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Securitization_InBrief_10.28

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					                          CONFLICTS OF INTEREST IN SECURITIZATION INBRIEF*
                                          UPDATED AS OF FRIDAY, OCTOBER 28, 2011
                                                   (UPDATES IN BLUE)



UPCOMING AGENCY ACTION

   Prohibition against Conflicts of Interest in Certain Securitizations
           o Release Date                                                                        9/19/11
           o Comment Deadline                                                                    12/19/11
   Advanced Notice of Proposed Rulemaking: Treatment of Asset-Backed Issuers under the
    Investment Company Act
           o Release Date                                                                        8/31/11
           o Comment Deadline                                                                    11/7/11
           o Proposed Rule to determine if the conditional exclusion provided to certain asset-backed
                issuers from the definition of investment company is necessary or beneficial.
   Concept Release: Companies Engaged in the Business of Acquiring Mortgages and Mortgage
    Related Instruments
           o Release Date                                                                        8/31/11
           o Comment Deadline                                                                    11/7/11
           o Concept Release to determine if companies engaged in the business of acquiring
                mortgages and mortgage related instruments should be covered under the investment
                company act instead of relying on exclusions from the definition of investment company.

CONGRESSIONAL ACTION

   Representative Scott Garrett - Fannie Mae and Freddie Mac Proposal: October 27, 2011
           o Representative Scott Garrett (R-NJ), Chairman of the Financial Services Subcommittee on
               Capital Markets and Government-Sponsored Entities, offered a proposal to reform the
               secondary mortgage market. One key point in the proposal would be to abolish the risk-
               retention provisions included in the Dodd-Frank Act.
           o Rep. Garrett’s proposal would direct the Federal Housing Finance Administration
               (FHFA) to create several categories of mortgages with uniform underwriting standards
               for each, develop standard and uniform securitization agreements and representations
               and warranties, and provide the FHFA with authority to ensure underwriting and
               securitization standardization compliance.
           o The proposal would also prevent regulators from unilaterally forcing investors to reduce
               the principal of loans they have invested in, allow the appointment of an independent


*This is not an all-inclusive list of agencies and market participant actions related to this issue. It is a snap-shot of the
most recent, most relevant activity at the agencies and in the marketplace with regard to securitization issues under the
Dodd-Frank Act of importance to the Association of Institutional INVESTORS’ members.

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              third party to act for the benefit of investors in mortgage-backed securities, and require
              mandatory arbitration on disagreements between investors and issuers on reps and
              warranties.
           o The proposal also aims to provide additional transparency and disclosure by ensuring
              investors have sufficient time to review and analyze disclosed information before making
              investment decisions and require the creation of an individualized marker for each loan
              within a securitization.
   House Financial Services Committee: Vote on July 20, 2011
           o The House Financial Services Committee voted, 31-19, in favor of undoing a section of
              the Dodd-Frank Act that exposes ratings firms to liability for the ratings they attach to
              asset-backed bond deals. The Dodd-Frank Act’s rule would shine a bright light on the
              quality of the credit rating provided.
           o Analysis suggests that the House Financial Services Committee measure may not pass
              the Senate.

COMMENTS LETTERS:

RE-PROPOSAL: SHELF ELIGIBILITY CONDITIONS FOR ASSET-BACKED SECURITIES’

   MetLife: Submitted Letter to SEC on October 4, 2011
           o MetLife believes the re-proposal bolsters sound governance and adequate disclosure.
           o MetLife encourages the SEC to adopt shelf-life eligibility requirements, but recommends
                that the SEC consider extending basic enhancement such as those in the re-proposal to all
                forms of securitization issuance.
           o MetLife urges the SEC to consider using the ANPR and Concept Release regarding ABS
                issuer exclusions under Rule 3a-7 and Section 3(c)(5)(c) of the Investment Company Act
                to introduce the same enhancements for all forms of securitization issuance, regardless of
                whether a public or private issuance of securities is made under the Securities Act.
           o MetLife disagrees with many comment letters arguing that risk retention may cripple the
                securitization market. MetLife writes that the global securitization market contains
                vibrant sectors where risk retention is perverse.
           o MetLife supports establishing clear mechanisms for the independent review of breaches
                of representations and warranties.
   American Securitization Forum: Letter submitted to the SEC on October 4, 2011
           o ASF argues the proposed performance certification is an unprecedented and
                inappropriate departure from the previous disclosure standards that have served as the
                basis for the content of prospectuses in both ABS and traditional debt and equity
                securities offerings.
           o ASF is concerned the proposed performance certification would significantly and
                inappropriately extend an officer’s liability exposure under the federal securities laws by
                making the officer responsible for predictive assessments.
           o ASF requests that the phrase “all risk factors” be changed to “the material risks” because
                “risk factors” refers to a section of the prospectus rather than to the actual risks and
                because the revised formulation mirrors the relevant disclosure standards.
           o Although the ASF endorses the principle of independent review of compliance with
                transaction representations and warranties in RMBS and ABS transactions, an
                independent review and dispute resolution process is not necessary, nor should be
                required, in transactions where breaches of representations and warranties have
                historically not been asserted.
   Prudential Investment: Letter submitted to the SEC on October 4, 2011


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            o  Prudential recommends that the principles of the Regulation AB proposals should apply
               to all publicly registered structured products and for all securities sold with reliance on
               Securities Act Rule 144A.
           o Prudential believes a credit risk manager, working on behalf of investors, should be
               responsible for ongoing monitoring of representations and warranties of the loan
               originator and the loan services, making claims for breaches when appropriate and
               following a claim through to resolution.
           o Prudential argues that trustees should maintain the current contact information for each
               noteholder and facilitate communication among transaction parties.
           o Prudential recommends that asset-level disclosures as currently proposed by the SEC,
               that is commercially reasonable for an issuer to provide and does not allow the
               identification of the obligor, should be provided at the offering and be ongoing through
               the life of the securitization.
   Investment Company Institute: Letter submitted to SEC on October 4, 2011
           o ICI supports the revised shelf eligibility criteria that are revised from the ABII Proposal,
               and in particular supports the certification requirement.
           o ICI supports the re-proposal’s requirement that the underlying transaction documents of
               each ABS offering provide for the appointment of a credit risk manager to review the
               underlying assets upon the occurrence of certain events and provide a report of the
               findings and conclusions of its review to the trustee.
           o ICI supports the requirement that ABS issuers file copies of the underlying transaction
               documents, in substantially final form, at the same time as a preliminary prospectus.
           o ICI believes it would be overly narrow to limit asset-level disclosures to only those
               privately offered structured finance products that are backed by assets of an asset class
               for which there are prescribed asset-level reporting requirements in Regulation AB.
   SIFMA AMG: Letter filed with the SEC on October 4, 2011
           o SIFMA AMG believes the certification requirement asks individual officers to assume too
               much responsibility and it will discourage able executives from taking such positions.
           o SIFMA AMG supports the appointment of a credit risk manager, who will review assets
               for compliance with the loan level representations and warranties in the transaction
               documents and determine the applicability of a repurchase obligation and in fact wants
               the credit risk manager to have more power. For example, SIFMA disagrees with
               allowing trustees the contractual right to evaluate the satisfaction of triggering events
               before invoking the protections of a credit risk manager.
           o SIFMA AMG supports the mandate for standardized disclosure at the asset level, but
               also supports an exemption for resecuritizations.

PROPOSED RULE: NATIONAL RECOGNIZED STATISTICAL RATINGS ORGANIZATIONS

   Consumer Federation of America (CFA) and Americans for Financial Reform (AFR): Submitted
    Letter to SEC on August 8, 2011
             o CFA and AFR oppose the proposed rules by the SEC to allow rating agencies develop
                appropriate internal controls. Rather, CFA and AFR argue that the SEC must establish a
                framework for assessing internal controls.
             o According to the CFA and AFR, the SEC should adopt rules to: (i) formulate a basic
                definition of internal controls; (ii) define “material weakness” in internal controls as a
                serious deficiency; (iii) define the steps for management of internal controls; and (iv)
                promote a level of assurance that internal controls are expected to provide.
             o Also, the two consumer advocates argue that internal controls should include strong
                requirements for consultation and quantitative testing, as well as providing for a
                documentation standard.

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            o   With regard to conflicts of interest, the CFA and AFR believe that a broad principles-
                based ban would need to be supplemented with more concrete guidance by, for example,
                adopting restrictions to ensure that communication between employees involved in sales
                and marketing activities and those producing and developing ratings are limited and
                carefully monitored.
   Moody’s Investors Service: Submitted Letter to SEC on August 8, 2011
           o Moody’s opposes the proposed rules to permit issuers and underwriters of ABS to shift
                to NRSROs their obligation to disclose the nature, findings, and conclusions of third-
                party due diligence reviews if the NRSROs hired to rate the ABS agree to publish the
                required disclosures at least five days before the first sale of the ABS.
           o Moody’s asks the SEC to reconsider the rating personnel participation in sales and
                marketing rule to reflect the Dodd-Frank Act language more closely – which would be
                designed to prevent sales and marketing considerations from influencing the quality or
                integrity of the credit rating process.
           o Moody’s argues that the SEC’s proposed definition of a “rating action” is overly broad.
           o Moody’s opposes equating “solicit” and “payment” in the proposed rule on labeling
                credit ratings as “solicited buy-side,” “solicited sell-side,” or “unsolicited” based on
                whether the rating is paid for and the type of market participant paying for it.
   Council of Institutional Investors (CII): Submitted Letter to SEC on August 8, 2011
           o The CII strongly supports the provision that prohibits NRSROs from allowing sales and
                marketing considerations from influencing the production of ratings and rating
                methodologies.
           o The CII argues that NRSROs should be required to provide more complete, prominent,
                and consistent information and therefore agree with the provisions requiring that
                NRSROs publish a form with each credit rating that includes additional details about the
                rating, such as the version of methodology used, main assumptions underlying the
                methodology, and the potential limitations of the rating among other information.
   Association of Financial Guaranty Insurers (AFGI): Submitted Letter to SEC on August 8, 2011
           o AFGI supports the consistent application of credit rating procedures and methodologies,
                and urges the SEC to adopt additional regulations that would ensure this.
           o AFGI believes the SEC should establish a formal transparent process whereby market
                participants could submit a notice to an NRSRO detailing any inconsistencies in credit
                rating procedures and methodologies of NRSROs.
           o AFGI asks the SEC to require NRSROS to establish internal control structures to review
                any such notice in a timely manner.
           o AFGI argues that an NRSRO should be required to provide that communications
                between market participants and NRSROs be accessible by the investing public.
   The Financial Services Roundtable: Submitted Letter to SEC on August 8, 2011
           o The Roundtable argues that the SEC should suspend or revoke a credit rating agency’s
                status as an NRSRO only upon a showing that it is necessary to protect investors.
           o The Roundtable believes that a rating agency should fully investigate any potential
                conflict of interest relating to its hiring of an analyst before taking any action affecting a
                credit rating.
           o According to the Roundtable, the SEC should clarify the manner in which changes in
                methodology should be applied to outstanding ratings.
           o The Roundtable asks the SEC to exclude “agreed-upon procedure” engagements from
                any rules applicable to third-party due diligence procedures.
   Senator Carl Levin (D-MI): Submitted Letter to SEC on August 8, 2011
           o Senator Levin opposes the deferral of issuing internal control standards because it is
                liable to result in NRSROs developing different internal control structures, making
                oversight and the implementation of minimum standards difficult and expensive.


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            o   Senator Levin argues that the proposed rule should identify the minimum components of
                an effective credit ratings internal control structure.
            o   Senator Levin also supports proposed internal controls that would require an NRSRO to
                determine if it has sufficient competency and access to information before commencing
                the rating of either a class of financial product that it has not previously rated, or before
                commencing the rating of an “exotic” or “bespoke” product.
            o   According to Senator Levin, the proposed rules should ensure that NRSROs have the
                adequate staffing to conduct surveillance of existing ratings and adjust them as needed.

PROPOSED RULE: CREDIT RISK RETENTION

   American Securitization Forum (ASF): Submitted Letter to SEC on August 1, 2011
           o ASF supports the effort to align the incentives of originators and securitizers with those
                of securitization investors. The ASF argues the incentives should encourage sound loan
                underwriting.
           o ASF argues that requirements should be tailored to asset classes and take into
                consideration that the form of credit risk retention can vary by asset type.
   American Financial Services Association (AFSA): Letter Submitted to SEC on August 1, 2011
           o Although sound underwriting criteria are important, AFSA argues that it should not
                restrict credit or impose artificially high requirements.
           o AFSA believes that the requirements to verify and document that, within 30 days of
                origination, the borrower was not currently 30 days or more past due, in whole or in part,
                on any debt obligation is overly burdensome and not feasible as that information is not
                available in any commercially reasonable fashion.
           o AFSA argues that the 5% risk retention requirements in the Exchange Act are reasonable
                and regulators should not impose additional requirements such as the premium capture
                cash reserve accounts.
           o AFSA believes that mandating risk retention for the life of the ABS is punitive and does
                not further align the interests of ABS securitizers or sponsors and ABS investors.
   Financial Services Roundtable: Submitted Letter to SEC on August 1, 2011
           o The Roundtable states that although securitization can provide benefits such as lowering
                the cost of credit, abuses to the system were a major contributor to the financial crisis.
           o The Roundtable argues that risk retention would better align securitizers’ economic
                interests with those of ABS investors and therefore the Roundtable supports the agencies
                imposition of credit risk retention requirements.
   Investment Company Institute: Submitted Letter to SEC on July 29, 2011
           o ICI argues that the proposed risk retention standards may not be appropriate or
                necessary for certain classes of ABS in which funds invest and specifically the proposed
                requirements do not sufficiently reflect differences among certain classes of ABS or
                market practice for those particular securities.
           o ICI supports a QRM standard under the proposed exemption from the risk retention
                requirements for RMBS that are backed solely by very high quality loans.
           o ICI is worried that certain MBS standards, in particular commercial mortgage-backed
                securities (CMBS), may impair the viability of those markets.
   Blackrock: Submitted Letter to SEC on July 28, 2011
           o Blackrock argues that high quality mortgage underwriting standards should be
                implemented.
           o Blackrock states that residential mortgage loans should be subject to national loan
                servicing standards.
           o Blackrock also urges that asset information, such as credit performance statistics, should
                be transparent and accessible.

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            o    According to Blackrock, the Commissions should reconsider the definition of Qualified
                 Credit Standards as an exemption from the credit risk retention requirements. They also
                 believe that forms of credit risk retention should be more flexible, allowing sponsors
                 multiple means to meet the requirements.
             o Blackrock asks the Commissions to eliminate the proposed premium capture cash
                 reserve amount provisions.
             o Last, Blackrock supports broader relief from credit risk transfer requirements for asset
                 classes where credit abuse has not been a large problem, such as in credit cards, auto
                 loans, and student loans.
   Representative J. Randy Forbes (R-VA), U.S. House of Representatives: Letter Submitted to SEC on
    July 22, 2011
             o Representative Forbes believes the proposed regulation does not follow the intent of
                 Congress by imposing onerous down payment restrictions that will inhibit the ability of
                 families to afford homes.
             o Also, Representative Forbes states that the proposed regulation establishes overly narrow
                 debt to income guidelines that would reduce credit for many families.
   Representative Candice S. Miller (R-MI), U.S. House of Representatives: Letter Submitted to SEC
    on July 22, 2011
             o Representative Miller argues that the minimum 20 percent down payment requirement
                 would reduce the availability of affordable mortgage capital for many families who
                 would otherwise qualify. She states that credit-worthy first time home buyers would be
                 priced out of the market if these restrictions are in place.
   Senator Carl Levin: Submitted Letter to SEC on June 28, 2011
             o Senator Levin supports the rule’s general approach to risk retention, but recommends
                 against the horizontal risk alternative for residential mortgage.
             o Although retaining a horizontal residual interest tranche may be appropriate in other
                 types of securitizations according to Senator Levin, it is not appropriate for residential
                 mortgage backed securities.
             o Senator Levin argues for applying the risk retention requirement to synthetic asset back
                 securities.
             o Senator Levin asks that the regulators charged with implementing Section 941 of the
                 Dodd-Frank Act include monitoring and compliance enforcement to their capabilities.
   Citigroup Global Markets: Submitted Letter to SEC on June 13, 2011
             o Citigroup referenced the Senate Committee on Banking, Housing, and Urban Affairs
                 which urges the agencies to conduct rigorous cost-benefit and economic analyses with
                 regard to any rulemaking.
             o Citigroup expressed concern regarding the meanings of “ABS interest,” “par value,” and
                 “gross proceeds,” and their application to various forms of securitization. They also
                 believe the Agencies should not apply risk retention to asset classes that are not true
                 securitizations, including asset backed commercial paper or repackaging transactions.
             o Citigroup urges the Agencies to recognize other forms of risk retention including
                 servicing fees, credit support and liquidity facilities, guarantees, funding loss reserves,
                 and incentive or performance fees and excess spread.
             o Until the agencies can complete an analysis so that they can address various asset classes,
                 a zero risk retention rate is the best option instead of a default 5% risk retention rate
                 applicable across asset classes.
   Prudential Investment Management (PIM): Submitted Letter to SEC on June 13, 2011
             o PIM argues that risk retention is an effective method to align the interests of issuers and
                 investors and should be 5% of the net proceeds lent to the underlying borrowers.
             o PIM believes that after an appropriate period of time, risk retention should be allowed to
                 be sold or hedged. They also maintain that an independent servicer or adviser is
                 necessary to address conflicts of interest where horizontal risk retention is chosen.
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            o Issuers, according to PIM, should not be permitted to realize any profit at the time of
              securitization because it rewards originators who maximize loan volume over loan
              underwriting quality.
   SIFMA, Asset Management Group (AMG): Submitted Letter to SEC on June 10, 2011
          o SIFMA AMG supports the proposal’s establishment of a narrow exemption from the risk
              retention requirement for Qualifying Residential Mortgages (QRMs) and believes the
              Proposal’s definition of QRMs is a reasonable starting point.
          o SIFMA AMG has concerns about the servicing parameters that are required in the risk
              retention exception, including provisions that address what occurs after a default, rather
              than focusing on minimizing risk of default based on the original terms.
          o Also, they believe it is not clear why a 3% cap on up-front points and fees relates to the
              alignment of incentives between securitizers and investors.
          o SIFMA AMG generally supports the sponsor’s retention of the full scope of risk in the
              securitized transaction. However, SIFMA AMG argues that if the originator “funds” its
              portion of the risk up front then the ability of securitizers to share the risk of loss with the
              originator should not be lost.
   Amherst Securities Group: Submitted Letter to SEC on June 2, 2011
          o Amherst argues the risk retention rules fail to address conflicts of interest in the
              securitization process. For example, originators who are also portfolio lenders may be
              incentivized to adversely select loans for securitization. Also, the problem of having
              rating agencies paid by issuers is not addressed in the risk retention rules.
          o The qualifying residential mortgage (QRM) exclusion from the credit risk retention rules
              are extremely restrictive in their definition as to what qualifies as a QRM. Amherst
              contends that the extremely restrictive nature of the definition is anti-competitive and
              provides additional benefits for the “too big to fail” banks. In the alternative a broader
              definition of QRMs would encourage private sector securitization, according to Amherst.


SECURITIZATION NEWS

   European Central Bank Increase Asset-Backed Bond Lending: October 21, 2011
           o The European Central Bank (ECB) may increase its asset-backed bond lending if issuers
               provide more information regarding the loans supporting the securities.
           o The ECB is hoping to improve transparency in the asset-backed bonds that banks sell to
               investors and to increase market confidence.
           o This plan, according to some experts, may enhance standardization of the collateral.
   President Obama Revamps Mortgage Refinancing Program: October 24, 2011
           o President Obama announced that his Administration will alter the Home Affordable
               Refinance Program (HARP) to allow more people to take advantage of declining interest
               rates – even if home values have fallen.
           o The changes will allow borrowers the opportunity to refinance their mortgages
               regardless of the decline of their home value, but loans that exceed the current 125%
               loan-to-value limit will not be eligible to refinance until early next year.
           o Some critics fear that the HARP alterations of mortgage-backed securities will lead to
               them being paid off sooner than expected as loans refinance – straddling investors with
               more cash to invest at lower rates.
   SEC Considering Suit Against S&P – September 27, 2011
           o The SEC is considering legal action against Standard and Poor for its rating of 2007
               mortgage debt.
   Fannie Mae Purchase Servicing Rights – September 16, 2011
           o Fannie Mae purchased about $500 million in servicing rights from Bank of America.


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           o  They most likely bought the servicing rights to sell them to another servicing company
              who may be able to better “service” the loans, i.e. collect more, and therefore mitigate
              any losses Fannie may incur on the loans.
           o Fannie may sell the servicing rights to servicers who are better equipped to handle
              troubled loans.
   Fannie Mae Releases Servicer Ratings – September 14, 2011
           o The Servicer Total Achievement and Rewards (STAR) program measures the
              performance of services in helping homeowners avoid foreclosure
           o Servicers on track to receive 3 STAR ratings include: GMAC Mortgage, CitiMortgage,
              Everhome Mortgage, and Wells Fargo Bank in Peer Group 1. In Peer Group 2, Fifth
              Third Bank, The Huntington national Bank, HSBC Mortgage Corporation, Aurora
              Financial Group, Regions Bank, and Central Mortgage Company are on pace to receive 3
              STAR ratings.
           o 3 STARs represent median performance, 4 STARs represent above median performance,
              and 5 STARs represent superior performance. Peer groups are based on the number of
              loans they service.




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