic leverage buffer that is
tied to the stability capital buffer will further align the ERCF with
Basel III standards. Internationally, under the latest Basel framework
adopted by the Bank for International Settlements, global systemically
important banks (G-SIBs) are required to hold a leverage buffer equal
to 50 percent of their higher loss-absorbency risk-based requirements--
a measure akin to the G-SIB surcharge in the U.S. banking framework--to
tailor an institution's leverage ratio to its business activities and
risk profile.
The vast majority of comments FHFA received supported decreasing
the tier 1 capital leverage buffer from a fixed 1.5 percent of adjusted
total assets. Many commenters supported FHFA's proposed approach, while
some supported decreasing the leverage buffer without tying it to the
stability capital buffer and others favored eliminating the leverage
buffer altogether.
Many commenters who recommended decreasing the leverage buffer
suggested doing so because it is preferrable for risk-based capital
metrics to be the binding capital constraint more frequently than non-
risk-based capital floors such as leverage. Commenters suggested that
this paradigm helps eliminate incentives for the Enterprises to
increase risk taking and risk retention while providing flexibility to
the Enterprises as they manage risk and rebuild robust levels of
capital. In addition, commenters agreed with FHFA that a smaller
leverage buffer would encourage the transfer of mortgage credit risk
from the Enterprises to private investors. Another commenter stated
that the 1.5 percent leverage buffer is unnecessary relative to the
Enterprises' recent stress test results, and that such a high buffer
would likely be excessive to the point of impairing the Enterprises'
ability to support the market and meet their mission.
Many commenters expressed their general support for FHFA's proposed
approach of tying the leverage buffer to the stability capital buffer.
Commenters contended that a dynamic leverage buffer that expands and
contracts with an Enterprise as its size and strategy evolve would more
accurately reflect the Enterprise's risk and thereby help facilitate
the Enterprises' ability to carry out their missions through all
economic cycles. Thus, commenters reasoned that the proposed approach
would help leverage serve as a credible backstop to the risk-based
capital framework and allow the Enterprises to withstand losses in
excess of those experienced during the great financial crisis. Other
commenters supported FHFA's effort to move toward a dynamic leverage
buffer to better reflect the spirit and intent of the leverage ratio,
and also because dynamic buffers have proven to be an effective tool
for managing capital at the global systemically important banks.
Another commenter suggested that the proposed approach will help
provide stability in the mortgage market and increase investor
confidence in the Enterprises and overall economy throughout the
economic cycle, helping stave off the need for emergency taxpayer
intervention. Another commenter stated that basing the leverage buffer
on a risk-based capital metric is preferrable because it better
reflects the varying levels of risk within an Enterprise's particular
pool of total assets.
Some commenters expressed more reserved support for setting the
leverage buffer equal to 50 percent of the stability
[[Page 14767]]
capital buffer. Several commenters expressed concern that tying the
leverage buffer to the stability capital buffer could have pro-cyclical
implications in the sense that an Enterprise's market share tends to
grow during a stress when other market participants are growing slowly
or shrinking. Thus, requiring an Enterprise to increase its leverage
buffer during the period when the Enterprise is fulfilling its
countercyclical role could limit the Enterprise's ability to supply
market liquidity when it is most needed. In contrast to these
commenters' concern, FHFA anticipates that setting the leverage buffer
equal to 50 percent of the stability capital buffer will actually
reduce the pro-cyclicality of the leverage framework because increases
to an Enterprise's adjusted total assets are reflected in the fixed 1.5
percent leverage buffer immediately whereas increases to an
Enterprise's share of the overall mortgage market are reflected in the
stability capital buffer with up to a two-year delay.\7\ FHFA believes
this delayed need to raise capital relative to the current ERCF will
facilitate the Enterprises' abilities to provide liquidity to the
mortgage market during a stress, even if an Enterprise grows its
portfolio as a result of fulfilling its countercyclical mission.
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\7\ Id.
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A few other commenters supported FHFA's proposed amendments but
recommended that FHFA: i. Continue to study the relationship between
leverage, risk-based capital, and the stability capital buffer to
determine definitively that the leverage buffer should be linked to the
stability capital buffer; and ii. provide historical data affirming the
proposed approach and demonstrating that under the proposed amendments
leverage will rarely exceed risk-based capital.
Another commenter recommended that FHFA must ensure that its
regulatory capital framework avoids discriminatory outcomes and
promotes equitable treatment of borrowers and communities of color. One
commenter supported FHFA's proposed amendments but expressed a desire
for FHFA to be more anticipatory and expansive in the list of
provisions it chooses to reconsider.
Some commenters recommended decreasing the leverage buffer but not
tying it to the stability capital buffer. One commenter expressed
concern that the stability capital buffer was itself arbitrarily
determined, so by association a leverage buffer equal to 50 percent of
the stability capital buffer is also arbitrarily determined. This
commenter recommended that FHFA consider alternative methods of the
setting the leverage buffer that are more closely tied to an
Enterprise's risk. One commenter recommended that FHFA decrease an
Enterprise's leverage buffer by some estimate of future guarantee fees.
Similarly, another commenter recommended that FHFA decrease an
Enterprise's leverage buffer to reflect risk transferred through CRT in
the same way that the risk-based capital framework provides capital
relief for CRT. Several commenters recommended FHFA simply reduce the
leverage buffer from 1.5 percent of adjusted total assets to a lower
percentage of adjusted total assets, such as 0.5 percent, because
market share is not a reasonable representation of Enterprise risk.
Some commenters recommended FHFA eliminate the leverage buffer
completely. These commenters generally viewed the leverage buffer as
not necessary for the leverage framework to be a credible backstop to
the risk-based capital framework. Two commenters suggested the 2.5
percent leverage capital requirement is itself sufficient as a credible
backstop to risk-based capital in the ERCF. Another commenter suggested
the leverage buffer is unnecessary because: i. Stress losses on a new
month of originations are lower than the capital required by the ERCF;
and ii. future guarantee fees provide a significant source of claims-
paying resources, which are not considered as a source of capital in
the framework. One commenter suggested FHFA eliminate the leverage
buffer rather than decrease it because a future FHFA director can just
as easily increase it again.
Finally, some commenters recommended that FHFA maintain the fixed
1.5 percent leverage buffer. One commenter claimed that FHFA does not
provide evidence that the existing ERCF leverage-based requirements
would be binding throughout the economic cycle, and that it is
difficult to envision any realistic scenario in which the proposed
amendments to the leverage buffer would result in a leverage-based
requirement that could exceed the risk-based requirement, violating the
concept of being a credible backstop. FHFA disagrees with the premise
of this argument because the argument compares tier 1 leverage capital
to adjusted total risk-based capital, which includes tier 2 capital.
When looking only at tier 1 capital, one can readily construct
realistic scenarios where tier 1 risk-based capital at an Enterprise
decreases due to a period of sustained house price appreciation such
that tier 1 leverage capital exceeds tier 1 risk-based capital and
therefore leverage becomes the binding capital constraint.
The commenter also suggests that FHFA fails to explain how the
calibration of the 1.5 percent leverage buffer is flawed and how the
proposed leverage buffer is analogous to the risk-weighted-asset-based
Basel leverage buffer for international G-SIBs. In the proposed rule,
FHFA discussed how the leverage framework unduly disincentivizes risk
transfer predominately due to the outsized leverage buffer, and how a
fixed leverage buffer may not concurrently be appropriate for both a
large and a small Enterprise. FHFA views these characteristics as flaws
in the calibration of the leverage buffer because the design could
result in taxpayers bearing excessive undue risk for as long as the
Enterprises are in conservatorships and excessive risk to the housing
finance market both during and after conservatorships. In addition,
FHFA discussed how the proposed leverage buffer is similar to the Basel
leverage buffer in that both are derived from measures that attempt to
quantify the amount of systemic risk posed by the Enterprises and G-
SIBs, respectively--the stability capital buffer in the ERCF and the G-
SIB surcharge in the Basel framework. There are, of course, structural
differences between the two buffers in both derivation and application,
as is appropriate given that the Enterprises and the other financial
institutions have different business models.
Furthermore, two commenters noted that the Financial Stability
Oversight Council's (FSOC) review of the 2020 ERCF proposed rule found
that capital requirements ``that are materially less than those
contemplated by [the proposed rule] would likely not adequately
mitigate the potential stability risk posed by the Enterprises,'' and
that the proposed rule would result in a material two-thirds reduction
to the leverage buffer, increasing risks to taxpayers and financial
stability. FHFA generally agrees with the findings presented in FSOC's
activities-based review of the secondary mortgage market.\8\ However,
similar to approaches followed by other financial regulators, FHFA
intends to periodically review the ERCF and adjust various elements as
necessary to ensure the safety and soundness of the Enterprises so they
can carry out their mission throughout the economic cycle. In addition,
FHFA notes that Federal Reserve officials have publicly
[[Page 14768]]
identified binding leverage capital requirements under the
Supplementary Leverage Ratio (SLR) framework as an important issue that
must be addressed so that banks' incentives are not skewed to increase
risk-taking. FHFA continues to agree with this guiding principle for
the Enterprises under the ERCF.
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\8\ https://home.treasury.gov/news/press-releases/sm1136.
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The final rule adopts the dynamic tier 1 capital leverage buffer
equal to 50 percent of the stability capital buffer as proposed. In
consideration of the public comments on the proposed rule, FHFA
continues to believe that such a leverage buffer determined in this
manner will best position the Enterprises to fulfil their mission in a
safe and sound manner throughout the economic cycle by ensuring that
the leverage framework acts as a credible backstop to the risk-based
capital framework and by encouraging the Enterprises to transfer credit
risk rather than to buy and hold risk.
FHFA notes that the final rule will not change the tier 1 leverage
capital requirement, which will remain at 2.5 percent of adjusted total
assets. This requirement, plus other features of the ERCF such as the
single-family countercyclical adjustment and the risk weight floor on
single-family and multifamily mortgage exposures, will continue to
mitigate the potential stability risk posed by the Enterprises and will
ensure an Enterprise maintains robust capital even during the best
economic conditions when risk-based capital requirements might fall due
to significant house price appreciation.
In addition, FHFA continues to believe that the leverage buffer
plays an important role in the ERCF, despite the recommendations of
several commenters to eliminate the buffer. The leverage buffer
represents a cushion above an Enterprise's 2.5 percent leverage ratio
requirement that can be drawn down in a stress scenario without
violating prompt corrective action, providing an Enterprise with
flexibility to continue its normal operations without risk of breaching
a requirement.
V. Credit Risk Transfer
The proposed rule would replace the prudential floor of 10 percent
on the risk weight assigned to any retained CRT exposure with a
prudential floor of 5 percent on the risk weight assigned to any
retained CRT exposure and would remove the requirement that an
Enterprise must apply an overall effectiveness adjustment to its
retained CRT exposures.\9\
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\9\ 12 CFR 1240.44(f) and (i).
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Many commenters expressed the view that CRT is an effective means
by which to transfer risk to private markets, protect taxpayers, and
stabilize the Enterprises and housing finance more generally.
Consequently, the vast majority of comments FHFA received on the
proposed amendments to the risk-based capital requirements for retained
CRT exposures were generally supportive of the amendments. However, a
minority of comments questioned the efficacy of CRT and noted that the
amendments would weaken the Enterprises' financial resilience. Several
other commenters offered broad critiques of and suggestions for the
risk-based capital approach to CRT and the Enterprises' CRT programs
more generally. While FHFA appreciates and considers all comments, the
following discussion focuses on comments directly pertaining to the
amendments put forward in the proposed rule.
CRT Risk Weight Floor
In the proposed rule, FHFA contended that amending the CRT risk
weight floor was necessary for two reasons. First, the 10 percent floor
on the risk weight assigned to a retained CRT exposure unduly decreases
the capital relief provided by CRT and reduces an Enterprise's
incentives to engage in risk transfer. This occurs in part because the
aggregate credit risk capital required for a retained CRT exposure is
often greater than the aggregate credit risk capital required for the
underlying exposures, especially when the credit risk capital
requirements on the underlying whole loans and guarantees are low or
the CRT is seasoned. Second, the 10 percent risk weight floor
discourages CRT through its duplicative nature. The operational
criteria for CRT, which state that FHFA must approve each transaction
as being effective in transferring the credit risk, as well as the
Enterprises' own ability to mitigate unknown risks through their
underwriting standards and servicing and loss mitigation programs,
lessen the need for a tranche-level risk weight floor as high as 10
percent.
Commenters were generally very supportive of the proposed amendment
to the CRT risk weight floor. Commenters suggested that reducing the
risk weight floor on retained CRT exposures from 10 percent to 5
percent raises the regulatory value of risk transfer closer to its
economic value. Commenters stated that the change would restore the
incentive for the Enterprises to engage in CRT to disperse credit risk
among private investors and thereby lessen the systemic risk posed by
the Enterprises. Commenters also suggested that transferring credit
risk away from the Enterprises strengthens their safety and soundness
and supports the overall mortgage market, including by promoting
greater private market participation without an adverse impact on
affordability. Several commenters supported the 5 percent floor because
it represents a more market-sensitive treatment of CRT and better
aligns capital to risk. In this regard, one commenter suggested that
unduly high capital requirements will hamper an Enterprise's ability to
fulfill its statutory mission of facilitating loans to low-income and
very low-income borrowers and communities. In addition, commenters
suggested that the 5 percent floor would provide reasonable protection
from model risk while maintaining a conservative discount to equity
capital, which has flexibility and fungibility advantages.
Furthermore, several commenters recommended lowering the CRT risk
weight floor below 5 percent or eliminating it altogether. Commenters
suggested that the floor is not analytically supported and provides
excessive protection against CRT-related risks. One commenter's
analysis suggested that CRT requirements are too stringent even if the
floor is removed and recommended that FHFA calibrate the risk-based
capital requirements for retained CRT exposures to be consistent with
the economics of CRT transactions.
A few commenters recommended rejecting the proposed amendment in
favor of the 10 percent risk weight floor. Several commenters claimed
that the proposed amendment weakens the financial resilience of the
Enterprises. These commenters suggested that the amendments will
increase leverage at the Enterprises which will increase insolvency
risk, and that FHFA should not balance incentivizing CRT with safety
and soundness when considering capital standards.
Some commenters generally supported FHFA's proposal to lower the
CRT risk weight floor but offered alternatives to the 5 percent floor
in the proposed rule. A few commenters recommended that FHFA apply the
CRT risk weight floor on a sliding scale such that the risk weight
floor decreases as credit risk becomes more remote. A few commenters
suggested that the floor should reflect an exposure-level analysis and
perhaps be functionally related to economic variables such as seasoning
or house price appreciation. One commenter recommended removing the
floor and using an econometric approach that requires capital above the
risk-based capital amount and provides a marginal benefit
[[Page 14769]]
to risk reduction activities beyond stress loss.
The final rule adopts the prudential floor of 5 percent on the risk
weight assigned to any retained CRT exposure as proposed. In
consideration of the public comments on the proposed rule, FHFA
continues to believe that a prudential risk weight of 5 percent
sufficiently ensures the viability of CRTs while mitigating their
safety and soundness, mission, and housing stability risks. The final
rule does not eliminate the CRT risk weight floor, as recommended by
some commenters, because the prudential floor for a retained CRT
exposure avoids treating that exposure as posing no credit risk, which
continues to be an important policy objective for FHFA. In addition,
FHFA has determined to finalize the 5 percent risk weight floor as
proposed rather than adopting one of the alternatives suggested by
commenters in order to maintain consistency with other aspects of the
CRT securitization framework that were designed with a static risk
weight floor in mind.
Overall Effectiveness Adjustment
In the proposed rule, FHFA presented rationale for eliminating the
overall effectiveness adjustment due to the duplicative nature of the
adjustment within the risk-based capital requirements for retained CRT
exposures. Unlike the counterparty and loss-timing effectiveness
adjustments in the CRT securitization framework, the overall
effectiveness adjustment does not target specific risks. Rather,
similar to the risk weight floor on retained CRT exposures and the CRT
operational criteria, the overall effectiveness adjustment was designed
to address risks that are difficult to measure, such as model risk and
the loss-absorbing benefits of equity capital relative to CRT. FHFA
reasoned that, considering the additional elements of the CRT
securitization framework that also target these difficult-to-measure
risks, the overall effectiveness adjustment is duplicative and creates
an unnecessary disincentive for the Enterprises to engage in CRT.
The vast majority of comments supported FHFA's proposed amendment
to eliminate the overall effectiveness adjustment from the CRT
securitization framework. Several commenters contended that the overall
effectiveness adjustment was redundant and was not analytically
supported. Commenters also reasoned that the proposed amendment
produces a CRT treatment that better recognizes the risk reduction in
CRT through improved CRT economics, provides appropriate incentives for
the transfer of credit risk, and that even after removing the overall
effectiveness adjustment, the capital relief provided by the framework
is conservative. One commenter maintained that the overall
effectiveness adjustment can be removed without sacrificing the
Enterprises' safety and soundness. Multiple commenters suggested that
the elimination of the overall effectiveness adjustment would encourage
the Enterprises to disperse credit risk among investors rather than
retaining that risk where taxpayers are ultimately liable, and that the
proposed amendment would facilitate the Enterprises to carry out their
mission throughout the economic cycle.
Several commenters supported keeping the overall effectiveness
adjustment. These commenters contended that the proposal to eliminate
the overall effectiveness adjustment further weakens the financial
resilience of the Enterprises to withstand future credit losses that
may occur during an economic stress and that FHFA should keep the
adjustment because it accounts for differences in loss-absorbing
capacity between CRT and equity capital. Several other commenters
recommended FHFA keep the overall effectiveness adjustment in the CRT
securitization framework, but their support for this aspect of the
framework was conditional on either eliminating the CRT risk weight
floor or making substantive reductions to the proposed risk weight
floor.
The final rule adopts the removal of the overall effectiveness
adjustment as proposed. In consideration of the public comments on the
proposed rule, FHFA continues to believe that the overall effectiveness
adjustment should be eliminated from the risk-based capital
requirements for retained CRT exposures. FHFA believes that the risk
weight floor, loss timing effectiveness adjustment, counterparty
effectiveness adjustments, and CRT operational criteria, including
FHFA's authority to review and approve CRT transactions as effective in
transferring credit risk, sufficiently protect the Enterprises from the
potential safety and soundness risks posed by CRT.
VI. ERCF Technical Corrections
The proposed rule would make technical corrections to the ERCF
related to definitions, variable names, the single-family
countercyclical adjustment, and CRT formulas that were not accurately
reflected in the final rule published on December 17, 2020. These
technical corrections would revise the ERCF for the following items:
In Sec. 1240.2, the definition of ``Multifamily mortgage
exposure'' would be moved from its current location to a location that
follows alphabetical order relative to the other definitions within the
section. The definition of a multifamily mortgage exposure would not
change.
In Sec. 1240.33, the definition of ``Long-term HPI
trend'' would be updated to correct a typographical error that resulted
in only the coefficient of the trendline formula, 0.66112295, being
published. The corrected trendline formula would be 0.66112295e
(0.002619948*t). The Enterprises use the long-term HPI trend
as the basis for calculating the single-family countercyclical
adjustment. As published in the ERCF, the trendline would be a time-
invariant horizontal line rather than a time-varying exponential
function.
In Sec. 1240.33, the definition of OLTV for single-family
mortgage exposures would be amended to include the parenthetical
(original loan-to-value) after the acronym to provide additional
clarity as to the meaning of OLTV. Single-family OLTV would continue to
be based on the lesser of the appraised value and the sale price of the
property securing the single-family mortgage.
In Sec. 1240.37, the second paragraph (d)(3)(iii) would
be redesignated as (d)(3)(iv) to correct a typographical error.
In Sec. 1240.43(b)(1), the term ``KG'' would be replaced
to correct a typographical error.
In Sec. 1240.44 we correct the following typographical
errors:
[cir] In paragraph (b)(9)(i)(C), the term ``(LTFUPB%)'';
[cir] In paragraph (b)(9)(i)(D), the term ``LTF%'';
[cir] In paragraph (b)(9)(ii), the term ``LTF%'';
[cir] In paragraph (b)(9)(ii)(B), the term ``(CRTF15%)'';
[cir] In paragraph (b)(9)(ii)(C), the term ``(CRT80NotF15%)'';
[cir] In paragraph (b)(9)(ii)(E)(2)(i), the equation would be
revised to correct typographical errors in the names of two variables
within the equation;
[cir] In paragraph (b)(9)(ii)(E)(2)(iii), the term ``LTF%'';
[cir] In paragraph (c) introductory text, the term ``RW%'';
[cir] In paragraph (c)(1), the term ``AggEL%'';
[cir] In paragraph (g), the first three equations would be combined
into one equation to correct a typographical error that erroneously
split the equation into three distinct parts.
The final rule adopts the ERCF technical corrections as proposed.
[[Page 14770]]
VII. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.) requires
that regulations involving the collection of information receive
clearance from the Office of Management and Budget (OMB). The final
rule contains no such collection of information requiring OMB approval
under the PRA. Therefore, no information has been submitted to OMB for
review.
VIII. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. FHFA need not undertake such an
analysis if the agency has certified that the regulation will not have
a significant economic impact on a substantial number of small
entities. 5 U.S.C. 605(b). FHFA has considered the impact of the final
rule under the Regulatory Flexibility Act. The General Counsel of FHFA
certifies that the final rule will not have a significant economic
impact on a substantial number of small entities because the final rule
is applicable only to the Enterprises, which are not small entities for
purposes of the Regulatory Flexibility Act.
IX. Congressional Review Act
In accordance with the Congressional Review Act (5 U.S.C. 801 et
seq.), FHFA has determined that this final rule is a major rule and has
verified this determination with the Office of Information and
Regulatory Affairs of OMB.
List of Subjects for 12 CFR Part 1240
Capital, Credit, Enterprise, Investments, Reporting and
recordkeeping requirements.
Authority and Issuance
For the reasons stated in the Preamble, under the authority of 12
U.S.C. 4511, 4513, 4513b, 4514, 4515-17, 4526, 4611-4612, 4631-36, FHFA
amends part 1240 of Title 12 of the Code of Federal Regulation as
follows:
CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY
SUBCHAPTER C--ENTERPRISES
PART 1240--CAPITAL ADEQUACY OF ENTERPRISES
0
1. The authority citation for part 1240 is revised to read as follows:
Authority: 12 U.S.C. 4511, 4513, 4513b, 4514, 4515, 4517, 4526,
4611-4612, 4631-36.
0
2. Amend Sec. 1240.2 by removing the definition of ``Multifamily
mortgage exposure'' and adding a new definition of ``Multifamily
mortgage exposure'' in alphabetical order to read as follows:
Sec. 1240.2 Definitions.
* * * * *
Multifamily mortgage exposure means an exposure that is secured by
a first or subsequent lien on a property with five or more residential
units.
* * * * *
0
3. Revise Sec. 1240.11(a)(6) as follows:
Sec. 1240.11 Capital conservation buffer and leverage buffer.
(a) * * *
(6) Prescribed leverage buffer amount. An Enterprise's prescribed
leverage buffer amount is 50 percent of the Enterprise's stability
capital buffer calculated in accordance with subpart G of this part.
* * * * *
0
4. Amend Sec. 1240.33(a) by:
0
a. In the definition of ``Long-term HPI trend'', removing
``0.66112295'' and adding ``0.66112295e (0.002619948*t)'' in
its place; and
0
b. Revising the definition of ``OLTV''.
The revision reads as follows:
Sec. 1240.33 Single-family mortgage exposures.
(a) * * *
OLTV (original loan-to-value) means, with respect to a single-
family mortgage exposure, the amount equal to:
(i) The unpaid principal balance of the single-family mortgage
exposure at origination; divided by
(ii) The lesser of:
(A) The appraised value of the property securing the single-family
mortgage exposure; and
(B) The sale price of the property securing the single-family
mortgage exposure.
* * * * *
Sec. 1240.37 [Amended]
0
5. Amend Sec. 1240.37 by redesignating the second paragraph
(d)(3)(iii) as (d)(3)(iv).
Sec. 1240.43 [Amended]
0
6. Amend Sec. 1240.43(b)(1) by removing the term ``KG'' and adding the
term ``KG'' in its place.
0
7. Amend Sec. 1240.44 by:
0
a. In paragraph (b)(9)(i)(C), removing the term ``(LTFUPB%)'' and
adding the term ``(LTFUPB)'' in its place;
0
b. In paragraph (b)(9)(i)(D), removing the term ``LTF%'' and adding the
term ``LTF'' in its place;
0
c. In paragraph (b)(9)(ii) introductory text removing the term ``LTF%''
and adding the term ``LTF'' in its place;
0
d. In paragraph (b)(9)(ii)(B), removing the term ``(CRTF15%)'' and
adding the term ``(CRTF15)'' in its place;
0
e. In paragraph (b)(9)(ii)(C), removing the term ``(CRT80NotF15%)'' and
adding the term ``(CRT80NotF15)'' in its place;
0
f. Revising the equation in paragraph (b)(9)(ii)(E)(2)(i);
0
g. In paragraph (b)(9)(ii)(E)(2)(iii), removing the term ``LTF%'' and
adding the term ``LTF,'' in its place;
0
h. In paragraph (c) introductory text:
0
i. Removing the term ``RW%'' and adding the term ``RW'' in its
place; and
0
ii. Removing the term ``10 percent'' and adding the term ``5 percent''
in its place;
0
i. In paragraph (c)(1), removing the term ``AggEL%'' and adding the
term ``AggEL'' in its place;
0
j. In paragraphs (c)(2) and (c)(3)(ii), removing the term ``10
percent'' and adding the term ``5 percent'' in its place;
0
k. Revising the first equation in paragraph (d);
0
l. In paragraph (e), removing the term ``10 percent'' and adding the
term ``5 percent'' in its place;
0
m. Revising paragraph (f)(2)(i);
0
n. In paragraph (g), revising the first three equations;
0
o. Revising the first equation in paragraph (h); and
0
p. Removing and reserving paragraph (i).
The revisions read as follows:
Sec. 1240.44 Credit risk transfer approach (CRTA).
* * * * *
(b) * * *
(9) * * *
(ii) * * *
(E) * * *
(2) * * *
(i) * * *
[[Page 14771]]
[GRAPHIC] [TIFF OMITTED] TR16MR22.001
* * * * *
(d) * * *
[GRAPHIC] [TIFF OMITTED] TR16MR22.002
* * * * *
(f) * * *
(2) Inputs--(i) Enterprise adjusted exposure. The adjusted exposure
(EAE) of an Enterprise with respect to a retained CRT exposure is as
follows:
[GRAPHIC] [TIFF OMITTED] TR16MR22.003
Where the loss timing effectiveness adjustments (LTEA) for a
retained CRT exposure are determined under paragraph (g) of this
section, and the loss sharing effectiveness adjustment (LSEA) for a
retained CRT exposure is determined under paragraph (h) of this
section.
* * * * *
(g) * * *
[GRAPHIC] [TIFF OMITTED] TR16MR22.004
* * * * *
(h) * * *
[[Page 14772]]
[GRAPHIC] [TIFF OMITTED] TR16MR22.005
* * * * *
Sandra L. Thompson,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2022-04529 Filed 3-15-22; 8:45 am]
BILLING CODE 8070-01-P