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					                                                  24090                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  DEPARTMENT OF THE TREASURY                              Securities Exchange Act of 1934 (15                       Instructions: You must include ‘‘OCC’’
                                                                                                          U.S.C. 78o–11), as added by section 941                as the agency name and ‘‘Docket
                                                  Office of the Comptroller of the                        of the Dodd-Frank Wall Street Reform                   Number OCC–2011–0002’’ in your
                                                  Currency                                                and Consumer Protection Act. Section                   comment. In general, OCC will enter all
                                                                                                          15G generally requires the securitizer of              comments received into the docket and
                                                  12 CFR Part 43                                          asset-backed securities to retain not less             publish them on the Regulations.gov
                                                                                                          than five percent of the credit risk of the            Web site without change, including any
                                                  [Docket No. OCC–2011–0002]
                                                                                                          assets collateralizing the asset-backed                business or personal information that
                                                  RIN 1557–AD40                                           securities. Section 15G includes a                     you provide such as name and address
                                                                                                          variety of exemptions from these                       information, e-mail addresses, or phone
                                                                                                          requirements, including an exemption                   numbers. Comments received, including
                                                  FEDERAL RESERVE SYSTEM                                  for asset-backed securities that are                   attachments and other supporting
                                                                                                          collateralized exclusively by residential              materials, are part of the public record
                                                  12 CFR Part 244                                         mortgages that qualify as ‘‘qualified                  and subject to public disclosure. Do not
                                                                                                          residential mortgages,’’ as such term is               enclose any information in your
                                                  [Docket No. 2011–1411]                                  defined by the Agencies by rule.                       comment or supporting materials that
                                                  RIN 7100–AD–70                                          DATES: Comments must be received by                    you consider confidential or
                                                                                                          June 10, 2011.                                         inappropriate for public disclosure.
                                                                                                          ADDRESSES: Interested parties are                         You may review comments and other
                                                  FEDERAL DEPOSIT INSURANCE                               encouraged to submit written comments                  related materials that pertain to this
                                                  CORPORATION                                             jointly to all of the Agencies.                        proposed rulemaking by any of the
                                                                                                          Commenters are encouraged to use the                   following methods:
                                                  12 CFR Part 373                                         title ‘‘Credit Risk Retention’’ to facilitate             • Viewing Comments Electronically:
                                                                                                          the organization and distribution of                   Go to http://www.regulations.gov, under
                                                  RIN 3064–AD74                                                                                                  the ‘‘More Search Options’’ tab click
                                                                                                          comments among the Agencies.
                                                                                                          Commenters are also encouraged to                      next to the ‘‘Advanced Document
                                                                                                          identify the number of the specific                    Search’’ option where indicated, select
                                                  FEDERAL HOUSING FINANCE                                 request for comment to which they are                  ‘‘Comptroller of the Currency’’ from the
                                                  AGENCY                                                  responding.                                            agency drop-down menu, then click
                                                                                                             Office of the Comptroller of the                    ‘‘Submit.’’ In the ‘‘Docket ID’’ column,
                                                  12 CFR Part 1234                                        Currency: Because paper mail in the                    select ‘‘OCC–2011–0002’’ to view public
                                                  RIN 2590–AA43                                           Washington, DC, area and at the OCC is                 comments for this rulemaking action.
                                                                                                          subject to delay, commenters are                          • Viewing Comments Personally: You
                                                                                                          encouraged to submit comments by the                   may personally inspect and photocopy
                                                                                                          Federal eRulemaking Portal or e-mail, if               comments at the OCC, 250 E Street,
                                                  SECURITIES AND EXCHANGE                                 possible. Please use the title ‘‘Credit Risk           SW., Washington, DC. For security
                                                  COMMISSION                                              Retention’’ to facilitate the organization             reasons, the OCC requires that visitors
                                                                                                          and distribution of the comments. You                  make an appointment to inspect
                                                  17 CFR Part 246
                                                                                                          may submit comments by any of the                      comments. You may do so by calling
                                                  [Release No. 34–64148; File No. S7–14–11]               following methods:                                     (202) 874–4700. Upon arrival, visitors
                                                                                                             • Federal eRulemaking Portal—                       will be required to present valid
                                                  RIN 3235–AK96
                                                                                                          ‘‘Regulations.gov’’: Go to http://                     government-issued photo identification
                                                                                                          www.regulations.gov, under the ‘‘More                  and submit to security screening in
                                                                                                          Search Options’’ tab click next to the                 order to inspect and photocopy
                                                  DEPARTMENT OF HOUSING AND                               ‘‘Advanced Docket Search’’ option                      comments.
                                                  URBAN DEVELOPMENT                                       where indicated, select ‘‘Comptroller of                  • Docket: You may also view or
                                                                                                          the Currency’’ from the agency drop-                   request available background
                                                  24 CFR Part 267                                         down menu, then click ‘‘Submit.’’ In the               documents and project summaries using
                                                  RIN 2501–AD53                                           ‘‘Docket ID’’ column, select ‘‘OCC–2011–               the methods described above.
                                                                                                          0002’’ to submit or view public                           Board of Governors of the Federal
                                                  Credit Risk Retention                                   comments and to view supporting and                    Reserve System: You may submit
                                                                                                          related materials for this proposed rule.              comments, identified by Docket No. R–
                                                  AGENCIES:  Office of the Comptroller of                 The ‘‘How to Use This Site’’ link on the               1411, by any of the following methods:
                                                  the Currency, Treasury (OCC); Board of                  Regulations.gov home page provides                        • Agency Web Site: http://
                                                  Governors of the Federal Reserve                        information on using Regulations.gov,                  www.federalreserve.gov. Follow the
                                                  System (Board); Federal Deposit                         including instructions for submitting or               instructions for submitting comments at
                                                  Insurance Corporation (FDIC); U.S.                      viewing public comments, viewing                       http://www.federalreserve.gov/
                                                  Securities and Exchange Commission                      other supporting and related materials,                generalinfo/foia/ProposedRegs.cfm.
                                                  (Commission); Federal Housing Finance                   and viewing the docket after the close                    • Federal eRulemaking Portal: http://
                                                  Agency (FHFA); and Department of                        of the comment period.                                 www.regulations.gov. Follow the
                                                  Housing and Urban Development                              • E-mail:
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                                                                                                                                                                 instructions for submitting comments.
                                                  (HUD).                                                  regs.comments@occ.treas.gov.                              • E-mail:
                                                  ACTION: Proposed rule.                                     • Mail: Office of the Comptroller of                regs.comments@federalreserve.gov.
                                                                                                          the Currency, 250 E Street, SW., Mail                  Include the docket number in the
                                                  SUMMARY:  The OCC, Board, FDIC,                         Stop 2–3, Washington, DC 20219.                        subject line of the message.
                                                  Commission, FHFA, and HUD (the                             • Fax: (202) 874–5274.                                 • Fax: (202) 452–3819 or (202) 452–
                                                  Agencies) are proposing rules to                           • Hand Delivery/Courier: 250 E                      3102.
                                                  implement the credit risk retention                     Street, SW., Mail Stop 2–3, Washington,                   • Mail: Address to Jennifer J. Johnson,
                                                  requirements of section 15G of the                      DC 20219.                                              Secretary, Board of Governors of the


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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                         24091

                                                  Federal Reserve System, 20th Street and                 if e-mail is used. To help us process and                Department of Housing and Urban
                                                  Constitution Avenue, NW., Washington,                   review your comments more efficiently,                 Development: Interested persons are
                                                  DC 20551.                                               please use only one method. The                        invited to submit comments regarding
                                                     All public comments will be made                     Commission will post all comments on                   this rule to the Regulations Division,
                                                  available on the Board’s Web site at                    the Commission’s Internet Web site                     Office of General Counsel, Department
                                                  http://www.federalreserve.gov/                          (http://www.sec.gov/rules/                             of Housing and Urban Development,
                                                  generalinfo/foia/ProposedRegs.cfm as                    proposed.shtml). Comments are also                     451 7th Street, SW., Room 10276,
                                                  submitted, unless modified for technical                available for website viewing and                      Washington, DC 20410–0500.
                                                  reasons. Accordingly, comments will                     printing in the Commission’s Public                    Communications must refer to the
                                                  not be edited to remove any identifying                 Reference Room, 100 F Street, NE.,                     following docket number [FR–5504–P–
                                                  or contact information. Public                          Washington, DC 20549, on official                      01] and title of this rule. There are two
                                                  comments may also be viewed                             business days between the hours of                     methods for submitting public
                                                  electronically or in paper in Room MP–                  10 a.m. and 3 p.m. All comments                        comments. All submissions must refer
                                                  500 of the Board’s Martin Building (20th                received will be posted without change;                to the above docket number and title.
                                                  and C Streets, NW.) between 9 a.m. and                  we do not edit personal identifying                      • Submission of Comments by Mail.
                                                  5 p.m. on weekdays.                                     information from submissions. You                      Comments may be submitted by mail to
                                                     Federal Deposit Insurance                            should submit only information that                    the Regulations Division, Office of
                                                  Corporation: You may submit                             you wish to make available publicly.                   General Counsel, Department of
                                                  comments, identified by RIN number,                        Federal Housing Finance Agency: You                 Housing and Urban Development, 451
                                                  by any of the following methods:                        may submit your written comments on                    7th Street, SW., Room 10276,
                                                     • Agency Web Site: http://                           the proposed rulemaking, identified by                 Washington, DC 20410–0500.
                                                  www.FDIC.gov/regulations/laws/                          RIN number 2590–AA43, by any of the                      • Electronic Submission of
                                                  federal/notices.html. Follow                            following methods:                                     Comments. Interested persons may
                                                  instructions for submitting comments                       • E-mail: Comments to Alfred M.                     submit comments electronically through
                                                  on the Agency Web Site.                                 Pollard, General Counsel, may be sent                  the Federal eRulemaking Portal at
                                                     • E-mail: Comments@FDIC.gov.                         by e-mail at RegComments@fhfa.gov.                     www.regulations.gov. HUD strongly
                                                  Include the RIN number on the subject                   Please include ‘‘RIN 2590–AA43’’ in the                encourages commenters to submit
                                                  line of the message.                                    subject line of the message.                           comments electronically. Electronic
                                                     • Mail: Robert E. Feldman, Executive                    • Federal eRulemaking Portal: http://               submission of comments allows the
                                                  Secretary, Attention: Comments, Federal                 www.regulations.gov. Follow the                        commenter maximum time to prepare
                                                  Deposit Insurance Corporation, 550 17th                 instructions for submitting comments. If               and submit a comment, ensures timely
                                                  Street, NW., Washington, DC 20429.                      you submit your comment to the                         receipt by HUD, and enables HUD to
                                                     • Hand Delivery: Comments may be                     Federal eRulemaking Portal, please also                make them immediately available to the
                                                  hand delivered to the guard station at                  send it by e-mail to FHFA at                           public. Comments submitted
                                                  the rear of the 550 17th Street Building                RegComments@fhfa.gov to ensure                         electronically through the
                                                  (located on F Street) on business days                  timely receipt by the Agency. Please                   www.regulations.gov website can be
                                                  between 7 a.m. and 5 p.m.                               include ‘‘RIN 2590–AA43’’ in the subject               viewed by other commenters and
                                                     Instructions: All comments received                  line of the message.                                   interested members of the public.
                                                  must include the agency name and RIN                       • U.S. Mail, United Parcel Service,                 Commenters should follow the
                                                  for this rulemaking and will be posted                  Federal Express, or Other Mail Service:                instructions provided on that site to
                                                  without change to http://www.fdic.gov/                  The mailing address for comments is:                   submit comments electronically.
                                                  regulations/laws/federal/propose.html,                  Alfred M. Pollard, General Counsel,                      • NOTE: To receive consideration as
                                                  including any personal information                      Attention: Comments/RIN 2590–AA43,                     public comments, comments must be
                                                  provided.                                               Federal Housing Finance Agency,                        submitted through one of the two
                                                     Securities and Exchange Commission:                  Fourth Floor, 1700 G Street, NW.,                      methods specified above. Again, all
                                                  You may submit comments by the                          Washington, DC 20552.                                  submissions must refer to the docket
                                                  following method:                                          • Hand Delivery/Courier: The hand                   number and title of the rule.
                                                                                                          delivery address is: Alfred M. Pollard,                  • No Facsimile Comments. Facsimile
                                                  Electronic Comments                                     General Counsel, Attention: Comments/                  (FAX) comments are not acceptable.
                                                     • Use the Commission’s Internet                      RIN 2590–AA43, Federal Housing                           • Public Inspection of Public
                                                  comment form (http://www.sec.gov/                       Finance Agency, Fourth Floor, 1700 G                   Comments. All properly submitted
                                                  rules/proposed.shtml); or                               Street, NW., Washington, DC 20552. A                   comments and communications
                                                     • Send an e-mail to rule-                            hand-delivered package should be                       submitted to HUD will be available for
                                                  comments@sec.gov. Please include File                   logged at the Guard Desk, First Floor, on              public inspection and copying between
                                                  Number S7–14–11 on the subject line;                    business days between 9 a.m. and 5 p.m.                8 a.m. and 5 p.m. weekdays at the above
                                                  or                                                         All comments received by the                        address. Due to security measures at the
                                                     • Use the Federal eRulemaking Portal                 deadline will be posted for public                     HUD Headquarters building, an
                                                  (http://www.regulations.gov). Follow the                inspection without change, including                   appointment to review the public
                                                  instructions for submitting comments.                   any personal information you provide,                  comments must be scheduled in
                                                                                                          such as your name and address, on the                  advance by calling the Regulations
                                                  Paper Comments                                          FHFA website at http://www.fhfa.gov.                   Division at 202–708–3055 (this is not a
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                                                    • Send paper comments in triplicate                   Copies of all comments timely received                 toll-free number). Individuals with
                                                  to Elizabeth M. Murphy, Secretary,                      will be available for public inspection                speech or hearing impairments may
                                                  Securities and Exchange Commission,                     and copying at the address above on                    access this number via TTY by calling
                                                  100 F Street, NE., Washington, DC                       government-business days between the                   the Federal Information Relay Service at
                                                  20549–1090.                                             hours of 10 a.m. and 3 p.m. To make an                 800–877–8339. Copies of all comments
                                                    • All submissions should refer to File                appointment to inspect comments                        submitted are available for inspection
                                                  Number S7–14–11. This file number                       please call the Office of General Counsel              and downloading at http://
                                                  should be included on the subject line                  at (202) 414–6924.                                     www.regulations.gov.


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                                                  24092                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  FOR FURTHER INFORMATION CONTACT:                        Management and Regulatory Affairs,                       2. Loan-to-Value Requirement
                                                  OCC: Chris Downey, Risk Specialist,                     Office of Housing, Department of                         3. Valuation of the Collateral
                                                  Financial Markets Group, (202) 874–                     Housing and Urban Development, 451                       4. Risk Management and Monitoring 

                                                  4660; Kevin Russell, Director, Retail                   7th Street, SW., Room 9106,                                 Requirements 

                                                                                                                                                                   E. Qualifying Automobile Loans
                                                  Credit Risk, (202) 874–5170; Darrin                     Washington, DC 20410; telephone                          1. Ability to Repay
                                                  Benhart, Director, Commercial Credit                    number 202–402–5216 (this is not a toll-                 2. Loan Terms
                                                  Risk, (202) 874–5670; or Jamey Basham,                  free number). Persons with hearing or                    3. Reviewing Credit History
                                                  Assistant Director, or Carl Kaminski,                   speech impairments may access this                       4. Loan-to-Value
                                                  Senior Attorney, Legislative and                        number through TTY by calling the toll-                  F. Buy-Back Requirements for ABS
                                                  Regulatory Activities Division, (202)                   free Federal Information Relay Service                      Issuances Collateralized by Qualifying
                                                  874–5090, Office of the Comptroller of                  at 800–877–8339.                                            Commercial, CRE or Automobile Loans
                                                  the Currency, 250 E Street, SW.,                                                                               VI. General Exemptions
                                                                                                          SUPPLEMENTARY INFORMATION:
                                                  Washington, DC 20219.                                                                                            A. Exemption for Federally Insured or
                                                    Board: Benjamin W. McDonough,                         Table of Contents                                           Guaranteed Residential, Multifamily and
                                                  Counsel, (202) 452–2036; April C.                                                                                   Health Care Mortgage Assets
                                                                                                          I. Introduction                                          B. Other Exemptions
                                                  Snyder, Counsel, (202) 452–3099;                        II. General Definitions and Scope                        C. Exemption for Certain Resecuritization
                                                  Sebastian R. Astrada, Attorney, (202)                      A. Asset-Backed Securities, Securitization               Transactions
                                                  452–3594; or Flora H. Ahn, Attorney,                          Transaction and ABS Interests                      D. Additional Exemptions
                                                  (202) 452–2317, Legal Division; Thomas                     B. Securitizer, Sponsor, and Depositor                E. Safe Harbor for Certain Foreign-Related
                                                  R. Boemio, Manager, (202) 452–2982;                        C. Originator                                            Transactions
                                                  Donald N. Gabbai, Senior Supervisory                    III. General Risk Retention Requirement                VII. Solicitation of Comments on Use of Plain
                                                  Financial Analyst, (202) 452–3358; or                      A. Minimum 5 Percent Risk Retention 
                    Language
                                                                                                                Required 
                                       VIII. Administrative Law Matters
                                                  Sviatlana A. Phelan, Financial Analyst,
                                                                                                             B. Permissible Forms of Risk Retention                A. Regulatory Flexibility Act
                                                  (202) 912–4306, Division of Banking                        1. Vertical Risk Retention
                                                  Supervision and Regulation; Andreas                                                                              B. Paperwork Reduction Act
                                                                                                             2. Horizontal Risk Retention                          C. Commission Economic Analysis
                                                  Lehnert, Deputy Director, Office of                        3. L-Shaped Risk Retention                            D. Executive Order 12866 Determination
                                                  Financial Stability Policy and Research,                   4. Revolving Asset Master Trusts (Seller’s            E. OCC Unfunded Mandates Reform Act of
                                                  (202) 452–3325; or Brent Lattin,                              Interest)                                             1995 Determination
                                                  Counsel, (202) 452–3367, Division of                       5. Representative Sample                              F. Commission: Small Business Regulatory
                                                  Consumer and Community Affairs,                            6. Asset-Backed Commercial Paper 
                       Enforcement Fairness Act
                                                  Board of Governors of the Federal                             Conduits 
                                         G. FHFA: Considerations of Differences
                                                  Reserve System, 20th and C Streets,                        7. Commercial Mortgage-Backed Securities                 Between the Federal Home Loan Banks
                                                                                                             8. Treatment of Government-Sponsored                     and the Enterprises
                                                  NW., Washington, DC 20551.
                                                                                                                Enterprises
                                                    FDIC: Beverlea S. Gardner, Special                                                                           I. Introduction
                                                                                                             9. Premium Capture Cash Reserve Account
                                                  Assistant to the Chairman, (202) 898–                      C. Allocation to the Originator
                                                  3640; Mark L. Handzlik, Counsel, (202)                     D. Hedging, Transfer, and Financing 
                  The Agencies are requesting comment
                                                  898–3990; Phillip E. Sloan, Counsel,                          Restrictions 
                                   on proposed rules (proposal or proposed
                                                  (703) 562–6137; or Petrina R. Dawson,                   IV. Qualified Residential Mortgages                    rules) to implement the requirements of
                                                  Counsel, (703) 562–2688, Federal                           A. Overall Approach to Defining Qualified           section 941(b) of the Dodd-Frank Wall
                                                  Deposit Insurance Corporation, 550 17th                       Residential Mortgages                            Street Reform and Consumer Protection
                                                  Street, NW., Washington, DC 20429.                         B. Exemption for QRMs                               Act (the Act, or Dodd-Frank Act),1
                                                    Commission: Jay Knight, Attorney-                        C. Eligibility Criteria                             which is codified as new section 15G of
                                                  Advisor in the Office of Rulemaking, or                    1. Eligible Loans, First Lien, No                   the Securities Exchange Act of 1934 (the
                                                  Katherine Hsu, Chief of the Office of                         Subordinate Liens, Original Maturity and
                                                                                                                Written Application Requirements
                                                                                                                                                                 Exchange Act).2 Section 15G of the
                                                  Structured Finance, Division of                            2. Borrower Credit History                          Exchange Act, as added by section
                                                  Corporation Finance, at (202) 551–3753,                    3. Payment Terms                                    941(b) of the Dodd-Frank Act, generally
                                                  U.S. Securities and Exchange                               4. Loan-to-Value Ratio                              requires the Board, the FDIC, the OCC
                                                  Commission, 100 F Street, NE.,                             5. Down Payment                                     (collectively, referred to as the Federal
                                                  Washington, DC 20549–3628.                                 6. Qualifying Appraisal                             banking agencies), the Commission,
                                                    FHFA: Patrick J. Lawler, Associate                       7. Ability To Repay                                 and, in the case of the securitization of
                                                  Director and Chief Economist,                              8. Points and Fees                                  any ‘‘residential mortgage asset,’’
                                                  Patrick.Lawler@fhfa.gov, (202) 414–                        9. Assumability Prohibition                         together with HUD and FHFA, to jointly
                                                  3746; Austin Kelly, Associate Director                     D. Repurchase of Loans Subsequently
                                                                                                                Determined To Be Non-Qualified After
                                                                                                                                                                 prescribe regulations that (i) require a
                                                  for Housing Finance Research,                                                                                  securitizer to retain not less than five
                                                                                                                Closing
                                                  Austin.Kelly@fhfa.gov, (202) 343–1336;                     E. Request for Comment on Possible 
                percent of the credit risk of any asset
                                                  Phillip Millman, Principal Capital                            Alternative Approach 
                           that the securitizer, through the
                                                  Markets Specialist,                                     V. Reduced Risk Retention Requirements for             issuance of an asset-backed security
                                                  Phillip.Millman@fhfa.gov, (202) 343–                          ABS Backed by Qualifying Commercial              (ABS), transfers, sells, or conveys to a
                                                  1507; or Thomas E. Joseph, Senior                             Real Estate, Commercial, or Automobile           third party, and (ii) prohibit a
                                                  Attorney Advisor,                                             Loans                                            securitizer from directly or indirectly
                                                  Thomas.Joseph@fhfa.gov, (202) 414–                         A. Asset Classes
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                                                                                                                                                                 hedging or otherwise transferring the
                                                  3095; Federal Housing Finance Agency,                      B. ABS Collateralized Exclusively by 

                                                                                                                Qualifying CRE Loans, Commercial 

                                                                                                                                                                 credit risk that the securitizer is
                                                  Third Floor, 1700 G Street, NW.,                                                                               required to retain under section 15G and
                                                                                                                Loans, or Automobile Loans 

                                                  Washington, DC 20552. The telephone                        C. Qualifying Commercial Loans                      the Agencies’ implementing rules.3
                                                  number for the Telecommunications                          1. Ability To Repay
                                                  Device for the Hearing Impaired is (800)                   2. Risk Management and Monitoring 
                   1 Public  Law 111–203, 124 Stat. 1376 (2010).
                                                  877–8339.                                                     Requirements 
                                     2 15  U.S.C. 78o–11.
                                                    HUD: Robert C. Ryan, Deputy                              D. Qualifying CRE Loans                                3 See 15 U.S.C. 78o–11(b), (c)(1)(A) and

                                                  Assistant Secretary for Risk                               1. Ability To Repay                                 (c)(1)(B)(ii).



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                      24093

                                                     Section 15G of the Exchange Act                      as that term is jointly defined by the                        As shown in tables A, B, C, and D
                                                  exempts certain types of securitization                 Agencies.4 In addition, section 15G                         below, the securitization markets are an
                                                  transactions from these risk retention                  states that the Agencies must permit a                      important source of credit to U.S.
                                                  requirements and authorizes the                         securitizer to retain less than five                        households and businesses and state
                                                  Agencies to exempt or establish a lower                 percent of the credit risk of commercial                    and local governments.6
                                                  risk retention requirement for other                    mortgages, commercial loans, and                            BILLING CODE 4810–33–P
                                                  types of securitization transactions. For               automobile loans that are transferred,
                                                  example, section 15G specifically                       sold, or conveyed through the issuance
                                                  provides that a securitizer shall not be                of ABS by the securitizer if the loans                        6 Data are through September 2010. All data from
                                                  required to retain any part of the credit               meet underwriting standards                                 Asset Backed Alert except: CMBS data from
                                                  risk for an asset that is transferred, sold,            established by the Federal banking                          Commercial Mortgage Alert, CLO data from
                                                  or conveyed through the issuance of                     agencies.5                                                  Securities Industry and Financial Markets
                                                  ABS by the securitizer, if all of the                                                                               Association. The tables do not include any data on
                                                  assets that collateralize the ABS are                     4 See   15 U.S.C. 78o–11(c)(1)(C)(iii), (4)(A) and (B).   securities issued or guaranteed by the Federal
                                                  qualified residential mortgages (QRMs),                   5 See   id. at sec. 78o–11(c)(1)(B)(ii) and (2).          National Mortgage Association or the Federal Home
                                                                                                                                                                      Loan Mortgage Corporation.
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                                                  24094                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules
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                                                                                    Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                          24095




                                                  BILLING CODE 4810–33–C


                                                                           TABLE D—TOTAL U.S. ASSET AND MORTGAGE BACKED SECURITIZATIONS ISSUED PER YEAR
                                                                                                                                [Dollars in millions]

                                                                                                                                                                                                                      Total 2002
                                                                                     2002        2003         2004              2005           2006           2007         2008            2009        2010            3Q2010

                                                  Auto ..........................    95,484     86,350          72,881          103,717         82,000         66,773      35,469          53,944       43,104            639,724
                                                  CLO ..........................     30,388     22,584          32,192           69,441        171,906        138,827      27,489           2,033    ..............       494,860
                                                  CMBS .......................       89,900    107,354         136,986          245,883        305,714        319,863      33,583          38,750       27,297          1,305,329
                                                  Credit Cards .............         73,004     67,385          51,188           62,916         72,518         94,470      61,628          46,581         6,149           535,839
                                                  Equipment ................          7,062      9,022           6,288            9,030          8,404          6,066       3,014           7,240         5,010            61,137
                                                  Floorplan ..................        3,000      6,315          11,848           12,670         12,173          6,925       1,000           4,959         8,619            67,510
                                                  Other ........................    135,384    196,769         330,161          444,137        516,175        165,515      19,872          10,652       24,936          1,843,601
                                                  RMBS .......................      287,916    396,288         503,911          724,115        723,257        641,808      28,612          48,082       39,830          3,393,819
                                                  Student Loan ............          25,367     40,067          45,759           62,212         65,745      5,812,212      28,199          20,839       13,899            360,210

                                                        Total ..................    747,506    932,134       1,191,216     1,734,122         1,957,891      1,498,370     238,868         233,079    168,843          ..................
                                                     Note: 2010 Data are through the month of September.


                                                    When properly structured,                                 when incentives are not properly                          among various parties involved in the
                                                  securitization provides economic                            aligned and there is a lack of discipline                 process.8
                                                  benefits that lower the cost of credit to                   in the origination process, securitization                   For example, as noted in the
                                                  households and businesses.7 However,                        can result in harm to investors,                          legislative history of section 15G, under
                                                                                                              consumers, financial institutions, and                    the ‘‘originate to distribute’’ model, loans
                                                     7 Securitization may reduce the cost of funding,
                                                                                                              the financial system. During the                          were made expressly to be sold into
                                                  which is accomplished through several different                                                                       securitization pools, with lenders often
                                                  mechanisms. For example, firms that specialize in
                                                                                                              financial crisis, securitization displayed
                                                  originating new loans and that have difficulty              significant vulnerabilities to                            not expecting to bear the credit risk of
                                                  funding existing loans may use securitization to            informational and incentive problems                      borrower default.9 In addition,
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  access more liquid capital markets for funding. In                                                                    participants in the securitization chain
                                                  addition, securitization can create opportunities for                                                                 may be able to affect the value of the
                                                  more efficient management of the asset–liability            originate loans to particular classes of borrowers, or
                                                  duration mismatch generally associated with the             in particular geographic areas, to limit concentrated     ABS in opaque ways, both before and
                                                  funding of long-term loans, for example, with short-        exposure to these idiosyncratic risks on their            after the sale of the securities,
                                                  term bank deposits. Securitization also allows the          balance sheets. See generally Report to the Congress      particularly if those assets are
                                                  structuring of securities with differing maturity and       on Risk Retention, Board of Governors of the
                                                  credit risk profiles that may appeal to a broad range       Federal Reserve System, at 8 (October 2010),              resecuritized into complex instruments
                                                  of investors from a single pool of assets. Moreover,        available at http://federalreserve.gov/boarddocs/
                                                                                                                                                                         8 See   Board Report at 8–9. 

                                                  securitization that involves the transfer of credit         rptcongress/securitization/riskretention.pdf (Board
                                                                                                                                                                                                                                           EP29AP11.001</GPH>




                                                  risk allows financial institutions that primarily           Report).                                                   9 See   S. Rep. No. 111–176, at 128 (2010). 




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                                                  24096                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  such as collateralized debt obligations                    In developing the proposed rules, the                 broad or narrow definition of QRMs on
                                                  (CDOs) and CDOs-squared.10 Moreover,                    Agencies have taken into account the                     the housing and housing finance
                                                  some lenders using an ‘‘originate-to-                   diversity of assets that are securitized,                markets.
                                                  distribute’’ business model loosened                    the structures historically used in                         As discussed in greater detail in Part
                                                  their underwriting standards knowing                    securitizations, and the manner in                       V of this Supplementary Information,
                                                  that the loans could be sold through a                  which securitizers may have retained                     the proposed rules would generally
                                                  securitization and retained little or no                exposure to the credit risk of the assets                prohibit QRMs from having product
                                                  continuing exposure to the quality of                   they securitize.17 As described in detail                features that contributed significantly to
                                                  those assets.11                                         below, the proposed rules provide                        the high levels of delinquencies and
                                                     The risk retention requirements added                several options securitizers may choose                  foreclosures since 2007—such as terms
                                                  by section 15G are intended to help                     from in meeting the risk retention                       permitting negative amortization,
                                                  address problems in the securitization                  requirements of section 15G, including,                  interest-only payments, or significant
                                                  markets by requiring that securitizers, as              but not limited to, retention of a five                  interest rate increases—and also would
                                                  a general matter, retain an economic                    percent ‘‘vertical’’ slice of each class of              establish underwriting standards
                                                  interest in the credit risk of the assets               interests issued in the securitization or                designed to ensure that QRMs are of
                                                  they securitize. As indicated in the                    retention of a five percent ‘‘horizontal’’               very high credit quality consistent with
                                                  legislative history of section 15G, ‘‘When              first-loss interest in the securitization, as            their exemption from risk retention
                                                  securitizers retain a material amount of                well as other risk retention options that                requirements. These underwriting
                                                  risk, they have ‘skin in the game,’                     take into account the manners in which                   standards include, among other things,
                                                  aligning their economic interest with                   risk retention often has occurred in                     maximum front-end and back-end debt-
                                                  those of investors in asset-backed                      credit card receivable and automobile                    to-income ratios of 28 percent and 36
                                                  securities.’’ 12 By requiring that the                  loan and lease securitizations and in                    percent, respectively; 19 a maximum
                                                  securitizer retain a portion of the credit              connection with the issuance of asset-                   loan-to-value (LTV) ratio of 80 percent
                                                  risk of the assets being securitized,                   backed commercial paper. The proposed                    in the case of a purchase transaction
                                                  section 15G provides securitizers an                    rules also include a special ‘‘premium                   (with a lesser combined LTV permitted
                                                  incentive to monitor and ensure the                     capture’’ mechanism designed to                          for refinance transactions); a 20 percent
                                                  quality of the assets underlying a                      prevent a securitizer from structuring an                down payment requirement in the case
                                                  securitization transaction, and thereby                 ABS transaction in a manner that would                   of a purchase transaction; and credit
                                                  helps align the interests of the                        allow the securitizer to effectively                     history restrictions.
                                                  securitizer with the interests of                       negate or reduce its retained economic                      The proposed rules also would not
                                                  investors. Additionally, in                             exposure to the securitized assets by                    require a securitizer to retain any
                                                  circumstances where the assets                          immediately monetizing the excess                        portion of the credit risk associated with
                                                  collateralizing the ABS meet                            spread created by the securitization                     a securitization transaction if the ABS
                                                  underwriting and other standards that                   transaction.18 In designing these options                issued are exclusively collateralized by
                                                  should ensure the assets pose low credit                and the proposed rules in general, the                   commercial loans, commercial
                                                  risk, the statute provides or permits an                Agencies have sought to ensure that the                  mortgages, or automobile loans that
                                                  exemption.13                                            amount of credit risk retained is                        meet underwriting standards included
                                                     The credit risk retention requirements               meaningful—consistent with the                           in the proposed rules for the individual
                                                  of section 15G are an important part of                 purposes of section 15G—while                            asset class. As for QRMs, these
                                                  the legislative and regulatory efforts to               reducing the potential for the proposed                  underwriting standards are designed to
                                                  address weaknesses and failures in the                  rules to negatively affect the availability              be robust and ensure that the loans
                                                  securitization process and the                          and costs of credit to consumers and                     backing the ABS are of very low credit
                                                  securitization markets. Section 15G                     businesses.                                              risk. In this Supplementary Information,
                                                  complements other parts of the Dodd-                       As required by section 15G, the                       the Agencies refer to these assets
                                                  Frank Act intended to improve the                       proposed rules provide a complete                        (including QRMs) as ‘‘qualified assets.’’
                                                  securitization markets. These include,                  exemption from the risk retention                           The Agencies recognize that many
                                                  among others, provisions that                           requirements for ABS that are                            prudently underwritten residential and
                                                  strengthen the regulation and                           collateralized solely by QRMs and                        mortgage loans, commercial loans, and
                                                  supervision of nationally recognized                    establish the terms and conditions                       automobile loans may not satisfy all the
                                                  statistical rating agencies (NRSROs) and                under which a residential mortgage                       underwriting and other criteria in the
                                                  improve the transparency of credit                      would qualify as a QRM. In developing                    proposed rules for qualified assets.
                                                  ratings; 14 provide for issuers of                      the proposed definition of a QRM, the                    Securitizers of ABS backed by such
                                                  registered ABS offerings to perform a                   Agencies carefully considered the terms                  prudently underwritten loans would, as
                                                  review of the assets underlying the ABS                 and purposes of section 15G, public                      a general matter, be required to retain
                                                  and disclose the nature of the review; 15               input, and the potential impact of a                     credit risk under the rule. However, as
                                                  and require issuers of ABS to disclose                                                                           noted above, the Agencies have sought
                                                  the history of the repurchase requests                    17 Both the language and legislative history of        to structure the proposed risk retention
                                                  they received and repurchases they                      section 15G indicate that Congress expected the          requirements in a flexible manner that
                                                                                                          agencies to be mindful of the heterogeneity of
                                                  made related to their outstanding                       securitization markets. See, e.g., 15 U.S.C. 78o–
                                                                                                                                                                   would allow the securitization markets
                                                  ABS.16                                                  11(c)(1)(E), (c)(2), (e); S. Rep. No. 111–76, at 130     for non-qualified assets to function in a
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                                                                                                          (2010) (‘‘The Committee believes that
                                                    10 See id.                                            implementation of risk retention obligations should        19 A front-end debt-to-income ratio measures how

                                                    11 See                                                recognize the differences in securitization practices    much of the borrower’s gross (pretax) monthly
                                                           id.
                                                    12 See id. at 129.
                                                                                                          for various asset classes.’’)                            income is represented by the borrower’s required
                                                                                                            18 ‘‘Excess spread’’ is the difference between the     payment on the first-lien mortgage, including real
                                                    13 See 15 U.S.C. 78o–11(c)(1)(B)(ii), (e)(1)–(2).
                                                                                                          gross yield on the pool of securitized assets less the   estate taxes and insurance. A back-end debt-to-
                                                    14 See, e.g., sections 932, 935, 936, 938, and 943
                                                                                                          cost of financing those assets (weighted average         income ratio measures how much of a borrower’s
                                                  of the Dodd-Frank Act.                                  coupon paid on the investor certificates), charge-       gross (pretax) monthly income would go toward
                                                    15 See section 945 of the Dodd-Frank Act.
                                                                                                          offs, servicing costs, and any other trust expenses      monthly mortgage and nonmortgage debt service
                                                    16 See section 943 of the Dodd-Frank Act.             (such as insurance premiums, if any).                    obligations.



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                                                                              Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                      24097

                                                  manner that both facilitates the flow of                   Financial Stability Oversight Council,                   securitization transaction, or other
                                                  credit to consumers and businesses on                      coordinated the development of these                     matter addressed by the interpretation,
                                                  economically viable terms and is                           joint proposed rules in accordance with                  guidance, exemption, exceptions, or
                                                  consistent with the protection of                          the requirements of section 15G.24                       adjustments. The Agencies expect to
                                                  investors.                                                    For ease of reference, the proposed                   coordinate with each other to facilitate
                                                     Section 15G allocates the authority for                 rules of the Agencies are referenced                     the processing, review and action on
                                                  writing rules to implement its                             using a common designation of § l.1 to                   requests for such written interpretations
                                                  provisions among the Agencies in                           § l.23 (excluding the title and part                     or guidance, or additional exemptions,
                                                  various ways. As a general matter, the                     designations for each Agency). With the                  exceptions or adjustments.
                                                  Agencies collectively are responsible for                  exception of HUD, each Agency will
                                                  adopting joint rules to implement the                      codify the rules, when adopted in final                  II. General Definitions and Scope
                                                  risk retention requirements of section                     form, within each of their respective                      Section l.2 of the proposed rules
                                                  15G for securitizations that are backed                    titles of the Code of Federal                            defines terms used throughout the
                                                  by residential mortgage assets and for                     Regulations.25 Section l.1 of each                       proposed rules. Certain of these
                                                  defining what constitutes a QRM for                        Agency’s proposed rules identifies the
                                                                                                                                                                      definitions are discussed in this part of
                                                  purposes of the exemption for QRM-                         entities or transactions that would be
                                                                                                                                                                      the Supplementary Information. Other
                                                  backed ABS.20 The Federal banking                          subject to such Agency’s rules.26
                                                                                                                In light of the joint nature of the                   terms are discussed together with the
                                                  agencies and the Commission, however,
                                                                                                             Agencies’ rulewriting authority under                    section of the proposed rules where they
                                                  are responsible for adopting joint rules
                                                                                                             section 15G, the appropriate Agencies                    are used. For example, certain
                                                  that implement section 15G for
                                                                                                             will jointly approve any written                         definitions that relate solely to the
                                                  securitizations backed by all other types
                                                                                                             interpretations, written responses to                    exemptions for securitizations based on
                                                  of assets,21 and also are the agencies
                                                                                                             requests for no-action letters and legal                 QRMs and certain qualifying
                                                  authorized to adopt rules in several
                                                                                                             opinions, or other written interpretive                  commercial, commercial real estate, and
                                                  specific areas under section 15G.22 In
                                                  addition, the Federal banking agencies                     guidance concerning the scope or terms                   automobile loans, are contained in, and
                                                  are responsible for establishing, by rule,                 of section 15G and the final rules issued                are discussed in the context of, those
                                                  the underwriting standards for non-                        thereunder that are intended to be relied                sections (see subpart C of the proposed
                                                  QRM residential mortgages, commercial                      on by the public generally.27 Similarly,                 rules).
                                                  mortgages, commercial loans and                            the appropriate Agencies will jointly                    A. Asset-Backed Securities,
                                                  automobile loans that would qualify                        approve any exemptions, exceptions, or                   Securitization Transaction and ABS
                                                  ABS backed by these types of loans for                     adjustments to the final rules.28 For                    Interests
                                                  a less than five percent risk retention                    these purposes, the phrase ‘‘appropriate
                                                  requirement.23 Accordingly, when used                      Agencies’’ refers to the Agencies with                      The proposed risk retention rules
                                                  in this proposal, the term ‘‘Agencies’’                    rulewriting authority for the asset class,               would apply to securitizers in
                                                  shall be deemed to refer to the                                                                                     securitizations that involve the issuance
                                                  appropriate Agencies that have                               24 See  id. at 78o–11(h).                              of ‘‘asset-backed securities’’ as defined in
                                                  rulewriting authority with respect to the                    25 Specifically,  the agencies propose to codify the   section 3(a)(77) of the Exchange Act,
                                                                                                             rules as follows: 12 CFR part 43 (OCC); 12 CFR part
                                                  asset class, securitization transaction, or                244 (Regulation RR) (Board); 12 CFR part 373
                                                                                                                                                                      which also was added to the Exchange
                                                  other matter discussed. The Secretary of                   (FDIC); 17 CFR part 246 (Commission); 12 CFR part        Act by section 941 of the Dodd-Frank
                                                  the Treasury, as Chairperson of the                        1234 (FHFA). As required by section 15G, HUD has         Act.29 Section 3(a)(77) of the Exchange
                                                                                                             jointly prescribed the proposed rules for a              Act generally defines an ‘‘asset-backed
                                                                                                             securitization that is backed by any residential
                                                    20 See  id. at sec. 78o–11(b)(2), (e)(4)(A) and (B).     mortgage asset and for purposes of defining a            security’’ to mean ‘‘a fixed-income or
                                                    21 See  id. at sec. 78o–11(b)(1).                        qualified residential mortgage. HUD’s codification       other security collateralized by any type
                                                     22 See, e.g. id. at sec. 78o–11(b)(1)(E) (relating to
                                                                                                             in 24 CFR part 267 indicates that the proposed rules     of self-liquidating financial asset
                                                  the risk retention requirements for ABS                    include exceptions and exemptions in Subpart D of
                                                  collateralized by commercial mortgages);
                                                                                                                                                                      (including a loan, lease, mortgage, or
                                                                                                             each of these rules for certain transactions involving
                                                  (b)(1)(G)(ii) (relating to additional exemptions for       programs and entities under the jurisdiction of          other secured or unsecured receivable)
                                                  assets issued or guaranteed by the United States or        HUD.                                                     that allows the holder of the security to
                                                  an agency of the United States); (d) (relating to the         26 The joint proposed rules being adopted by the
                                                                                                                                                                      receive payments that depend primarily
                                                  allocation of risk retention obligations between a         Agencies would apply to all sponsors that fall
                                                  securitizer and an originator); and (e)(1) (relating to
                                                                                                                                                                      on cash flow from the asset.’’ 30 The
                                                                                                             within the scope of 15G, including state and federal
                                                  additional exemptions, exceptions or adjustments           savings associations and savings and loan holding        proposed rules incorporate by reference
                                                  for classes of institutions or assets).                    companies. These entities are currently regulated        this definition of asset-backed security
                                                     23 See id. at sec. 78o-11(b)(2)(B). Therefore,          and supervised by the Office of Thrift Supervision       from the Exchange Act.31 Consistent
                                                  pursuant to section 15G, only the Federal banking          (OTS), which is not among the Federal banking            with this definition, the proposed rules
                                                  agencies are proposing the underwriting definitions        agencies with rulemaking authority under section
                                                  in § l.16 (except the asset class definitions of           15G. Authority of the OTS under the Home Owners’         also define the term ‘‘asset’’ to mean a
                                                  automobile loan, commercial loan, and commercial           Loan Act (12 U.S.C. 1461 et seq.) with respect to        self-liquidating financial asset,
                                                  real estate loan, which are being proposed by the          such entities will transfer from the OTS to the          including loans, leases, or other
                                                  Federal banking agencies and the Commission), and          Board, FDIC, and OCC on the transfer date provided
                                                  the underwriting standards in §§ l.18(b)(1)–(6),           in section 311 of the Dodd-Frank Act. This transfer
                                                                                                                                                                        29 See  section 941(a) of the Dodd-Frank Act.
                                                  l.19(b)(1)–(9), and l.20(b)(1)–(8) of the proposed         will take place well before the effective date of the
                                                                                                             Federal banking agencies’ final rules under section        30 See  15 U.S.C. § 78c(a)(77). The term also (i)
                                                  rules. At the final rule stage, FHFA proposes to
                                                  adopt only those provisions of the common rules            15G. Accordingly, the final rules issued by the          includes any other security that the Commission, by
                                                                                                             appropriate Federal banking agency would include         rule, determines to be an asset-backed security for
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                                                  that address the types of asset securitization
                                                  transactions in which its regulated entities could be      the relevant set of these entities in the agency’s       purposes of section 15G of the Exchange Act; and
                                                  authorized to engage under existing law. The               Purpose, Authority, and Scope section (§ l.1).           (ii) does not include a security that is issued by a
                                                  remaining provisions, such as those addressing                27 These items would not include staff comment        finance subsidiary and held by the parent company
                                                  underwriting standards for non-residential                 letters and informal written guidance provided to        of the finance subsidiary or a company that is
                                                  commercial loans and auto loans, would be                  specific institutions or matters raised in a report of   controlled by such parent company provided that
                                                  designated as [reserved], and the provisions               examination or inspection of a supervised                none of the securities issued by the finance
                                                  adopted would be numbered and otherwise                    institution, which are not intended to be relied on      subsidiary are held by an entity that is not
                                                  designated so as to correspond to the equivalent           by the public generally.                                 controlled by the parent company.
                                                  provisions appearing in the regulations of the other          28 See 15 U.S.C. 78o–11(c)(1)(G)(i) and (e)(1);          31 See proposed rules at § l.2 (definition of

                                                  Agencies.                                                  proposed rules at § l.22.                                ‘‘asset-backed security’’).



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                                                  24098                       Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  receivables.32 The proposal defines the                   not the offering is registered with the                 indirectly, including through an
                                                  term ‘‘securitized asset’’ to mean an asset               Commission under the Securities Act.                    affiliate, to the issuer.’’39
                                                  that is transferred, sold, or conveyed to                    As discussed further below, the                         The Agencies note that the second
                                                  an issuing entity and that collateralizes                 proposed rules generally apply the risk                 prong of this definition (i.e., the person
                                                  the ABS interests issued by the issuing                   retention requirements to the securitizer               who organizes and initiates the ABS
                                                  entity.33                                                 in each ‘‘securitization transaction,’’                 transaction by selling or transferring
                                                     Section 15G does not appear to                         which is defined as a transaction                       assets, either directly or indirectly,
                                                  distinguish between transactions that                     involving the offer and sale of ABS by                  including through an affiliate, to the
                                                  are registered with the Commission                        an issuing entity.37 Applying the risk                  issuer) is substantially identical to the
                                                  under the Securities Act of 1933 (the                     retention requirements to the securitizer               definition of a ‘‘sponsor’’ of a
                                                  ‘‘Securities Act’’) and those that are                    of each issuance of ABS ensures that the                securitization transaction in the
                                                  exempt from registration under the                        requirements apply in the aggregate to                  Commission’s Regulation AB governing
                                                                                                            all ABS issued by an issuing entity,                    disclosures for ABS offerings registered
                                                  Securities Act. For example, section 15G
                                                                                                            including an issuing entity—such as a                   under the Securities Act.40 In light of
                                                  provides authority for exempting from
                                                                                                            master trust—that issues ABS                            this, the proposed rules provide that a
                                                  the risk retention requirements certain
                                                                                                            periodically.
                                                  securities that are exempt from                                                                                   ‘‘sponsor’’ of an ABS transaction is a
                                                  registration under the Securities Act.34                     The proposed rules use the term ‘‘ABS                ‘‘securitizer’’ for the purposes of section
                                                                                                            interest’’ to refer to all types of interests           15G, and define the term ‘‘sponsor’’ in a
                                                  In addition, the statutory definition of
                                                                                                            or obligations issued by an issuing                     manner consistent with the definition of
                                                  asset-backed security is broader than the
                                                                                                            entity, whether or not in certificated                  that term in the Commission’s
                                                  definition of asset-backed security in the
                                                                                                            form, including a security, obligation,                 Regulation AB.41
                                                  Commission’s Regulation AB,35 which
                                                                                                            beneficial interest or residual interest,
                                                  governs the disclosure requirements for                   the payments on which are primarily                        The proposal would, as a general
                                                  ABS offerings that are registered under                   dependent on the cash flows on the                      matter, require that a sponsor of a
                                                  the Securities Act.36 The definition of                   collateral held by the issuing entity. The              securitization transaction retain the
                                                  asset-backed security for purposes of                     term, however, does not include                         credit risk of the securitized assets in
                                                  section 15G also includes securities that                 common or preferred stock, limited                      the form and amount required by the
                                                  are typically sold in transactions that                   liability interests, partnership interests,             proposed rules. The Agencies believe
                                                  are exempt from registration under the                    trust certificates, or similar interests in             that proposing to apply the risk
                                                  Securities Act, such as CDOs, as well as                  an issuing entity that are issued                       retention requirement to the sponsor of
                                                  securities issued or guaranteed by a                      primarily to evidence ownership of the                  the ABS—as permitted by section 15G—
                                                  government sponsored entity (GSE),                        issuing entity, and the payments, if any,               is appropriate in light of the active and
                                                  such as the Federal National Mortgage                     on which are not primarily dependent                    direct role that a sponsor typically has
                                                  Association (Fannie Mae) and the                          on the cash flows of the collateral held                in arranging a securitization transaction
                                                  Federal Home Loan Mortgage                                by the issuing entity.38                                and selecting the assets to be
                                                  Corporation (Freddie Mac). In light of                                                                            securitized.42 In circumstances where
                                                  the foregoing, the proposed risk                          B. Securitizer, Sponsor, and Depositor
                                                                                                                                                                    two or more entities each meet the
                                                  retention requirements would apply to                        Section 15G generally provides for the               definition of sponsor for a single
                                                  securitizers of ABS offerings whether or                  Agencies to apply the risk retention                    securitization transaction, the proposed
                                                                                                            requirements of the statute to a                        rules would require that one of the
                                                     32 See proposed rules at § l.2 (definition of          ‘‘securitizer’’ of ABS. Section 15G(a)(3)               sponsors retain a portion of the credit
                                                  ‘‘asset’’). Because the term ‘‘asset-backed security’’    in turn provides that the term                          risk of the underlying assets in
                                                  for purposes of section 15G includes only those
                                                  securities that are collateralized by self-liquidating
                                                                                                            ‘‘securitizer’’ with respect to an issuance             accordance with the requirements of
                                                  financial assets, ‘‘synthetic’’ securitizations are not   of ABS includes both ‘‘(A) an issuer of                 this proposal.43 Each sponsor in the
                                                  within the scope of the proposed rules.                   an asset-backed security; or (B) a person               transaction, however, would remain
                                                     33 See proposed rules at § l.2. Assets or other
                                                                                                            who organizes and initiates an asset-                   responsible for ensuring that at least one
                                                  property collateralize an issuance of ABS interests       backed securities transaction by selling
                                                  if the assets or property serves as collateral for such
                                                  issuance. Assets or other property serve as collateral    or transferring assets, either directly or                39 See  15 U.S.C. 78o–11(a)(3).
                                                  for an ABS issuance if they provide the cash flow                                                                   40 See  Item 1101 of the Commission’s Regulation
                                                  for the ABS interests issued by the issuing entity           37 An ‘‘issuing entity’’ is defined to mean, with    AB (17 CFR 229.1101) (defining a sponsor as ‘‘a
                                                  (regardless of the legal structure of the issuance),      respect to a securitization transaction, the trust or   person who organizes and initiates an asset-backed
                                                  and may include security interests in assets or other     other entity created at the direction of the sponsor    securities transaction by selling or transferring
                                                  property of the issuing entity, fractional undivided      that owns or holds the pool of assets to be             assets, either directly or indirectly, including
                                                  property interests in the assets or other property of     securitized, and in whose name the ABS are issued.      through an affiliate, to the issuing entity.’’)
                                                  the issuing entity, or any other property interest in                                                                41 See proposed rules at § __.2. Consistent with
                                                                                                            See proposed rules at § l.2.
                                                  such assets or other property. The term collateral           38 See proposed rules at § l.2. In securitization    the Commission’s definition of sponsor, the
                                                  includes leases that may convert to cash proceeds         transactions where ABS interests are issued and         Agencies interpret the term ‘‘issuer’’ as used in
                                                  from the disposition of the physical property             some or all of the cash proceeds of the transaction     section 15G(a)(3)(B) to refer to the issuing entity
                                                  underlying the assets. The cash flow from an asset        are retained by the issuing entity to purchase,         that issues the ABS.
                                                  includes any proceeds of a foreclosure on, or sale        during a limited time period after the closing of the      42 For example, in the context of collateralized
                                                  of, the asset. See proposed rules at § l.2 (definition    securitization, self-liquidating financial assets to    loan obligations (CLOs), the CLO manager generally
                                                  of ‘‘collateral’’ for an ABS transaction).                                                                        acts as the sponsor by selecting the commercial
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                                                                                                            support the securitization, the terms ‘‘asset,’’
                                                     34 See, e.g., 15 U.S.C. 78o–11(c)(1)(G) (authorizing
                                                                                                            ‘‘collateral,’’ and ‘‘securitized assets’’ should be    loans to be purchased by an agent bank for
                                                  exemptions from the risk retention requirements           construed to include such cash proceeds as well as      inclusion in the CLO collateral pool, and then
                                                  certain transactions that are typically exempt from       the assets purchased with such proceeds and any         manages the securitized assets once deposited in
                                                  Securities Act registration); 15 U.S.C. 78o–              assets transferred to the issuing entity on the         the CLO structure.
                                                  11(e)(3)(B)(providing for certain exemptions for          closing date. Accordingly, the terms ‘‘asset-backed        43 See proposed rules at § l.3(a). Because the
                                                  certain assets, or securitizations based on assets,       security’’ and ‘‘ABS interest’’ should also be          term sponsor is used throughout the proposed rules,
                                                  which are insured or guaranteed by the United             construed to include securities and other interests     the term is separately defined in § l.2 of the
                                                  States).                                                  backed by such proceeds. Such securitization            proposed rules. The definition of ‘‘sponsor’’ in § l.2
                                                     35 17 CFR 229.1100 through 17 CFR 229.1123.
                                                                                                            transactions are commonly referred to as including      is identical to the sponsor part of the proposed
                                                     36 See 15 U.S.C. 78b.                                  a ‘‘pre-funding account.’’                              rules’ definition of a ‘‘securitizer.’’



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                                                                               Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                        24099

                                                  sponsor complied with the                                   to the originator(s) of the securitized                proportional amount, should the
                                                  requirements.                                               assets in certain circumstances and                    sponsor selling the greatest number of
                                                      As noted above, the definition of                       subject to certain conditions. The                     assets or with a particular attribute be
                                                  ‘‘securitizer’’ in section 15G(a)(3)(A)                     proposed rules define the term                         required to retain the risk, or should the
                                                  includes the ‘‘issuer of an asset-backed                    originator in the same manner as section               proposed rules only allow a sponsor
                                                  security.’’ The term ‘‘issuer’’ when used                   15G, that is, as a person who, through                 that has transferred a minimum
                                                  in the federal securities laws may have                     the extension of credit or otherwise,                  percentage (e.g., 10 percent, 20 percent,
                                                  different meanings depending on the                         creates a financial asset that                         or 50 percent) of the total assets into the
                                                  context in which it is used. For                            collateralizes an asset-backed security,               trust to retain the risk?
                                                  example, for several purposes under the                     and sells the asset directly or indirectly                8(a). Should the proposed rules allow
                                                  federal securities laws, including the                      to a securitizer (i.e., a sponsor or                   for allocation of risk to a sponsor
                                                  Securities Act 44 and the Exchange                          depositor). Because this definition refers             (among multiple sponsors in a single
                                                  Act 45 and the rules promulgated under                      to the person that ‘‘creates’’ a loan or               transaction) similar to the proposed
                                                  these Acts,46 the term ‘‘issuer’’ when                      other receivable, only the original                    rules’ parameters for allocation of risk
                                                  used with respect to an ABS transaction                     creditor under a loan or receivable—and                among multiple originators? 8(b). Why
                                                  is defined to mean the entity—the                           not a subsequent purchaser or                          or why not?
                                                  depositor—that deposits the assets that                     transferee—is an ‘‘originator’’ of the loan               9. A securitization transaction is
                                                  collateralize the ABS with the issuing                      or receivable for purposes of section                  proposed to be defined as a transaction
                                                  entity. The Agencies interpret the                          15G.48                                                 involving the offer and sale of asset-
                                                  reference in section 15G(a)(3)(A) to an                                                                            backed securities by an issuing entity. In
                                                  ‘‘issuer of an asset-backed security’’ as                   Request for Comment                                    a single securitization transaction, there
                                                  referring to the ‘‘depositor’’ of the ABS,                     1. Do the proposed rules                            may be intermediate steps; however, the
                                                  consistent with how that term has been                      appropriately implement the terms                      proposed rules would only require the
                                                  defined and used under the federal                          ‘‘securitizer’’ and ‘‘originator’’ as used in          sponsor to retain risk for the
                                                  securities laws in connection with                          section 15G and consistent with its                    securitization transaction as a whole.49
                                                  ABS.47 As noted above, the proposed                         purpose?                                               Should the rules provide additional
                                                  rules generally would apply the risk                           2. Are there other terms, beyond those              guidance for when a transaction with
                                                  retention requirements of section 15G to                    defined in § l.2 of the proposed rules,                intermediate steps constitutes one or
                                                  a sponsor of a securitization transaction                   that the Agencies should define?                       more securitization transactions that
                                                  (and not the depositor for the                                 3(a). As a general matter, is it                    each should be subject to the rules’ risk
                                                  securitization transaction).                                appropriate to impose the risk retention               retention requirements?
                                                                                                              requirements on the sponsor of an ABS
                                                  C. Originator                                               transaction, rather than the depositor for             III. General Risk Retention
                                                    As permitted by section 15G, § l.13                       the transaction? 3(b). If not, why?                    Requirement
                                                  of the proposed rules permit a sponsor                         4(a). With respect to the terms                     A. Minimum 5 Percent Risk Retention
                                                  to allocate its risk retention obligations                  defined, would you define any of the                   Required
                                                                                                              terms differently? 4(b). If so, which ones
                                                                                                                                                                        Section 15G of the Exchange Act
                                                     44 Section 2(a)(4) of Securities Act (15 U.S.C.          would you define differently, and how
                                                  77b(a)(4)) defines the term ‘‘issuer’’ in part to                                                                  generally requires that the Agencies
                                                                                                              would you define them? For example,
                                                  include every person who issues or proposes to                                                                     jointly prescribe regulations that require
                                                                                                              credit risk is defined to mean, among
                                                  issue any security, except that with respect to                                                                    a securitizer to retain not less than five
                                                  certificates of deposit, voting-trust certificates, or      other things, the risk of loss that could
                                                                                                                                                                     percent of the credit risk for any asset
                                                  collateral trust certificates, or with respect to           result from failure of the issuing entity
                                                  certificates of interest or shares in an                                                                           that the securitizer, through the
                                                                                                              to make required payments or from
                                                  unincorporated investment trust not having a board                                                                 issuance of an ABS, transfers, sells, or
                                                                                                              bankruptcy of the issuing entity.
                                                  of directors (or persons performing similar
                                                                                                                 5. Is it appropriate for the definition             conveys to a third party, unless an
                                                  functions), the term issuer means the person or                                                                    exemption from the risk retention
                                                  persons performing the acts and assuming the                of credit risk to include risk of non-
                                                  duties of depositor or manager pursuant to the              payment by the issuing entity unrelated                requirements for the securities or
                                                  provisions of the trust or other agreement or               to the assets, such as risk that the                   transaction is otherwise available (e.g.,
                                                  instrument under which the securities are issued.
                                                                                                              issuing entity is not bankruptcy remote?               if the ABS is collateralized exclusively
                                                     45 See Exchange Act sec. 3(a)(8) (15 U.S.C.
                                                                                                                 6. Are all of the definitions in § l.2              by QRMs). Consistent with the statute,
                                                  78c(a)(8) (defining ‘‘issuer’’ under the Exchange
                                                  Act).                                                       of the proposed rules necessary? For                   the proposed rules generally would
                                                     46 See, e.g., Securities Act Rule 191 (17 CFR            instance, is a definition of ‘‘asset’’                 require that a sponsor retain an
                                                  230.191) and Exchange Act Rule 3b–19 (17 CFR                necessary?                                             economic interest equal to at least five
                                                  240.3b-19).
                                                                                                                 7(a). As proposed, where two or more                percent of the aggregate credit risk of the
                                                     47 For asset-backed securities transactions where
                                                                                                              entities each meet the definition of                   assets collateralizing an issuance of ABS
                                                  there is not an intermediate transfer of the assets
                                                  from the sponsor to the issuing entity, the term            sponsor for a single securitization                    (the ‘‘base’’ risk retention requirement).50
                                                  depositor refers to the sponsor. For asset-backed           transaction, the proposed rules would
                                                                                                                                                                       49 For example, in auto lease securitizations, the
                                                  securities transactions where the person                    require that one of the sponsors retain
                                                  transferring or selling the pool assets is itself a trust                                                          auto leases and car titles are originated in the name
                                                  (such as in an issuance trust structure), the               a portion of the credit risk of the                    of a separate trust to avoid the administrative
                                                  depositor of the issuing entity is the depositor of         underlying assets in accordance with                   expenses of retitling the physical property
                                                  that trust. See proposed rules at § l.2. Securities         the requirements of the rules. Is this the             underlying the leases. The separate trust will issue
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                                                  Act Rule 191 and Exchange Act Rule 3b–19 also                                                                      to the issuing entity for the asset-backed security a
                                                                                                              best approach to take when there are                   collateral certificate, often called a ‘‘special unit of
                                                  note that the person acting as the depositor in its
                                                  capacity as depositor to the issuing entity is a            multiple sponsors in a single                          beneficial interest’’ (SUBI). The issuing entity will
                                                  different ‘‘issuer’’ from that person in respect of its     securitization transaction? 7(b). If not,              then issue the asset-backed securities backed by the
                                                  own securities in order to make clear—for                   what is a better approach and why? For                 SUBI certificate.
                                                  example—that any applicable exemptions from                                                                          50 See proposed rules at § l.3 through § l.11.
                                                                                                              example, should all sponsors be
                                                  Securities Act registration that person may have                                                                   We note that the proposed rules, in some instances,
                                                  with respect to its own securities are not applicable       required to retain credit risk in some                 permit a sponsor to allow another person to retain
                                                  to the asset-backed securities. That distinction does                                                              the required amount of credit risk (e.g., originators,
                                                  not appear relevant here.                                    48 See   15 U.S.C. 78o–11(a)(3).                                                                    Continued




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                                                  24100                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  This exposure should provide a sponsor                  exempt ABS transactions or for any                     securitized that exposes the sponsor to
                                                  with an incentive to monitor and                        particular classes or types of non-                    credit risk that is equivalent to that of
                                                  control the quality of the assets being                 exempt ABS.                                            the securitized assets. These examples
                                                  securitized and help align the interests                   11. If a higher minimum requirement                 are not exclusive.
                                                  of the sponsor with those of investors in               should be established, what minimum                       The various forms of risk retention
                                                  the ABS. As discussed in Part III.D of                  should be established and what factors                 have developed, in part, due to the
                                                  this Supplementary Information, the                     should the Agencies take into account                  diversity of assets that are securitized
                                                  sponsor also would be prohibited from                   in determining that higher minimum?                    and the structures commonly used in
                                                  hedging or otherwise transferring this                  For example, should the amount of                      securitizing different types of assets. For
                                                  retained interest.                                      credit risk be based on expected losses,               example, due to the revolving nature of
                                                     As required by section 15G, the                      or a market-based test based on the                    credit card accounts and the fact that
                                                  proposed risk retention requirements                    interest rate spread relative to a                     multiple series of ABS collateralized by
                                                  would apply to all ABS transactions that                benchmark index?                                       credit card receivables typically are
                                                  are within the scope of section 15G,                       12(a). Would the minimum five                       issued using a single master trust
                                                  regardless of whether the sponsor is an                 percent risk retention requirement, as                 structure, sponsors of ABS transactions
                                                  insured depository institution, a bank                  proposed to be implemented, have a                     collateralized by credit card receivables
                                                  holding company or subsidiary thereof,                  significant adverse effect on liquidity or             often have maintained exposure to the
                                                  a registered broker-dealer, or other type               pricing in the securitization markets for              credit risk of the underlying loans
                                                  of federally supervised financial                       certain types of assets (such as, for                  through use of a seller’s interest. On the
                                                  institution. Thus, for example, it would                example, prudently underwritten                        other hand, sponsors of ABS backed by
                                                  apply to securitization transactions by                 residential mortgage loans that do not                 automobile loans where the originator of
                                                  any nonbank entity that is not an                       satisfy all of the requirements to be a                the loan is often a finance company
                                                  insured depository institution (such as                 QRM)? 12(b). If so, what markets would                 affiliated with the sponsor will often
                                                  an independent mortgage firm), as well                  be adversely affected and how? What                    retain a portion of the loans that would
                                                  as by Fannie Mae and Freddie Mac.                       adjustments to the proposed rules (e.g.,               ordinarily be securitized, thus providing
                                                     The Agencies note that the five                      the minimum risk retention amount, the                 the sponsor some continuing exposure
                                                  percent risk retention requirement                      manner in which credit exposure is                     to the credit risk of those loans. In
                                                  established by the proposed rules would                 measured for purposes of applying the                  connection with the securitization of
                                                  be a regulatory minimum. The sponsor,                   risk retention requirement, or the form                commercial mortgage-backed securities
                                                  originator, or other party to a                         of risk retention) could be made to the                (‘‘CMBS’’), a form of horizontal risk
                                                  securitization may retain, or be required               proposed rules to address these                        retention often has been employed, with
                                                  to retain, additional exposure to the                   concerns in a manner consistent with                   the horizontal first-loss position being
                                                  credit risk of assets that the sponsor,                 the purposes of section 15G? Please                    initially held by a third-party purchaser
                                                  originator, or other party helps                        provide details and supporting data.                   that specifically negotiates for the
                                                  securitize beyond that required by the                                                                         purchase of the first-loss position and
                                                                                                          B. Permissible Forms of Risk Retention
                                                  proposed rules, either on its own                                                                              conducts its own credit analysis of each
                                                  initiative or in response to the demands                   As recognized in recent studies and                 commercial loan backing the CMBS.52
                                                  of private market participants.                         reports on securitization and risk                     Sponsors across a wide range of asset
                                                  Moreover, the proposed rules would                      retention that have examined historical                classes may initially hold a horizontal
                                                  require that a sponsor, in certain                      market practices, there are several ways
                                                                                                                                                                 piece of the securitization (such as a
                                                  circumstances, fund a premium capture                   in which a sponsor or other entity may
                                                                                                                                                                 residual interest). Different forms of risk
                                                  cash reserve account in connection with                 have retained exposure to the credit risk
                                                                                                                                                                 retention also may have different
                                                  a securitization transaction (see Part                  of securitized assets.51 These include
                                                                                                                                                                 accounting implications for a sponsor or
                                                  III.B.9 of this Supplementary                           (i) a ‘‘vertical’’ slice of the ABS interests,
                                                                                                                                                                 other entity.53 Historically, whether or
                                                  Information). Any amount a sponsor                      whereby the sponsor or other entity
                                                  might be required to place in a premium                 retains a specified pro rata piece of                     52 Section 15G(c)(1)(E) allows the Federal banking

                                                  capture cash reserve account would be                   every class of interests issued in the                 agencies and the Commission to determine that
                                                  in addition to the five percent ‘‘base’’                transaction; (ii) a ‘‘horizontal’’ first-loss          with respect to CMBS, a form of retention that
                                                                                                          position, whereby the sponsor or other                 satisfies the requirements includes retention of a
                                                  risk retention requirement of the                                                                              first-loss position by a third-party purchaser that
                                                  proposed rules.                                         entity retains a subordinate interest in               meets certain criteria. See 15 U.S.C. 78o–11(c)(1)(E).
                                                                                                          the issuing entity that bears losses on                   53 The determination whether a legal entity
                                                  Request for Comment                                     the assets before any other classes of                 established to issue ABS must be included in the
                                                     10. The Agencies request comment on                  interests; (iii) a ‘‘seller’s interest’’ in            consolidated financial statements of the sponsor or
                                                  whether the minimum five percent risk                   securitizations structured using a master              another participant in the securitization chain is
                                                                                                                                                                 primarily addressed by the following generally
                                                  retention requirement established by the                trust collateralized by revolving assets               accepted accounting principles issued by the
                                                  proposed rules for non-exempt ABS                       whereby the sponsor or other entity                    Financial Accounting Standards Board (FASB):
                                                  transactions is appropriate, or whether a               holds a separate interest that is pari                 Accounting Standards Codification Topic 860,
                                                  higher risk retention requirement                       passu with the investors’ interest in the              Transfers and Servicing (ASC 860, commonly called
                                                                                                                                                                 FAS 166); and FASB Accounting Standards
                                                  should be established for all non-                      pool of receivables (unless and until the              Codification Topic 810, Consolidation (ASC 810,
                                                                                                          occurrence of an early amortization                    commonly called FAS 167). ASC 860 addresses
                                                                                                          event); or (iv) a representative sample,
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                                                  third-party purchasers in commercial mortgage-                                                                 whether securitizations and other transfers of
                                                  backed securities transactions, and originator-         whereby the sponsor retains a                          financial assets are treated as sales or financings.
                                                  sellers in asset-backed commercial paper conduit                                                               ASC 810 addresses whether legal entities often used
                                                  securitizations). However, in such circumstances        representative sample of the assets to be              in securitization and other structured finance
                                                  the proposal includes limitations and conditions                                                               transactions should be included in the consolidated
                                                  designed to ensure that the purposes of section 15G       51 See Board Report; see also Macroeconomic          financial statements of any one of the parties
                                                  continue to be fulfilled. Further, we note that even    Effects of Risk Retention Requirements, Chairman of    involved in the transaction. Together, this guidance
                                                  when a sponsor would be permitted to allow              the Financial Stability Oversight Counsel (January     determines the extent to which an originator,
                                                  another person to retain risk, the sponsor would        2011), available at http://www.treasury.gov/           sponsor, or another company is required to
                                                  still remain responsible under the rule for             initiatives/wsr/Documents/Section 946 Risk             maintain securitized assets and corresponding
                                                  compliance with the risk retention requirements.        Retention Study (FINAL).pdf.                           liabilities on their balance sheets.



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                    24101

                                                  how a sponsor retained exposure to the                  Further, the disclosures are also integral              requirements in an effort to reduce or
                                                  credit risk of the assets it securitized                to the rule because they would provide                  eliminate their risk retention
                                                  was determined by a variety of factors                  investors and the Agencies with an                      requirements? 21(b). If so, how should
                                                  including the rating requirements of the                efficient mechanism to monitor                          we modify the proposed rules to address
                                                  NRSROs, investor preferences or                         compliance with the risk retention                      this potential?
                                                  demands, accounting considerations,                     requirements of the proposed rules.55                      22. Are the methodologies proposed
                                                  and whether there was a market for the                                                                          for calculating the required five percent
                                                                                                          Request for Comment
                                                  type of interest that might ordinarily be                                                                       exposure under each of the options
                                                  retained (at least initially by the                        13. Is the proposed menu of options                  appropriate?
                                                  sponsor).                                               approach to risk retention, which would                    23(a). Are there other ways that the
                                                     Section 15G expressly provides the                   allow a sponsor to choose the form of                   minimum five percent requirement
                                                  Agencies the authority to determine the                 risk retention (subject to all applicable               should be calculated? 23(b). Would such
                                                  permissible forms through which the                     terms and conditions), appropriate?                     calculation methods be difficult to
                                                  required amount of risk retention must                     14(a). Should the Agencies mandate                   enforce? 23(c). If so, how can we
                                                  be held.54 Consistent with this                         that sponsors use a particular form of                  address those difficulties? 23(d). Are
                                                  flexibility, Subpart B of the proposed                  risk retention (e.g., a vertical slice or a             there other alternatives?
                                                  rules would provide sponsors with                       horizontal slice) for all or specific types
                                                  multiple options to satisfy the risk                    of asset classes or specific types of                   1. Vertical Risk Retention
                                                  retention requirements of section 15G.                  transactions? 14(b). If so, which forms                    As proposed, a sponsor may satisfy its
                                                  The options in the proposed rules are                   should be required for with which asset                 risk retention requirements with respect
                                                  designed to take into account the                       classes and why?                                        to a securitization transaction by
                                                  heterogeneity of securitization markets                    15. Does the proposed menu approach                  retaining at least five percent of each
                                                  and practices, and to reduce the                        achieve the objectives of the statute to                class of ABS interests issued as part of
                                                  potential for the proposed rules to                     provide securitizers an incentive to                    the securitization transaction.56 A
                                                  negatively affect the availability and                  monitor and control the underwriting
                                                                                                                                                                  sponsor using this approach must retain
                                                  costs of credit to consumers and                        quality of securitized assets and help
                                                                                                                                                                  at least five percent of each class of ABS
                                                  businesses. However, importantly, each                  align incentives among originators,
                                                                                                                                                                  interests issued in the securitization
                                                  of the permitted forms of risk retention                sponsors, and investors?
                                                                                                                                                                  transaction regardless of the nature of
                                                  included in the proposed rules is                          16. Is each of the proposed forms of
                                                                                                                                                                  the class of ABS interests (e.g., senior or
                                                  subject to terms and conditions that are                risk retention appropriate? In particular,
                                                                                                                                                                  subordinated) and regardless of whether
                                                  intended to help ensure that the sponsor                the Agencies seek comment on the
                                                                                                                                                                  the class of interests has a par value,
                                                  (or other eligible entity) retains an                   potential effectiveness of the proposed
                                                                                                                                                                  was issued in certificated form, or was
                                                  economic exposure equivalent to at least                forms of risk retention in achieving the
                                                                                                                                                                  sold to unaffiliated investors. For
                                                  five percent of the credit risk of the                  purposes of section 15G, their potential
                                                                                                                                                                  example, if four classes of ABS interests
                                                  securitized assets. Thus, the forms of                  effect on securitization markets, and any
                                                                                                                                                                  were issued by an issuing entity as part
                                                  risk retention would help to ensure that                operational or other problems these
                                                                                                                                                                  of a securitization—a senior AAA-rated
                                                  the purposes of section 15G are fulfilled.              forms may present.
                                                                                                             17. Are there any kinds of                           class, a subordinated class, an interest-
                                                  In addition, as discussed further in Part                                                                       only class, and a residual interest—a
                                                  III.D of this Supplementary Information                 securitizations for which a particular
                                                                                                          form of risk retention is not appropriate?              sponsor using this approach with
                                                  below, the proposed rules would                                                                                 respect to the transaction would have to
                                                  prohibit a sponsor from transferring,                      18. How effective would each of the
                                                                                                          proposed risk retention options be in                   retain at least five percent of each such
                                                  selling or hedging the risk that the
                                                                                                          creating incentives to monitor and                      class or interest.57 The proposed rules
                                                  sponsor is required to retain, thereby
                                                                                                          control the quality of assets that are                  do not specify a method of measuring
                                                  preventing sponsors from circumventing
                                                                                                          securitized and in aligning the interests               the amount of each class, because the
                                                  the requirements of the rules by selling
                                                                                                          among the parties in a securitization                   amount retained, regardless of method
                                                  or transferring the risk after the
                                                                                                          transaction?                                            of measurement, should equal at least
                                                  securitization transaction has been
                                                                                                             19(a). Are there other forms of risk                 five percent of the par value (if any), fair
                                                  completed. The proposed rules also
                                                                                                          retention that the Agencies should                      value, and number of shares or units of
                                                  include disclosure requirements that are
                                                                                                          permit? 19(b). If so, please provide a                  each class.
                                                  an integral part of and specifically
                                                  tailored to each of the permissible forms               detailed description of the form(s), how                   Under the vertical risk retention
                                                  of risk retention. The disclosure                       such form(s) could be implemented, and                  option, by holding a five percent
                                                  requirements are integral to the                        whether such form(s) would be                           vertical slice in an ABS issuance, a
                                                  proposed rules because they would                       appropriate for all, or just certain,                   sponsor is exposed to five percent of the
                                                  provide investors with material                         classes of assets.                                      credit risk that each class of investors
                                                  information concerning the sponsor’s                       20. Should the proposed rules require                has to the underlying collateral. This
                                                  retained interests in a securitization                  disclosure as to why the sponsor chose                  provides the sponsor an interest in the
                                                  transaction, such as the amount and                     a particular risk retention option?                     entire structure of the securitization
                                                  form of interest retained by sponsors,                     21(a). Are there ways that sponsors                  transaction.
                                                  and the assumptions used in                             could avoid the risk retention
                                                                                                                                                                    56 See  proposed rules at § l.4.
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                                                  determining the aggregate value of ABS
                                                                                                            55 The  Agencies note that a variation of the           57 As  noted previously, the proposed definition of
                                                  to be issued (which generally affects the
                                                                                                          vertical, horizontal, seller’s interest and             ABS interests does not include common or
                                                  amount of risk required to be retained).                representative sample options described below are       preferred stock, limited liability interests,
                                                                                                          forms of eligible risk retention in the proposed        partnership interests, trust certificates or similar
                                                    54 See 15 U.S.C. 78o–11(c)(1)(C)(i); see also S.      European Union capital requirement directive            interests that are issued primarily to evidence
                                                  Rep. No. 111–176, at 130 (2010) (‘‘The Committee        relating to securitizations. See ‘‘Call for Technical   ownership of the issuing entity and the payments,
                                                  [on Banking, Housing, and Urban Affairs] believes       Advice on the Effectiveness of a Minimum                if any, on which are not primarily dependent on the
                                                  that implementation of risk retention obligations       Retention Requirement for Securitizations,’’            cash flows of the assets of the issuing entity. See
                                                  should recognize the differences in securitization      Committee of European Bank Supervisors (October         proposed rules at § l.2 (definition of ‘‘ABS
                                                  practices for various asset classes.’’).                30, 2009) (CEBS proposal).                              interests’’).



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                                                  24102                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                     Under the proposed rules, a sponsor                     25(a). Should additional disclosures                 would be prohibited from receiving any
                                                  that elects to retain risk through the                   be required? 25(b). If so, what should be              prepayments of principal made on the
                                                  vertical slice option would be required                  required and why?                                      underlying assets because these are, by
                                                  to provide, or cause to be provided, to                    26. Are there any additional factors,                definition, unscheduled payments. This
                                                  potential investors a reasonable time                    such as cost considerations, that the                  sponsor also would be prohibited from
                                                  prior to the sale of the asset-backed                    Agencies should consider in                            receiving principal payments made on
                                                  securities in the securitization                         formulating an appropriate vertical risk               the underlying assets derived from
                                                  transaction and, upon request, to the                    retention option?                                      proceeds from the sale of, or foreclosure
                                                  Commission and to its appropriate                        2. Horizontal Risk Retention                           on, an underlying asset. The prohibition
                                                  Federal banking agency (if any), the                                                                            of unscheduled payments to the eligible
                                                  amount (expressed as a percentage and                       As proposed, the second risk                        horizontal residual interest is designed
                                                  a dollar amount) of each class of ABS                    retention option permits a sponsor to                  to ensure that unscheduled payments
                                                  interests in the issuing entity that the                 satisfy its risk retention obligations by              would not accelerate the payoff of the
                                                  sponsor will retain (or did retain) at                   retaining an ‘‘eligible horizontal residual            eligible horizontal residual interest
                                                  closing as well as the amount                            interest’’ in the issuing entity in an                 before other ABS interests. Such
                                                  (expressed, again, as a percentage and                   amount that is equal to at least five                  acceleration would reduce the capacity
                                                  dollar amount) that the sponsor is                       percent of the par value of all ABS                    of the eligible horizontal residual
                                                  required to retain under the proposed                    interests in the issuing entity that are               interest to absorb losses on the
                                                  rules. This disclosure would allow                       issued as part of the securitization                   securitized assets as well as the duration
                                                  investors to know what risk the sponsor                  transaction.59 As discussed below, the                 of the sponsor’s interest in the
                                                  will actually retain in the transaction                  eligible horizontal residual interest                  securitized assets. The proposed rules
                                                  and compare this amount to the risk that                 would expose the sponsor to a five                     would, however, permit the eligible
                                                  the sponsor is required to retain under                  percent first-loss exposure to the credit              horizontal residual interest to receive its
                                                  the proposed rules. In addition, the                     risk of the entire pool of securitized                 pro rata share of scheduled principal
                                                  proposed rules would require a sponsor                   assets.                                                payments on the underlying assets.62
                                                  to disclose, or cause to be disclosed, the                  The proposed rules include a number                    Similar to the vertical slice risk
                                                  material assumptions and                                 of terms and conditions governing the                  retention option, under the proposed
                                                  methodologies it used to determine the                   structure of an eligible horizontal                    rules, a sponsor using the horizontal
                                                  aggregate dollar amount of ABS interests                 residual interest in order to ensure that              risk retention option would be required
                                                  issued by the issuing entity in the                      the interest would be a ‘‘first-loss’’                 to provide, or cause to be provided, to
                                                  securitization transaction, including                    position,60 and could not be reduced in                potential investors a reasonable period
                                                  those pertaining to any estimated cash                   principal amount (other than through                   of time prior to the sale of ABS interests
                                                  flows and the discount rate used.                        the absorption of losses) more quickly                 in the issuing entity and, upon request,
                                                  Disclosure of these assumptions and                      than more senior interests and, thus,                  to the Commission and its appropriate
                                                  methodologies should help investors                      would remain available to absorb losses                Federal banking agency (if any): the
                                                  and the Agencies monitor the sponsor’s                   on the securitized assets. Specifically,               amount (expressed as a percentage and
                                                  compliance with its risk retention                       an interest qualifies as an ‘‘eligible                 dollar amount) of the eligible horizontal
                                                  requirements because the five percent                    horizontal residual interest’’ under the               residual interest that will be retained (or
                                                  risk retention requirement is based on                   proposed rules only if it is an ABS                    was retained) by the sponsor at closing,
                                                  the aggregate amount of each class of                    interest that is allocated all losses on the           and the amount (expressed as a
                                                  ABS interests issued as part of the                      securitized assets until the par value of              percentage and dollar amount) of the
                                                  transaction.58                                           the class is reduced to zero and has the               eligible horizontal residual interest
                                                                                                           most subordinated claim to payments of                 required to be retained by the sponsor
                                                  Request for Comment                                      both principal and interest by the                     in connection with the securitization
                                                    24. Are the disclosures proposed                       issuing entity.61                                      transaction; a description of the material
                                                  sufficient to provide investors with all                    Moreover, until all other ABS                       terms of the eligible horizontal residual
                                                  material information concerning the                      interests in the issuing entity are paid in            interest, such as when such interest is
                                                  sponsor’s retained interest in a                         full, the eligible horizontal residual                 allocated losses or may receive
                                                  securitization transaction, as well as to                interest generally cannot receive any                  payments; and the material assumptions
                                                  enable investors and the Agencies to                     payments of principal made on a                        and methodologies used in determining
                                                  monitor the sponsor’s compliance with                    securitized asset. However, the interest               the aggregate dollar amount of ABS
                                                  the rule?                                                may receive its proportionate share of                 interests issued by the issuing entity in
                                                                                                           scheduled payments of principal                        the securitization transaction, including
                                                     58 For similar reasons, disclosure of such            received on the securitized assets in                  those pertaining to any estimated cash
                                                  assumptions and methodologies would be required          accordance with the relevant transaction               flows and the discount rate used.
                                                  under the other risk retention options where the         documents. For example, so long as any
                                                  amount of the sponsor’s required amount of risk                                                                    In lieu of holding an eligible
                                                  retention is based on the amount of interests issued     other ABS interests are outstanding, a                 horizontal residual interest, the
                                                  by the issuing entity or the amount of the collateral    sponsor, through its ownership of the                  proposed rules would allow a sponsor
                                                  underlying such interests. Depending on the              eligible horizontal residual interest,                 to cause to be established and funded,
                                                  circumstances, a sponsor may have an incentive to
                                                  inflate the value of the underlying collateral and the                                                          in cash, a reserve account at closing
                                                                                                             59 See  proposed rules at § l.4.
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  ABS supported by such collateral (for example, to
                                                                                                             60 As  discussed in Part III.B.9 of this
                                                  increase the proceeds from the securitization                                                                     62 Thus, an eligible horizontal residual interest
                                                  transaction) or to underestimate the value of such       Supplemental Information, if a sponsor is required     with a par value of five percent of the aggregate par
                                                  collateral and ABS (for example, to reduce the           to establish and fund a premium capture cash           value of all ABS interests could, subject to its most
                                                  sponsor’s risk retention requirement). The material      reserve account in connection with a securitization    subordinate place in the payments waterfall, (i)
                                                  assumptions relating to estimated cash flows likely      transaction, such account would first bear losses on   initially be entitled to receive up to five percent of
                                                  would include those relating to the estimated            the securitized assets (even before an eligible        scheduled principal payments received on the
                                                  default rate, prepayment rate, the time between          horizontal residual interest) until the account was    securitized assets, and (ii) if losses reduced the par
                                                  default and recoveries on the underlying assets, as      depleted.                                              value of the interest to three percent, receive no
                                                  well as interest rate projections for assets with           61 See proposed rules at § l.2 (definition of       more than three percent of scheduled principal
                                                  variable interest rates.                                 ‘‘eligible horizontal residual interest’’).            payments received on the securitized assets.



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                                                                                Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                    24103

                                                  (horizontal cash reserve account) in an                    interest, a horizontal cash reserve                        34. Are the terms and conditions of
                                                  amount equal to at least five percent of                   account would not be depleted by                        the horizontal cash reserve account
                                                  the par value of all the ABS interests                     unscheduled payments of principal on                    appropriate?
                                                  issued as part of the transaction (i.e., the               the underlying assets. The second                          35. Do the terms and conditions
                                                  same dollar amount as would be                             exception would be that the sponsor                     ensure that such an account will expose
                                                  required if the sponsor held an eligible                   would be permitted to receive interest                  the sponsor to the same type and
                                                  horizontal residual interest).63 This                      payments (but not principal payments)                   amount of credit risk and have the same
                                                  horizontal cash reserve account would                      received by the horizontal cash reserve                 incentive effects as an eligible
                                                  have to be held by the trustee (or person                  account on its permitted investments.65                 horizontal residual interest?
                                                  performing functions similar to a                            A sponsor electing to establish and                      36(a). Should the eligible horizontal
                                                  trustee) for the benefit of the issuing                    fund a horizontal cash reserve account                  residual interest be required to be
                                                  entity. The proposed rules include                         would be required to provide                            structured as a ‘‘Z bond’’ such that it
                                                  several important restrictions and                         disclosures similar to those required                   pays no interest while principal is being
                                                  limitations on such a horizontal cash                      with respect to an eligible horizontal                  paid down on more senior interests?
                                                  reserve account. These limitations and                     residual interest, except that these                    36(b). Why or why not?
                                                  restrictions are intended to ensure that                   disclosures have been modified to                       3. L-Shaped Risk Retention
                                                  a sponsor that establishes a horizontal                    reflect the different nature of the
                                                  cash reserve account would be exposed                                                                                 The next risk retention option in the
                                                                                                             account.
                                                  to the same amount and type of first-loss                                                                          proposed rules would allow a sponsor,
                                                  credit risk on the underlying assets as                    Request for Comment                                     subject to certain conditions, to use an
                                                  would be the case if the sponsor held an                      27. Do the conditions and limitations                equal combination of vertical risk
                                                  eligible horizontal residual interest.                     in the proposed rules effectively limit                 retention and horizontal risk retention
                                                     Specifically, the proposed rules                        the ability of the sponsor to structure                 as a means of retaining the required five
                                                  would provide that, until all ABS                          away its risk exposure?                                 percent exposure to the credit risk of the
                                                  interests in the issuing entity are paid in                                                                        securitized assets. This form of risk
                                                                                                                28(a). Is the restriction on certain
                                                  full or the issuing entity is dissolved,                                                                           retention is referred to as an ‘‘L-Shaped’’
                                                                                                             payments to the sponsor with respect to
                                                  the horizontal cash reserve account                                                                                form of risk retention because it
                                                                                                             the eligible horizontal residual interest
                                                  must be used to satisfy payments on                                                                                combines both vertical and horizontal
                                                                                                             appropriate and sufficient? 28(b). Why
                                                  ABS interests on any payment date                                                                                  forms. Specifically, § l.6 of the
                                                                                                             or why not?
                                                  when the issuing entity has insufficient                                                                           proposed rules would allow a sponsor
                                                                                                                29(a). Is the proposed approach to
                                                  funds from any source (including any                                                                               to meet its risk retention obligations
                                                                                                             measuring the size of horizontal risk
                                                  premium capture cash reserve account                                                                               under the rules by retaining:
                                                                                                             retention (five percent of the par value                   (i) Not less than 2.5 percent of each
                                                  established under § l.12 of the                            of all ABS interests in the issuing entity
                                                  proposed rules) to satisfy an amount                                                                               class of ABS interests in the issuing
                                                                                                             that are issued as part of the                          entity issued as part of the securitization
                                                  due on any ABS interest.64 Thus, the                       securitization transaction) appropriate?
                                                  amounts in the account would bear first                                                                            transaction (the vertical component);
                                                                                                             29(b). Would a different measurement                    and
                                                  loss on the securitized assets in the                      be better? Please provide details and
                                                  same way as an eligible horizontal                                                                                    (ii) An eligible horizontal residual
                                                                                                             data supporting any alternative                         interest in the issuing entity in an
                                                  residual interest. In addition, until all                  measurements.
                                                  ABS interests in the issuing entity are                                                                            amount equal to at least 2.564 percent
                                                                                                                30. Are the disclosures proposed                     of the par value of all ABS interests in
                                                  paid in full or the issuing entity is                      sufficient to provide investors with all
                                                  dissolved, the proposed rules would                                                                                the issuing entity issued as part of the
                                                                                                             material information concerning the                     securitization transaction, other than
                                                  prohibit any other amounts from being                      sponsor’s retained interest in a
                                                  withdrawn or distributed from the                                                                                  those interests required to be retained as
                                                                                                             securitization transaction, as well as                  part of the vertical component (the
                                                  account, with only two exceptions. The                     enable investors and the Agencies to
                                                  first exception would allow amounts in                                                                             horizontal component).66
                                                                                                             monitor whether the sponsor has                            The amount of the horizontal
                                                  the account to be released to the sponsor                  complied with the rule?
                                                  (or any other person) due to receipt by                                                                            component is calibrated to avoid double
                                                                                                                31(a). Should additional disclosures                 counting that portion of an eligible
                                                  the issuing entity of scheduled                            be required? 31(b). If so, what should be
                                                  payments of principal on the securitized                                                                           horizontal residual interest that the
                                                                                                             required and why?                                       sponsor is required to hold as part of the
                                                  assets, provided that the issuing entity
                                                                                                                32. Are there any additional factors,                vertical component. This calibration
                                                  distributes such payments of principal
                                                                                                             such as accounting or cost                              also ensures that the combined amount
                                                  in accordance with the transaction
                                                                                                             considerations that the Agencies should                 of the vertical component and the
                                                  documents and the amount released
                                                                                                             consider with respect to horizontal risk                horizontal component would be five
                                                  from the horizontal cash reserve account
                                                                                                             retention?                                              percent of the aggregate transaction. For
                                                  on any date does not exceed the product
                                                                                                                33. Should a sponsor be prohibited                   example, in a securitization transaction
                                                  of: (i) The amount of scheduled
                                                                                                             from utilizing the horizontal risk                      structured with three classes of
                                                  payments of principal on the securitized
                                                                                                             retention option if the sponsor (or an                  interests: A certificated senior class
                                                  assets received by the issuing entity and
                                                                                                             affiliate) acts as servicer for the                     whose par value is equal to $950, an
                                                  for which the release is being made; and
                                                                                                             securitized assets?
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  (ii) the ratio of the current balance in the
                                                                                                                                                                        66 As under the horizontal risk retention option
                                                  horizontal cash reserve account to the                       65 Under  the proposed rules, amounts in a            itself, a sponsor would have the option of
                                                  aggregate remaining principal balance of                   horizontal cash reserve account may only be             establishing and funding, in cash, a horizontal cash
                                                  all ABS interests in the issuing entity.                   invested in (i) United States Treasury securities       reserve account at the closing of the securitization
                                                  This limitation is intended to ensure                      with remaining maturities of 1 year or less; and (ii)   transaction in this amount rather than holding an
                                                                                                             deposits in one or more insured depository              eligible horizontal residual interest. See proposed
                                                  that, like an eligible horizontal residual                 institutions (as defined in section 3 of the Federal    rules at § l.4(b). Any such horizontal cash reserve
                                                                                                             Deposit Insurance Act (12 U.S.C. 1813)) that are        account would be subject to the same restrictions
                                                    63 See   proposed rules at § l.4(b). 
                   fully insured by federal deposit insurance. See         and limitations as under the horizontal risk
                                                    64 See   proposed rules at § l.4(b)(3)(i). 
             proposed rules at § l.4(b)(2).                          retention option.



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                                                  24104                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  uncertificated subordinated class of $24                40(b). What implications might such                     designed to ensure that any seller’s
                                                  and an uncertificated eligible horizontal               changes have on the effectiveness of the                interest retained by a sponsor under the
                                                  residual interest whose par value is                    option in helping achieving the                         proposal would expose the sponsor to
                                                  equal to $26, a sponsor would be                        purposes of section 15G?                                the credit risk of the underlying assets.
                                                  required to retain $23.75 of the senior                                                                            Under the proposed rules, a sponsor
                                                                                                          4. Revolving Asset Master Trusts
                                                  class ($950*2.5%), $0.60 of the                                                                                 using the seller’s interest option would
                                                                                                          (Seller’s Interest)
                                                  subordinated class ($24*2.5%) and                                                                               be required to provide, or cause to be
                                                  $25.65 of the eligible horizontal residual                 Securitizations backed by revolving                  provided, in writing to potential
                                                  interest (($26*2.5%) + ($1000 ¥ ($23.75                 lines of credit, such as credit card                    investors a reasonable period of time
                                                  + $0.60 + $0.65))*2.564%) for a total of                accounts or dealer floorplan loans, often               prior to the sale of the asset-backed
                                                  $50 in risk retention requirements.                     are structured using a revolving master                 securities in the securitization
                                                  Because the required size of the                        trust, which allows the trust to issue                  transaction and, upon request, to the
                                                  sponsor’s retained eligible horizontal                  more than one series of ABS backed by                   Commission and its appropriate Federal
                                                  residual interest ($25.65) is less than the             a single pool of the revolving assets.68                banking agency (if any) the amount
                                                  amount of the eligible horizontal                       In these types of transactions, the                     (expressed as a percentage and dollar
                                                  residual interest, retention of the entire              sponsor typically holds an interest                     amount) of the seller’s interest that the
                                                  horizontal residual interest by the                     known as a ‘‘seller’s interest.’’ This                  sponsor will retain (or has retained) in
                                                  sponsor complies with the minimum                       interest is pari passu with the investors’              the transaction at closing and the
                                                  L-shape retention requirements for the                  interest in the receivables backing the                 amount (expressed as a percentage and
                                                  securitization.67                                       ABS interests of the issuing entity until               dollar amount) that the sponsor is
                                                     The proposal would require that a                    the occurrence of an early amortization                 required to retain pursuant to § l.7 of
                                                  sponsor hold 50 percent of its required                 event. A seller’s interest is a direct,                 the rule; a description of the material
                                                  risk retention amount in the form of a                  shared interest with all of the investors               terms of the seller’s interest; and the
                                                  vertical component and 50 percent in                    in the performance of the underlying                    material assumptions and methodology
                                                  the form of a horizontal component in                   assets and, thus, exposes the sponsor to                used in determining the aggregate dollar
                                                  order to help ensure that each                          the credit risk of the pool or receivables.             amount of ABS interests issued by the
                                                  component is large enough to affect the                    In light of and to accommodate those                 issuing entity in the securitization
                                                  sponsor’s incentives and to help align                  types of securitizations, the proposed                  transaction, including those pertaining
                                                  the incentives of the sponsor and                       rules would allow a sponsor of a                        to any estimated cash flows and the
                                                  investors. In addition, requiring that                  revolving asset master trust that is                    discount rate used.
                                                                                                          collateralized by loans or other
                                                  each component represent 50 percent of
                                                                                                          extensions of credit that arise under                   Request for Comment
                                                  the total minimum risk retention
                                                                                                          revolving accounts to meet its base risk                   41(a). Should a sponsor of a revolving
                                                  requirement should assist investors and
                                                                                                          retention requirement by retaining a                    asset master trust be permitted to satisfy
                                                  the Agencies with monitoring
                                                                                                          seller’s interest in an amount not less                 its base risk retention requirement by
                                                  compliance with the proposed rules.
                                                     Because a sponsor using the L-shape                  than five percent of the unpaid                         retaining the seller’s interest, as
                                                  risk retention option would retain both                 principal balance of all the assets held                proposed? 41(b). Why or why not?
                                                  a vertical and a horizontal component,                  by the issuing entity.69 The proposed                      42(a). Are there additional or different
                                                                                                          rules define a ‘‘revolving asset master                 conditions that should be placed on this
                                                  the proposed rules would require that
                                                                                                          trust’’ as an issuing entity that (i) is a              option? 42(b). If so, please explain in
                                                  the sponsor provide the disclosures
                                                                                                          master trust; and (ii) is established to                detail what other conditions would be
                                                  required under the vertical risk
                                                                                                          issue more than one series of ABS, all                  appropriate.
                                                  retention option, as well as those
                                                                                                          of which are collateralized by a single                    43. Are there alternative methods of
                                                  required under the horizontal risk
                                                                                                          pool of revolving securitized assets that               structuring risk retention for revolving
                                                  retention option.
                                                                                                          are expected to change in composition                   asset master trust securitization
                                                  Request for Comment                                     over time. The proposed rules also                      transactions that should be permitted?
                                                     37. Are the disclosures proposed                     define a ‘‘seller’s interest’’ as an ABS                Provide detailed descriptions and data
                                                  sufficient to provide investors with all                interest (i) in all of the assets that are              or other support for any alternatives.
                                                  material information concerning the                     held by the issuing entity and that do                     44. Are the proposed disclosures
                                                  sponsor’s retained interest in a                        not collateralize any other ABS interests               sufficient to provide investors with all
                                                  securitization transaction, as well as                  issued by the entity; (ii) that is pari                 material information concerning the
                                                  enable investors and the Agencies to                    passu with all other ABS interests                      sponsor’s retained interest in a
                                                  monitor whether the sponsor has                         issued by the issuing entity with respect               securitization transaction, as well as
                                                  complied with the rule?                                 to the allocation of all payments and                   enable investors and the Agencies to
                                                     38(a). Should additional disclosures                 losses prior to an early amortization                   monitor whether the sponsor has
                                                  be required? 38(b). If so, what should be               event (as defined in the transaction                    complied with the rule?
                                                  required and why?                                       documents); and (iii) that adjusts for                     45(a). Should additional disclosures
                                                     39. Are there any additional factors,                fluctuations in the outstanding principal               be required? 45(b). If so, what should be
                                                  such as cost considerations, that the                   balances of the securitized assets. The                 required and why?
                                                  Agencies should consider with respect                   definitions of a seller’s interest and a                   46. Should a seller’s interest form of
                                                                                                          revolving asset master trust are intended
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  to L-shape risk retention?                                                                                      risk retention be applied to any other
                                                     40(a). Should the Agencies permit or                 to be consistent with market practices                  types of securitization transactions? If
                                                  require that a higher proportion of the                 and, with respect to seller’s interest,                 so, explain in detail and provide data or
                                                  risk retention held by a sponsor under                                                                          other support for application to other
                                                                                                             68 In a master trust securitization, assets (e.g.,
                                                  this option be composed of a vertical                                                                           types of securitization transactions.
                                                                                                          credit card receivables or dealer floorplan
                                                  component or a horizontal component?                    financings) may be added to the pool in connection      5. Representative Sample
                                                                                                          with future issuances of the securities backed by the
                                                     67 This example is provided for simple               pool.                                                      The next proposed risk retention
                                                  illustration only.                                         69 See proposed rules at § l.7.                      option permits a sponsor of a


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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                       24105

                                                  securitization transaction to meet its                  other than those that are either                            The proposal contains a variety of
                                                  risk retention requirements by retaining                securitized or selected for the                          safeguards to ensure that the sponsor
                                                  a randomly selected representative                      representative sample. In the second                     has constructed the representative
                                                  sample of assets that is equivalent, in all             step, the sponsor must use a random                      sample in conformance with the
                                                  material respects, to the assets that are               selection process to identify those loans                requirements described above. For
                                                  transferred to the issuing entity and                   from within the designated pool that                     example, the sponsor would be required
                                                  securitized, subject to certain                         will be included in the representative                   to have in place, and adhere to, policies
                                                  conditions.70 This method of risk                       sample. This random selection process                    and procedures for (i) identifying and
                                                  retention has been used in connection                   may not take account of any                              documenting the material
                                                  with securitizations involving                          characteristic of the assets other than                  characteristics of the assets in the
                                                  automobile loans where the underlying                   their unpaid principal balance.                          designated pool; (ii) selecting assets
                                                  loans are not originated purely for                        After the sponsor randomly selects a                  randomly from the designated pool for
                                                  distribution, but are securitized by the                representative sample from the                           inclusion in the representative sample;
                                                  sponsor as part of a broader funding                    designated pool, it would be required to                 (iii) testing the randomly selected
                                                  strategy. By retaining a randomly                       assess that sample to ensure that, for                   sample of assets in the designated pool;
                                                  selected representative sample of assets,               each material characteristic of the                      (iv) maintaining, until all ABS interests
                                                  the sponsor retains exposure to                         assets, including the average unpaid                     are paid in full, documentation that
                                                  substantially the same type of credit risk              principal balance, in the designated                     clearly identifies the assets included in
                                                  as investors in the ABS. Therefore, this                pool the mean of any quantitative                        the representative sample; and (v)
                                                  structure provides a sponsor incentives                 characteristic, and the proportion of any                prohibiting, until all ABS interests are
                                                  to monitor and control the quality of the               characteristic that is categorical in                    paid in full, assets in the representative
                                                  underwriting of the securitized assets                  nature, of the sample of assets randomly                 sample from being included in the
                                                  and helps align the sponsor’s incentives                selected from the designated pool is                     designated pool of any other
                                                  with those of investors in the ABS.                     within a 95 percent two-tailed                           securitization transaction.
                                                     Consistent with other risk retention                 confidence interval of the mean or                          In addition, prior to the sale of the
                                                  options, a sponsor using the                            proportion, respectively, of the same                    asset-backed securities as part of the
                                                  representative sample approach would                    characteristic of all the assets in the                  securitization transaction, the sponsor
                                                  be required to retain at least five percent             designated pool.72                                       would be required to obtain an agreed
                                                  of the credit risk of the assets the                                                                             upon procedures report from an
                                                                                                             Without these statistical tests, a
                                                  sponsor identifies for securitization.                                                                           independent, public accounting firm. At
                                                                                                          sample could be biased towards, for
                                                  Therefore, the unpaid principal balance                                                                          a minimum, the independent, public
                                                                                                          example, assets with a larger dollar
                                                  of all the assets in the representative                                                                          accounting firm must report on whether
                                                                                                          value or assets with a lower expected
                                                  sample would be required to equal at                                                                             the sponsor has the policies and
                                                                                                          risk of default. In summary, this process
                                                  least five percent of the aggregate                                                                              procedures mentioned above.73 Once an
                                                                                                          is designed to ensure that the assets
                                                  unpaid principal balance of all the                                                                              acceptable agreed upon procedures
                                                                                                          randomly selected from the designated
                                                  assets in the pool of assets initially                                                                           report has been obtained, the sponsor
                                                                                                          pool are, in fact, representative of the
                                                  identified for securitization (including                                                                         may rely on such report for subsequent
                                                                                                          securitized pool. If this process does not
                                                  those that end up in the representative                                                                          securitizations. However, if the
                                                                                                          produce a sample with equivalent
                                                  sample). For example, if the assets that                                                                         sponsor’s policies and procedures
                                                                                                          material characteristics (as measured by
                                                  are identified for securitization have an                                                                        change in any material respect, a new
                                                                                                          the required two-tailed confidence
                                                  aggregate unpaid principal balance of                                                                            agreed upon procedures report would be
                                                                                                          level), the sponsor must repeat it as
                                                  $100 million, the aggregate unpaid                                                                               required. Under the proposal, the
                                                                                                          necessary in order to achieve an
                                                  principal balance of the assets in the                                                                           independent public accounting firm
                                                                                                          equivalent result or rely on another
                                                  representative sample would be                                                                                   providing the agreed upon procedures
                                                                                                          permissible option for retaining credit
                                                  required to equal at least $5 million.71                                                                         report must report on the following
                                                                                                          risk. The proposal permits this re-
                                                     To ensure that a sponsor that retains                                                                         minimum items:
                                                                                                          selection and testing process.                              (i) Policies and procedures that
                                                  a representative sample remains
                                                  exposed to substantially the same                                                                                require the sponsor to identify and
                                                                                                            72 Depending on the type of assets involved in the
                                                  aggregate credit risks as investors in the                                                                       document the material characteristics of
                                                                                                          securitization, the material characteristics other
                                                  ABS, the proposal would require the                     than the unpaid principal balance of the assets          assets included in a designated pool of
                                                  sponsor to construct a representative                   might include, for example, the geographical             assets that meets the requirements of the
                                                  sample according to a specific process.                 location of the property securing the loan, the debt-    proposal;
                                                                                                          to-income ratio(s) of the borrower (DTI ratio), and         (ii) Policies and procedures that
                                                  As an initial step, the sponsor would                   the interest rate payable on the loan. Characteristics
                                                  need to designate a pool of at least 1,000              such as the DTI ratio and the interest rate payable
                                                                                                                                                                   require the sponsor to select assets
                                                  separate assets for securitization (the                 on the loan would be considered quantitative             randomly in accordance with the
                                                  ‘‘designated pool’’). The representative                characteristics, and characteristics such as the         proposal;
                                                  sample would be required to be drawn
                                                                                                          geographic location of the property securing the            (iii) Policies and procedures that
                                                                                                          loan would be considered categorical                     require the sponsor to test the
                                                  exclusively from the designated pool.                   characteristics. Assuming the factors above are
                                                  Also, the designated pool would be                      material, a sponsor using the representative sample      randomly-selected sample of assets in
                                                  prohibited from containing any assets                   option would be required to test the mean of the         accordance with the proposal of this
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                                                                                                          DTI ratio of loans in the representative sample          section;
                                                                                                          against the mean of the DTI ratio of all assets in the      (iv) Policies and procedures that
                                                    70 See proposed rules at § l.8.                       designated pool (including the ones selected for the
                                                    71 Stated otherwise, the unpaid principal balance     random sample). In addition, the sponsor would be        require the sponsor to maintain, until all
                                                  of the assets comprising the representative sample      required to test the proportion of the number of         ABS interests are paid in full,
                                                  must be no less than 5/95ths (5.264 percent) of the     assets from one geographic location in the               documentation that identifies the assets
                                                  aggregate unpaid principal balance of all the assets    representative sample to the total number of assets      in the representative sample established
                                                  that ultimately are securitized in the securitization   in the representative sample against the proportion
                                                  transaction. The proposed rules use this approach       of the number of assets from the same geographic         in accordance with the proposal; and
                                                  to defining the minimum size of a representative        location in the designated pool to the total number
                                                  sample. See proposed rules at § l.8(b)(1)(i).           of assets in the designated pool.                         73 See   proposed rules at § l.8(d)(2)(i)–(v).



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                                                  24106                        Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                     (v) Policies and procedures that                           (iii) A description of the material                 Request for Comment
                                                  require the sponsor to prohibit, until all                 characteristics of the designated pool                    47. Should we include the
                                                  ABS interests are paid in full, assets in                  and the representative sample,                         representative sample alternative as a
                                                  the representative sample from being                       including, but not limited to, the                     risk retention option?
                                                  included in the designated pool of any                     average unpaid principal balance of the                   48. Are the mechanisms that we have
                                                  other securitization transaction.                          assets in the designated pool and the                  proposed adequate to ensure monitoring
                                                     Because the performance of the assets                   representative sample, the means of the                of the randomization process if such an
                                                  included in the representative sample                      quantitative characteristics and                       alternative were permitted?
                                                  could differ from the performance of the                   proportions of characteristics that are                   49. Is the requirement that the
                                                  securitized assets if the two sets of                      categorical in nature with respect to                  designated pool contain at least 1000
                                                  assets were serviced under different                       each of the material characteristics of                assets appropriate, or should a greater
                                                  standards or procedures, the proposal                      the assets in the designated pool and the              number of assets be required or a lesser
                                                  provides that, until such time as all ABS                                                                         number be permitted?
                                                                                                             representative sample, of appropriate
                                                  interests in the issuing entity have been                                                                            50. Are there material characteristics
                                                                                                             introductory and explanatory
                                                  fully paid or the issuing entity has been                                                                         other than the average unpaid principal
                                                                                                             information to introduce the
                                                  dissolved, servicing of the assets                                                                                balance of all the assets that should be
                                                  included in the representative sample                      characteristics, the methodology used in
                                                                                                             determining or calculating the                         identified in the rule for purposes of the
                                                  must be conducted by the same entity                                                                              equivalent risk determination and
                                                  and under the same contractual                             characteristics, and any terms or
                                                                                                             abbreviations used; 75                                 disclosure requirements?
                                                  standards as the servicing of the                                                                                    51. Are there any better ways to
                                                  securitized assets. In addition, the                          (iv) A description of the policies and              ensure an adequate randomization
                                                  individuals responsible for servicing the                  procedures that the sponsor used for                   process and the equivalence of the
                                                  assets comprising the representative                       ensuring that the process for identifying              representative sample to the pool of
                                                  sample or the securitized assets must                      the representative sample complies with                securitized assets? For example, would
                                                  not be able to determine whether an                        the proposal and that the representative               it be appropriate and sufficient if the
                                                  asset is held by the sponsor or held by                    sample has equivalent material                         sponsor were required to use a third
                                                  the issuing entity.                                        characteristics to those of the pool of                party to conduct the random selection
                                                     A sponsor would also be required to                     securitized assets;                                    with no subsequent testing to determine
                                                  comply with the hedging, transfer and                                                                             if the sample constructed has material
                                                  sale restrictions in section l.14 with                        (v) Confirmation that an agreed upon
                                                                                                             procedures report was obtained as                      characteristics equivalent to those of the
                                                  respect to the assets in the                                                                                      securitized assets?
                                                  representative sample. Additionally, the                   required by the proposal; and
                                                                                                                                                                       52(a). Alternatively, would it be
                                                  sponsor would be prohibited from                              (vi) The material assumptions and                   adequate if the sponsor was required to
                                                  removing any assets from the                               methodology used in determining the                    provide a third-party opinion that the
                                                  representative sample and, until all ABS                   aggregate dollar amount of ABS interests               selection process was random and that
                                                  interests are repaid, causing or                           issued by the issuing entity in the                    retained exposures are equivalent (i.e.,
                                                  permitting the assets in the                               securitization transaction, including                  share a similar risk profile) to the
                                                  representative sample to be included in                    those pertaining to any estimated cash                 securitized exposures? 52(b). Would this
                                                  any other designated pool or                               flows and the discount rate used.                      opinion resemble a credit rating, thereby
                                                  representative sample established in                                                                              raising concerns about undue reliance
                                                  connection with any other securitization                      Further, after the sale of the ABS, the
                                                                                                             sponsor would be required to provide,                  on credit ratings? 52(c). If this approach
                                                  transaction.74                                                                                                    were adopted, should the Agencies
                                                     To help ensure that potential                           or cause to be provided, to investors at
                                                                                                             the end of each distribution period (as                impose any standards of performance to
                                                  investors and the Agencies can monitor                                                                            be followed by such a third party, or
                                                  and assess the sponsor’s compliance                        specified in the governing transaction
                                                                                                                                                                    that such third party have certain
                                                  with these requirements, the proposal                      documents) a comparison of the
                                                                                                                                                                    characteristics?
                                                  would require the sponsor to provide, or                   performance of the pool of securitized                    53. If the Agencies adopt a
                                                  cause to be provided, the following                        assets for the related distribution period             representative sample option, should
                                                  disclosures to potential investors a                       with the performance of the assets in the              the same disclosures be required
                                                  reasonable period of time prior to the                     representative sample for the related                  regarding the securitized assets subject
                                                  sale of asset-backed securities as part of                 distribution period. A sponsor selecting               to risk retention that are required for the
                                                  the securitization transaction and to                      the representative sample option also                  assets in the pool at the time of
                                                  provide, or cause to be provided, the                      would be required to provide investors                 securitization and on an ongoing basis?
                                                  same information, upon request, to the                     disclosure concerning the assets in the                   54. Should the retained exposures, as
                                                  Commission and its appropriate Federal                     representative sample in the same form,                proposed, be subject to the same
                                                  banking agency (if any):                                   level, and manner as it provides,                      servicing standards as the securitized
                                                     (i) The amount (expressed as a                          pursuant to rule or otherwise,                         exposures?
                                                  percentage of the designated pool and                      concerning the securitized assets.                        55. Are the disclosures proposed
                                                  dollar amount) of assets included in the                   Therefore, if loan-level disclosure                    sufficient to provide investors with all
                                                  representative sample to be retained by                                                                           material information concerning the
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                                                                             concerning the securitized assets was
                                                  the sponsor;                                               required, by rule or otherwise, to be                  sponsor’s retained interest in a
                                                     (ii) The amount (expressed as a                         provided to investors, the same level of               securitization transaction, as well as
                                                  percentage of the designated pool and                      disclosure would also be required                      enable investors and the Agencies to
                                                  dollar amount) of assets required to be                    concerning the representative sample.                  monitor whether the sponsor has
                                                  included in the representative sample                                                                             complied with the rule?
                                                  and retained by the sponsor;                                 75 See, e.g., disclosure of pool characteristics        56(a). Should additional disclosures
                                                                                                             required in registered transactions in the             be required? 56(b). If so, what should be
                                                    74 See   proposed rules at § l.8(f).                     Commission’s Regulation AB, Item 1111(b).              required and why?


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                                                                               Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                      24107

                                                     57(a). Is the condition that a sponsor                 securities or arbitrage programs.77 ABCP                 insolvency purposes from the sponsor
                                                  obtain an agreed upon procedures report                   conduits that purchase loans or                          and any intermediate SPV. Second, the
                                                  from an independent, public accounting                    receivables from one originator or                       ABS issued by an intermediate SPV to
                                                  firm appropriate? 57(b). If not, is there                 multiple originators are commonly                        the issuing entity must be collateralized
                                                  another mechanism that should be                          referred to as single-seller ABCP                        solely by assets originated by a single
                                                  included in the option that helps ensure                  programs and multi-seller ABCP                           originator-seller.79 Third, all the
                                                  that the sponsor has constructed the                      programs, respectively. In each of these                 interests issued by an intermediate SPV
                                                  representative sample in conformance                      programs, the sponsor of the ABCP                        must be transferred to one or more
                                                  with the requirements of the rule?                        conduit approves the originators whose                   ABCP conduits or retained by the
                                                     58(a). Is the requirement that the                     loans or receivables will collateralize                  originator-seller. Fourth, a regulated
                                                  sponsor determine equivalency with a                      the ABCP issued by the conduit. An                       liquidity provider must have entered
                                                  95 percent two-tailed confidence                          ‘‘originator-seller’’ will sell the eligible             into a legally binding commitment to
                                                  appropriate? 58(b). If not, what                          loans or receivables to an intermediate,                 provide 100 percent liquidity coverage
                                                  measurement of equivalency do you                         bankruptcy remote SPV established by                     (in the form of a lending facility, an
                                                  recommend and why?                                        the originator-seller. The credit risk of                asset purchase agreement, a repurchase
                                                                                                            the receivables transferred to the                       agreement, or similar arrangement) to all
                                                  6. Asset-Backed Commercial Paper                          intermediate SPV then typically is                       the ABCP issued by the issuing entity by
                                                  Conduits                                                  separated into two classes—a senior                      lending to, or purchasing assets from,
                                                                                                            interest that is purchased by the ABCP                   the issuing entity in the event that funds
                                                     The next risk retention option under                   conduit and a residual interest that                     are required to repay maturing ABCP
                                                  the proposed rules is an option                           absorbs first losses on the receivables                  issued by the issuing entity.80
                                                  specifically designed for structures                      and is retained by the originator-seller.                   Under the proposed risk retention
                                                  involving asset-backed commercial                         The residual interest retained by the                    option applicable to ABCP conduit
                                                  paper (ABCP) that is supported by                         originator-seller typically is sized so                  structures, the sponsor of an eligible
                                                  receivables originated by one or more                     that it is sufficiently large to absorb all              ABCP conduit would be permitted to
                                                  originators and that is issued by a                       losses on the underlying receivables.                    satisfy its base risk retention obligations
                                                  conduit that meets certain conditions.76                     The ABCP conduit, in turn, issues                     under the rule if each originator-seller
                                                  This option is designed to take account                   short-term ABCP that is collateralized                   that transfers assets to collateralize the
                                                  of the special structures through which                   by the senior interests purchased from                   ABCP issued by the conduit retains the
                                                  this type of ABCP typically is issued, as                 the intermediate SPVs (which itself is                   same amount and type of credit risk as
                                                  well as the manner in which exposure                      supported by the subordination                           would be required under the horizontal
                                                  to the credit risk of the underlying                      provided by the residual interest                        risk retention option as if the originator-
                                                  assets typically is retained by                           retained by the originator-seller). The                  seller was the sponsor of the
                                                  participants in the securitization chain                  sponsor of these types of ABCP conduit,                  intermediate SPV. Specifically, the
                                                  for this type of ABCP.                                    which is usually a bank or other                         proposal provides that a sponsor of an
                                                     ABCP is a type of liability that is                    regulated financial institution, also                    ABCP securitization transaction would
                                                  typically issued by a special purpose                     typically provides (or arranges for                      satisfy its base risk retention
                                                  vehicle (or conduit) sponsored by a                       another regulated financial institution to               requirement with respect to the issuance
                                                  financial institution or other sponsor.                   provide) 100 percent liquidity coverage                  of ABCP by an eligible ABCP conduit if
                                                  The commercial paper issued by the                        on the ABCP issued by the conduit. This                  each originator-seller retains an eligible
                                                  conduit is collateralized by a pool of                    liquidity support typically requires the                 horizontal residual interest in each
                                                  assets, which may change over the life                    support provider to provide funding to,                  intermediate SPV established by or on
                                                  of the entity. Depending on the type of                   or purchase assets from, the ABCP
                                                                                                                                                                        79 Under the proposal, an originator-seller would
                                                  ABCP program being conducted, the                         conduit in the event that the conduit                    mean an entity that creates assets through one or
                                                  assets collateralizing the ABCP may                       lacks the funds necessary to repay                       more extensions of credit and sells those assets (and
                                                  consist of a wide range of assets                         maturing ABCP issued by the conduit.                     no other assets) to an intermediate SPV, which in
                                                  including auto loans, commercial loans,                      The proposal includes several                         turn sells interests collateralized by those assets to
                                                                                                            conditions designed to ensure that this                  one or more ABCP conduits. The proposal defines
                                                  trade receivables, credit card                                                                                     an intermediate SPV as a special purpose vehicle
                                                  receivables, student loans, and other                     option is available only to the type of                  that is bankruptcy remote or otherwise isolated for
                                                  securities. Like other types of                           single-seller or multi-seller ABCP                       insolvency purposes that purchases assets from an
                                                  commercial paper, the term of ABCP                        conduits described above. For example,                   originator-seller and that issues interests
                                                                                                                                                                     collateralized by such assets to one or more ABCP
                                                  typically is short, and the liabilities are               this option is available only with                       conduits. See proposed rules at § l.2 (definitions
                                                  ‘‘rolled,’’ or refinanced, at regular                     respect to ABCP issued by an ‘‘eligible                  of ‘‘originator-seller’’ and ‘‘intermediate SPV’’).
                                                  intervals. Thus, ABCP conduits                            ABCP conduit,’’ as defined by the                           80 The proposal defines a regulated liquidity

                                                  generally fund longer-term assets with                    proposal. The proposal defines an                        provider as a depository institution (as defined in
                                                                                                            eligible ABCP conduit as an issuing                      section 3 of the Federal Deposit Insurance Act (12
                                                  shorter-term liabilities.                                                                                          U.S.C. 1813)); a bank holding company (as defined
                                                     As proposed, this risk retention                       entity that issues ABCP and that meets                   in 12 U.S.C. 1841) or a subsidiary thereof; a savings
                                                  option in § __.9 of the proposed rules                    each of the following criteria.78 First,                 and loan holding company (as defined in 12 U.S.C.
                                                                                                            the issuing entity must be bankruptcy                    1467a) provided all or substantially all of the
                                                  would be available only for short-term                                                                             holding company’s activities are permissible for a
                                                  ABCP collateralized by receivables or                     remote or otherwise isolated for
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                                                                                                                                                                     financial holding company under 12 U.S.C. 1843(k)
                                                  loans and supported by a liquidity                           77 Structured investment vehicles (SIVs) and
                                                                                                                                                                     or a subsidiary thereof; or a foreign bank (or a
                                                  facility that provides 100 percent                                                                                 subsidiary thereof) whose home country supervisor
                                                                                                            securities arbitrage ABCP programs both purchase         (as defined in § 211.21 of the Federal Reserve
                                                  liquidity coverage from a regulated                       securities (rather than receivables and loans from       Board’s Regulation K (12 CFR 211.21)) has adopted
                                                  institution. This risk retention option                   originators). SIVs typically lack liquidity facilities   capital standards consistent with the Capital
                                                  would not be available to entities or                     covering all of these liabilities issued by the SIV,     Accord of the Basel Committee on Banking
                                                                                                            while securities arbitrage ABCP programs typically       Supervision, as amended, provided the foreign bank
                                                  ABCP programs that operate as                             have such liquidity support.                             is subject to such standards. See http://www.bis.org/
                                                                                                               78 See proposed rules at § l.2 (definition of         bcbs/index.htm for more information about the
                                                    76 See   proposed rules at § l.9.                       ‘‘eligible ABCP conduit’’).                              Basel Capital Accord.



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                                                  24108                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  behalf of that originator-seller for                       In addition, consistent with market                   of the Exchange Act.84 The terms of the
                                                  purposes of issuing interests to the                    practice, the proposal would require                     proposed option for eligible ABCP
                                                  eligible ABCP conduit. The eligible                     that the sponsor:                                        conduits include conditions designed to
                                                  horizontal residual interest retained by                   (i) Establish the eligible ABCP                       ensure that the interests in the
                                                  the originator-seller must equal at least               conduit;                                                 intermediate SPVs sold to an eligible
                                                  five percent of the par value of all                       (ii) Approve the originator-sellers                   ABCP conduit have low credit risk, and
                                                  interests issued by the intermediate                    permitted to sell or transfer assets,                    to ensure that originator-sellers have
                                                  SPV. Accordingly, each originator-seller                indirectly through an intermediate SPV,                  incentives to monitor the quality of the
                                                  would be required to retain credit                      to the ABCP conduit;                                     assets that are sold to an intermediate
                                                  exposure to the receivables sold by that                   (iii) Establish criteria governing the                SPV and collateralize the ABCP issued
                                                  originator-seller to support issuance of                assets the originator-sellers are                        by the conduit. In addition, the proposal
                                                  the ABCP.                                               permitted to sell or transfer to an                      is designed to effectuate the risk
                                                                                                          intermediate SPV;                                        retention requirements of section 15G of
                                                     The eligible horizontal residual                                                                              the Exchange Act in a manner that
                                                                                                             (iv) Approve all interests in an
                                                  interest retained by the originator-seller              intermediate SPV to be purchased by                      facilitates reasonable access to credit by
                                                  would be subject to the same terms and                  the eligible ABCP conduit;                               consumers and businesses through the
                                                  conditions as apply under the                              (v) Administer the ABCP conduit by                    issuance of ABCP backed by consumer
                                                  horizontal risk retention option. Thus,                 monitoring the interests acquired by the                 and business receivables. Finally, as
                                                  for example, if an originator-seller                    conduit and the assets collateralizing                   noted above, an originator-seller would
                                                  transfers $100 of receivables to an                     those interests, arranging for debt                      be subject to the same restrictions on
                                                  intermediate SPV, which then issues                     placement, compiling monthly reports,                    transferring the retained eligible
                                                  senior interests and an eligible                        and ensuring compliance with the                         horizontal residual interest to a third
                                                  horizontal residual interest with an                    conduit documents and with the                           party as would apply to sponsors under
                                                  aggregate par value of $100, the                        conduit’s credit and investment policy;                  the rule.
                                                  originator-seller must retain an eligible               and                                                      Request for Comment
                                                  horizontal residual interest with a par                    (vi) Maintain, and adhere to, policies
                                                  value of $5 or more.81 Importantly, the                 and procedures for ensuring that the                       59. Is the proposed risk retention
                                                  originator-seller also would be                         requirements of the rule have been                       option for eligible ABCP conduits
                                                  prohibited from selling, transferring,                  met.82                                                   appropriate?
                                                  and hedging the eligible horizontal                                                                                60(a). Have the Agencies
                                                                                                             The sponsor also would have to
                                                  residual interest that it is required to                                                                         appropriately defined the terms (such as
                                                                                                          provide, or cause to be provided, to
                                                  retain. This option is designed to                                                                               an eligible ABCP conduit, intermediate
                                                                                                          potential purchasers a reasonable period
                                                  accommodate the special structure and                                                                            SPV and originator-seller) that govern
                                                                                                          of time prior to the sale of any ABCP
                                                  features of these types of ABCP                                                                                  use of this option? 60(b). Is the foregoing
                                                                                                          from the conduit, and to the
                                                  programs.                                                                                                        description of ABCP structures
                                                                                                          Commission and its appropriate Federal
                                                                                                                                                                   accurate? 60(c) Are there additional
                                                     Although the proposal would allow                    banking agency, if any, upon request,
                                                                                                                                                                   ABCP structures that are not easily
                                                  the originator-sellers (rather than the                 the name and form of organization of
                                                                                                                                                                   adaptable to the risk retention options
                                                  sponsor) to retain the required eligible                each originator-seller that will retain (or
                                                                                                                                                                   proposed? 60(d). If so, should the
                                                  horizontal residual interest, the                       has retained) an interest in the
                                                                                                                                                                   proposed ABCP option be revised to
                                                  proposal also imposes certain                           securitization transaction pursuant to
                                                                                                                                                                   include these structures and if so, how?
                                                  obligations directly on the sponsor in                  § l.9 of the proposed rules (including                     61. Should the proposed option for
                                                  recognition of the key role the sponsor                 a description of the form, amount, and                   securitizations structured using ABCP
                                                  plays in organizing and operating an                    nature of such interest), and of each                    conduits require financial disclosure
                                                  eligible ABCP conduit. Most                             regulated liquidity provider that                        regarding the liquidity provider?
                                                  importantly, the proposal provides that                 provides liquidity support to the eligible                 62(a). Also, should other entities be
                                                  the sponsor of an eligible ABCP conduit                 ABCP conduit (including a description                    permitted to be liquidity providers for
                                                  that issues ABCP in reliance on this                    of the form, amount, and nature of such                  purposes of the rule? For example,
                                                  option would be responsible for                         liquidity coverage).                                     should the rule permit an insurance
                                                  compliance with the requirements of                        Section 15G permits the Agencies to                   company to be an eligible liquidity
                                                  this risk retention option. The proposal                allow an originator (rather than a                       provider if the company is in the
                                                  also would require that the sponsor                     sponsor) to retain the required amount                   business of providing credit protection
                                                  maintain policies and procedures to                     and form of credit risk and to reduce the                (such as a bond insurer or re-insurer)
                                                  monitor the originator-sellers’                         amount of risk retention required of the                 and is subject to supervision by a State
                                                  compliance with the requirements of the                 sponsor by the amount retained by the                    insurance regulator or is a foreign
                                                  proposal. In the event that the sponsor                 originator.83 In developing the proposed                 insurance company subject to
                                                  determines that an originator-seller no                 risk retention option for eligible ABCP                  comparable regulation to that imposed
                                                  longer complies with the requirements                   conduits, the Agencies have considered                   by U.S. insurance companies?
                                                  of the rule (for example, because the                   the factors set forth in section 15G(d)(2)                 62(b). Why or why not?
                                                  originator-seller has sold the interest it
                                                                                                             82 The sponsor of an ABCP conduit satisfies the
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                                                                                                                                      84 15 U.S.C. 78o–11(d)(2). These factors are
                                                  was required to retain), the sponsor                    definition of ‘‘sponsor’’ under the proposed rules. If   whether the assets sold to the securitizer have
                                                  would be required to promptly notify, or                the conduit does not satisfy the conditions for an       terms, conditions, and characteristics that reflect
                                                  cause to be notified, the investors in the              ‘‘eligible ABCP conduit,’’ the sponsor must retain       low credit risk; whether the form or volume of
                                                  securitization transaction of such                      credit risk in accordance with another risk retention    transactions in securitization markets creates
                                                                                                          option included in the proposal (unless an               incentives for imprudent origination of the type of
                                                  noncompliance.                                          exemption for the transaction exists).                   loan or asset to be sold to the securitizer; and the
                                                                                                             83 See 15 U.S.C. 78o–11(1)(c)(G)(iv) and (d)          potential impact of the risk retention obligations on
                                                    81 As noted above, this would be the minimum          (permitting the Commission and the Federal               the access of consumers and businesses to credit on
                                                  amount of credit risk that must be retained as part     banking agencies to allow the allocation of risk         reasonable terms, which may not include the
                                                  of a securitization transaction.                        retention from a sponsor to an originator).              transfer of credit risk to a third party.



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                                                                               Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                  24109

                                                     63. In addition, the Agencies seek                     interest in the issuing entity in the same             B-piece buyers, newly issued CMBS for
                                                  confirmation that the terms of this                       form, amount, and manner as the                        which investors received financing
                                                  option effectively prevent structures                     sponsor would have been required to                    through the Term-Asset Backed
                                                  such as SIVs and ABCP programs that                       retain under the horizontal risk                       Securities Lending Facility (‘‘TALF’’)
                                                  operate as arbitrage programs from using                  retention option and certain additional                were required to have an independent
                                                  this option.                                              conditions are met.                                    operating advisor that acted on behalf of
                                                     64. Should the rule, as proposed,                         The allocation of a first-loss position             the investors as a collective whole, had
                                                  allow the liquidity provider to be a                      to a third-party purchaser has been                    consultative rights over major decisions
                                                  depository institution holding company                    common practice in CMBS transactions                   of the special servicer, and had the
                                                  or a subsidiary of a depository                           for a number of years.86 The third-party               ability to recommend replacement of the
                                                  institution instead of just the depository                purchaser has been commonly referred                   special servicer.88 These operating
                                                  institution?                                              to in the CMBS marketplace as a ‘‘B-                   advisor requirements also were coupled
                                                     65. Are the disclosures proposed                       piece buyer’’ 87 because the CMBS                      with enhanced disclosures to investors
                                                  sufficient to provide investors with all                  tranche or tranches purchased by this                  regarding major decisions by the B-piece
                                                  material information concerning the                       investor were either unrated by the                    buyer and special servicer. Aspects of
                                                  originator-seller that will retain an                     credit rating agencies or assigned a                   these TALF requirements have been
                                                  interest in the securitization transaction                below-investment grade credit rating.                  incorporated into recent CMBS
                                                  and of each regulated liquidity provider                  Typically a B-piece buyer purchases at                 transactions undertaken after the closing
                                                  that provides liquidity support to the                    a discount to face value the most                      of the TALF to new financings.
                                                  eligible ABCP conduit, as well as enable                  subordinate tranche in the cash flow                      In light of the specific provisions of
                                                  investors and the Agencies to monitor                     waterfall of the CMBS transaction. In                  Section 15G(c)(1)(E) and the historical
                                                  whether the sponsor has complied with                     order to manage its risk, the B-piece                  market practice of third-party
                                                  the rule?                                                 buyer often is involved early in the                   purchasers acquiring first-loss positions
                                                     66(a). Should additional disclosures                   securitization process and has                         in CMBS transactions, the Agencies’
                                                  be required? 66(b). If so, what should be                 significant influence over the selection               proposal would allow a sponsor to meet
                                                  required and why? 66(c). For example,                                                                            its risk retention requirements under the
                                                                                                            of pool assets. For example, the B-piece
                                                  should a sponsor be required to disclose                                                                         rule if a third-party purchaser retains
                                                                                                            buyer often performs ‘‘due diligence’’ on
                                                  the material assumptions and                                                                                     the necessary exposure to the credit risk
                                                                                                            the pool assets, which often means a
                                                  methodology used in determining the                                                                              of the underlying assets provided six
                                                                                                            review of the loans in the pool at the
                                                  aggregate dollar amount of interests                                                                             conditions are met. These conditions are
                                                                                                            property and loan level. As a result of
                                                  issued by each intermediate SPV? 66(d).                                                                          designed to help ensure that the form,
                                                                                                            this review, a B-piece buyer may request
                                                  Would such a disclosure be beneficial to                                                                         amount, and manner of the third-party
                                                                                                            that specific loans be removed from the
                                                  investors? 66(e). In light of the broad                                                                          purchaser’s risk retention are consistent
                                                                                                            pool prior to securitization.
                                                  range of asset classes that underlie                                                                             with the purposes of section 15G of the
                                                                                                               Additionally, a B-piece buyer is often
                                                  ABCP conduits, would such a                                                                                      Exchange Act. This option would be
                                                                                                            designated as the ‘‘controlling class’’
                                                  disclosure pose any operational or other                                                                         available only for securitization
                                                                                                            under the terms of the pooling and
                                                  challenges for sponsors of ABCP                                                                                  transactions where commercial real
                                                                                                            servicing agreement governing the
                                                  conduits?                                                                                                        estate loans constitute at least 95
                                                                                                            CMBS transaction, and in accordance
                                                     67(a). Should we, as proposed, require                                                                        percent of the unpaid principal balance
                                                                                                            with its rights as the controlling class,
                                                  that the ABCP be for a term of 270 days                                                                          of the assets being securitized.89
                                                                                                            a B-piece buyer often names itself, or an
                                                  or less? 67(b). Should we allow for a                                                                               The first condition requires that the
                                                                                                            affiliated company, as the ‘‘special
                                                  longer term, such as up to one year?                                                                             third-party purchaser retain an eligible
                                                                                                            servicer’’ in the transaction. Such
                                                  7. Commercial Mortgage-Backed                             servicer typically is the servicer                        88 The TALF was a special lending facility
                                                  Securities                                                authorized to service loans in default or              established by the Federal Reserve and the Treasury
                                                     Section 15G(c)(1)(E) of the Exchange                   having other non-payment issues. The                   Department in response to the financial crisis to
                                                                                                            control of special servicing rights by the             assist the financial markets in accommodating the
                                                  Act provides that, with respect to                                                                               credit needs of consumers and businesses of all
                                                  securitizations involving commercial                      B-piece buyer has the potential to create              sizes by facilitating the issuance of ABS
                                                  mortgages, the regulations prescribed by                  conflicts of interest with the senior                  collateralized by a variety of consumer and business
                                                  the Agencies may provide for ‘‘retention                  certificate holders to the securitization.             loans. The TALF also was intended to improve the
                                                                                                            For example, the control of special                    market conditions for ABS more generally.
                                                  of the first-loss position by a third-party                                                                      Additional information concerning the TALF is
                                                  purchaser that specifically negotiates for                servicing rights would allow the B-piece               available on the public Web sites of the Board (see
                                                  the purchase of such first loss position,                 buyer to directly or indirectly manage                 http://www.federalreserve.gov/monetarypolicy/bst_
                                                  holds adequate financial resources to                     any loan modifications. While some                     lendingother.htm ) and the Federal Reserve Bank of
                                                                                                            CMBS transactions required an                          New York (see http://www.newyorkfed.org/markets/
                                                  back losses, provides due diligence on                                                                           talf.html).
                                                  all individual assets in the pool before                  ‘‘operating advisor’’ to oversee the                      89 See proposed rules at § l.10(a). ‘‘Commercial

                                                  the issuance of the asset-backed                          servicing activities of the special                    real estate loan’’ is defined in § l.16 of the
                                                  securities, and meets the same standards                  servicer, in many instances this                       proposed rules to mean a loan secured by a
                                                                                                            operating advisor works on behalf of the               property with five or more single family units, or
                                                  for risk retention as the Federal banking                                                                        by nonfarm nonresidential real property, the
                                                  agencies and the Commission require of                    controlling class (i.e., the B-piece buyer             primary source (fifty (50) percent or more) of
                                                  the securitizer[.]’’ 85 In light of this                  unless and until losses reduced its
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                                                                                                                                                                   repayment for which is expected to be derived from
                                                  provision, the Agencies are proposing to                  junior tranche to zero). To help better                the proceeds of the sale, refinancing, or permanent
                                                                                                            address the potential conflict created by              financing of the property; or rental income
                                                  permit a sponsor of ABS that is                                                                                  associated with the property other than rental
                                                  collateralized by commercial real estate                  special servicer arrangements involving                income derived from any affiliate of the borrower.
                                                  loans to meet its risk retention                                                                                 A commercial real estate loan does not include a
                                                                                                              86 See, e.g., Board Report.
                                                  requirements if a third-party purchaser                                                                          land development and construction loan (including
                                                                                                              87 We  note that under the proposal there is no      1- to 4-family residential or commercial
                                                  acquires an eligible horizontal residual                  requirement that the tranche or tranches purchased     construction loans); any other land loan; a loan to
                                                                                                            by the third-party purchaser be assigned any           a real estate investment trust (REIT); or an
                                                    85 15   U.S.C. 78o–11(c)(1)(E)(iv).                     particular credit rating.                              unsecured loan to a developer.



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                                                  24110                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  horizontal residual interest in the                     shared by all other investors in the                    servicing of the securitized assets. Major
                                                  securitization in the same form, amount,                securitization. The proposed prohibition                decisions would include, without
                                                  and manner as would be required of the                  of control rights related to servicing,                 limitation, any material modification of,
                                                  sponsor under the horizontal risk                       would be subject to an exception,                       or waiver with respect to, any provision
                                                  retention option (proposed § l.5).90                    however, if the underlying                              of a loan agreement, any foreclosure
                                                  Accordingly, the interest acquired by                   securitization transaction documents                    upon or comparable conversion of the
                                                  the third-party purchaser must be the                   provide for the appointment of an                       ownership of a property, and any
                                                  most junior interest in the issuing                     independent operating advisor                           acquisition of a property.
                                                  entity, and must be subject to the same                 (Operating Advisor) with certain powers                    The securitization transaction
                                                  limits on payments as would apply if                    and responsibilities.93 Under the                       documents must also provide that the
                                                  the eligible horizontal residual interest               proposal, an ‘‘Operating Advisor’’ would                Operating Advisor is responsible for
                                                  were held by the sponsor pursuant to                    be defined as a party that (i) is not                   reviewing the actions of any servicer
                                                  the horizontal risk retention option.                   affiliated with any other party to the                  that is, or is, affiliated with the third-
                                                     The second condition would require                   securitization, (ii) does not directly or               party purchaser and for issuing a report
                                                  that the third-party purchaser pay for                  indirectly have any financial interest in               to investors and the issuing entity, on a
                                                  the first-loss subordinated interest in                 the securitization other than in fees                   periodic basis, concerning whether the
                                                  cash at the closing of the securitization               from its role as Operating Advisor, and                 Operating Advisor believes, in its sole
                                                  without financing being provided,                       (iii) is required to act in the best interest           discretion exercised in good faith, the
                                                  directly or indirectly, from any other                  of, and for the benefit of, investors as a              servicer is in compliance with any
                                                  person that is a party to the                           collective whole.                                       standards required of the servicer as
                                                  securitization transaction (including,                     The Agencies believe that the                        provided in the applicable transaction
                                                  but not limited to, the sponsor,                        introduction of an independent                          documents, and if not, the standard(s)
                                                  depositor, or an unaffiliated servicer),                Operating Advisor would minimize the                    with which the servicer is out of
                                                  other than a person that is a party solely              ability of third-party purchasers to                    compliance. In addition, the
                                                  by reason of being an investor.91 This                  manipulate cash flows through special                   securitization transaction documents
                                                  would prohibit the third-party                          servicing. In approving loans for                       must also provide that the Operating
                                                  purchaser or an affiliate of the third-                 inclusion in the securitization, the                    Advisor has the authority to recommend
                                                  party purchase from obtaining financing                 third-party purchaser will be mindful of                that a servicer that is, or is affiliated
                                                  from any such person as well as from                    the limits on its ability to offset the                 with, the third-party purchaser be
                                                  any affiliate of any such person. These                 consequences of poor underwriting
                                                                                                                                                                  replaced by a successor servicer if the
                                                  requirements should help ensure that                    through servicing tactics if a loan
                                                                                                                                                                  Operating Advisor determines, in its
                                                  the third-party purchaser has sufficient                becomes troubled, thereby providing
                                                                                                                                                                  sole discretion exercised in good faith,
                                                  financial resources to fund the                         stronger incentive for the third-party
                                                                                                                                                                  that the servicer has failed to comply
                                                  acquisition of the first-loss subordinated              purchaser to be diligent in assessing
                                                                                                                                                                  with any standard required of the
                                                  interest and absorb losses on the                       credit quality of the pool assets at the
                                                                                                                                                                  servicer as provided in the applicable
                                                  underlying assets to which it would be                  time of securitization. For these types of
                                                                                                                                                                  transaction documents and that such
                                                  exposed through this interest.92                        securitization transactions, the third-
                                                     The third condition relates to the                                                                           replacement would be in the best
                                                                                                          party purchaser’s review of each loan
                                                  third-party purchaser’s review of the                                                                           interest of the investors as a collective
                                                                                                          can serve as an effective check on the
                                                  assets collateralizing the ABS. This                    underwriting quality and credit risk of                 whole. The relevant transaction
                                                  proposed condition would require that                   the underlying loans and the reliability                documents must provide that, if such a
                                                  the third-party purchaser perform a                     of key information utilized.                            recommendation is made, the servicer
                                                  review of the credit risk of each asset in                 Further, in order for a third-party                  that is, or affiliated with, the third-party
                                                  the pool prior to the sale of the asset-                purchaser to have servicing rights in                   purchaser must be replaced unless a
                                                  backed securities. This review must                     connection with the securitization                      majority of each class of certificate
                                                  include, at a minimum, a review of the                  transaction, the securitization                         holders eligible to vote on the matter
                                                  underwriting standards, collateral, and                 transaction documents must require that                 votes to retain the servicer.
                                                  expected cash flows of each commercial                  the Operating Advisor have certain                         Consistent with other disclosure
                                                  loan in the pool.                                       powers and responsibilities in order to                 requirements under the proposed rules,
                                                     The fourth condition is intended to                  ensure that the Operating Advisor can                   the fifth proposed condition requires
                                                  address the potential conflicts of                      effectively fulfill its advisory role in the            that the sponsor provide, or cause to be
                                                  interest that can arise when a third-                   transaction.94 For example, as proposed,                provided, potential purchasers certain
                                                  party purchaser serves as the                           the transaction documents must require                  information concerning the third-party
                                                  ‘‘controlling class’’ of a CMBS                         that, if the third-party purchaser or an                purchaser and other information
                                                  transaction. This condition would                       affiliate acts as servicer, the servicer                concerning the transaction. Specifically,
                                                  prohibit a third-party purchaser from                   consult with the Operating Advisor in                   the proposal would require that a
                                                  (i) being affiliated with any other party               connection with, and prior to, any major                sponsor disclose to potential investors a
                                                  to the securitization transaction (other                decision in connection with the                         reasonable time before the sale of asset-
                                                  than investors); or (ii) having control                                                                         backed securities and, upon request, to
                                                  rights in the securitization (including,                  93 See proposed rules at § l.10(a)(4)(i). The         the Commission and its appropriate
                                                  but not limited to acting as servicer or                proposal also includes a de minimis exception to        Federal banking agency (if any) the
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                                                                                                          the general prohibition on affiliation with other       name and form of organization of the
                                                  special servicer) that are not collectively             parties to the securitization transaction. Under this
                                                                                                          de minimis exception, the third-party purchaser         third-party purchaser, a description of
                                                    90 See  proposed rules at § l.10.                     would be permitted to be affiliated with one or         the third-party purchaser’s experience
                                                    91 See  proposed rules at § l.10.                     more originators of the securitized assets so long as   in investing in CMBS, and any other
                                                     92 This requirement is consistent with section       the assets contributed by such originator(s)            information regarding the third-party
                                                  15G(b)(1)(E)(ii) of the Exchange Act, which             collectively comprise less than 10 percent of the
                                                  provides that the Agencies may consider whether         assets in the pool (as measured by dollar volume).      purchaser or the third-party purchaser’s
                                                  a third-party purchaser of CMBS ‘‘holds adequate        See proposed rules at § l.10(a)(4)(ii).                 retention of the eligible horizontal
                                                  financial resources to back losses.’’                     94 See proposed rules at § l.10(a)(4)(B)–(E).         residual interest that is material to


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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                   24111

                                                  investors in light of the circumstances of              Request for Comment                                    warranties for the securitization
                                                  the particular securitization transaction.                 68(a). Should the rules allow a third-              transaction against an industry-accepted
                                                     Additionally, a sponsor would be                     party purchaser to retain the required                 standard for model representations and
                                                  required to disclose the amount of the                                                                         warranties be provided to investors at a
                                                                                                          amount of risk in a CMBS transaction as
                                                  eligible horizontal residual interest that                                                                     reasonable time prior to sale? 76(b).
                                                                                                          described above?
                                                  the third-party purchaser will retain (or                  68(b). Why or why not?                              Would this provide more information
                                                  has retained) in the transaction                           69(a). Should a third-party purchaser               regarding the adequacy of the
                                                  (expressed as a percentage of ABS                       option be available to other asset classes             representation and warranties being
                                                  interests in the issuing entity and as a                besides CMBS? Would expanding this                     provided? 76(c). Would this be a costly
                                                  dollar amount); the purchase price paid                 option to other asset classes fulfill the              requirement? 76(d). Could investors
                                                  for such interest; the material terms of                purposes of section 15G? 69(b). If so,                 easily create their own blacklines if
                                                  such interest; and the amount of the                                                                           needed?
                                                                                                          would any adjustments or requirements
                                                  interest that the sponsor would have                                                                              77. Are the disclosures proposed
                                                                                                          be necessary?
                                                  been required to retain if the sponsor                     70. Should the use of this option be                sufficient to provide investors with all
                                                  had retained an interest in the                         conditioned, as proposed, on a                         material information concerning the
                                                  transaction pursuant to the horizontal                                                                         third-party purchaser’s retained interest
                                                                                                          requirement that the third-party
                                                  menu option. The material assumptions                                                                          in the securitization transaction, as well
                                                                                                          purchaser separately examine the assets
                                                  and methodology used in determining                                                                            as to enable investors and the Agencies
                                                                                                          in the pool and/or not sell or hedge the
                                                  the aggregate amount of ABS interests of                                                                       to monitor whether the sponsor has
                                                                                                          interest it is required to retain?
                                                  the issuing entity, including any                                                                              complied with the rule?
                                                                                                             71(a). Should the use of this option be
                                                  estimated cash flows and the discount                                                                             78(a). Should additional disclosures
                                                                                                          conditioned, as proposed, on the
                                                  rate used, also must be included in the                                                                        be required? 78(b). If so, what should be
                                                                                                          requirement that the sponsor disclose
                                                  disclosure. The proposed rules would                                                                           required and why?
                                                                                                          the actual purchase price paid by the
                                                  require that the sponsor provide, or
                                                                                                          third-party purchaser for the eligible                 8. Treatment of Government-Sponsored
                                                  cause to be provided, to potential
                                                                                                          horizontal residual interest? 71(b). Why               Enterprises
                                                  investors the representations and
                                                                                                          or why not?                                               Section l.11 of the proposed rules
                                                  warranties concerning the securitized
                                                                                                             72. Is any disclosure concerning the
                                                  assets, the schedule of any securitized                                                                        would govern the credit risk retention
                                                                                                          financial resources of the third-party
                                                  assets that are determined not to comply                                                                       requirements for the Federal National
                                                                                                          purchaser necessary in light of the
                                                  with such representations and                                                                                  Mortgage Association (Fannie Mae) and
                                                                                                          requirement that the third-party
                                                  warranties, and what factors were used                                                                         the Federal Home Loan Mortgage
                                                                                                          purchaser fund the acquisition of the
                                                  to make the determination that a                                                                               Corporation (Freddie Mac) (jointly, the
                                                  securitized asset should be included in                 eligible horizontal residual interest in
                                                                                                                                                                 ‘‘Enterprises’’) while operating under the
                                                  the pool notwithstanding that it did not                cash without direct or indirect financing
                                                                                                                                                                 conservatorship or receivership of
                                                  comply with such representations and                    from a party to the transaction?
                                                                                                                                                                 FHFA, as well as for any limited-life
                                                  warranties, such as compensating                           73(a). Should the rule specify the
                                                                                                                                                                 regulated entity succeeding to the
                                                  factors or a determination that the                     particular types of information about a
                                                                                                                                                                 charter of either Fannie Mae or Freddie
                                                  exceptions(s) were not material.                        third-party purchaser that should be
                                                                                                                                                                 Mac pursuant to section 1367 of the
                                                     Finally, the sixth condition would                   disclosed, rather than requiring
                                                                                                                                                                 Federal Housing Enterprises Financial
                                                  require that any third-party purchaser                  disclosure of any other information
                                                                                                                                                                 Safety and Soundness Act of 1992
                                                  acquiring an eligible horizontal residual               regarding the third-party purchaser that
                                                                                                                                                                 (Safety and Soundness Act).96 The
                                                  interest under this option comply with                  is material to investors in light of the
                                                                                                                                                                 primary business of the Enterprises
                                                  the hedging, transfer and other                         circumstances of the particular
                                                                                                                                                                 under their respective charter acts is to
                                                  restrictions applicable to such interest                securitization transaction? 73(b). Should
                                                                                                                                                                 pool conventional mortgage loans and to
                                                  under the proposed rules if the third-                  the specific types of information about
                                                                                                                                                                 issue securities backed by these
                                                  party purchaser was a sponsor who had                   a third-party purchaser be in addition to
                                                                                                                                                                 mortgages that are fully guaranteed as to
                                                  acquired the interest under the                         any other information regarding the
                                                                                                                                                                 the timely payment of principal and
                                                  horizontal risk retention option.                       third-party purchaser that is material to
                                                                                                                                                                 interest by the issuing Enterprise.97
                                                     Although the third-party purchaser                   investors in light of the circumstances of
                                                                                                                                                                 Because of these activities, Fannie Mae
                                                  may retain the credit risk required                     the particular securitization transaction?
                                                                                                                                                                 or Freddie Mac (or a successor limited-
                                                  under § l.3 of the proposed rules, the                     74. Are the conditions relating to
                                                                                                                                                                 life regulated entity) would be the
                                                  proposal provides that the sponsor                      servicing, including those related to an
                                                                                                                                                                 sponsor of the asset-backed securities
                                                  remains responsible for compliance                      Operating Advisor, appropriate or
                                                                                                                                                                 that it issues for purposes of section
                                                  with the requirements described above.                  should they be modified or
                                                                                                                                                                 15G.
                                                  Therefore, consistent with the menu                     supplemented?                                             In considering how to address in the
                                                  option available to eligible ABCP                          75(a). Should the Agencies require
                                                                                                                                                                 proposal the risk retention requirements
                                                  conduits, the proposal would require                    any other disclosure relating to
                                                                                                                                                                 of section 15G with respect to the
                                                  that the sponsor maintain and adhere to                 representations and warranties
                                                                                                                                                                 mortgage-backed securities issued, and
                                                  policies and procedures to monitor the                  concerning the assets for CMBS?
                                                                                                                                                                 fully guaranteed as to timely payment of
                                                  third-party purchaser’s compliance with                    76(a). We are aware of at least one
                                                                                                                                                                 principal and interest, by the
                                                  these requirements. In the event that the               industry group developing model
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                                                                                                                                                                 Enterprises or a successor limited-life
                                                  sponsor determines that the third-party                 representations and warranties for
                                                                                                                                                                 regulated entity, the Agencies
                                                  purchaser no longer complies with the                   CMBS.95 Should the rule require that a
                                                                                                                                                                 considered several factors. Because
                                                  requirements of the rule (for example,                  blackline of the representations and
                                                                                                                                                                 Fannie Mae and Freddie Mac fully
                                                  because the third-party purchaser has                                                                          guarantee the timely payment of
                                                                                                             95 See, e.g., comment letter to the Commission
                                                  sold the interest it was required to
                                                                                                          from CRE Finance Council dated January 19, 2011,
                                                  retain), the sponsor must promptly                      available at http://www.sec.gov/comments/df-title-       96 12U.S.C. 4617. 

                                                  notify the investors in the securitization              ix/asset-backed-securities/assetbackedsecurities­        97 See12 U.S.C. 1451, et seq. (Freddie Mac); 12 

                                                  transaction of such noncompliance.                      37.pdf.                                                U.S.C. 1716, et seq. (Fannie Mae).



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                                                  24112                       Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  principal and interest on the mortgage-                   Enterprise under the respective PSPA                  and (d), of the proposed rules shall not
                                                  backed securities they issue, the                         increases in an equivalent amount. The                apply to an Enterprise while operating
                                                  Enterprises are exposed to the entire                     senior preferred stock of each Enterprise             under the conservatorship or
                                                  credit risk of the mortgages that                         purchased by Treasury is senior to all                receivership of FHFA with capital
                                                  collateralize those securities.98                         other preferred stock, common stock or                support from the United States, or to a
                                                     Both Fannie Mae and Freddie Mac                        other capital stock issued by the                     limited-life regulated entity that has
                                                  have been operating under the                             Enterprise, and dividends on the                      succeeded to the charter of an
                                                  conservatorship of FHFA since                             aggregate liquidation preference of the               Enterprise and that is operating under
                                                  September 6, 2008. As conservator,                        senior preferred stock purchased by                   the direction and control of FHFA with
                                                  FHFA has assumed all powers formerly                      Treasury are payable at a rate of 10                  capital support from the United States.
                                                  held by each Enterprise’s officers,                       percent per annum.101 Under each                      In the past, the Enterprises have
                                                  directors, and shareholders. In addition,                 PSPA, Treasury’s commitment to each                   sometimes acquired pool insurance to
                                                  FHFA, as conservator, is authorized to                    Enterprise is the greater of (1) $200                 cover a percentage of losses on the
                                                  take such actions as may be necessary                     billion, or (2) $200 billion plus the                 mortgage loans comprising the pool.103
                                                  to restore each Enterprise to a sound                     cumulative amount of the Enterprise’s                 Because § l.11 requires each
                                                  and solvent condition and that are                        net worth deficit as of the end of any                Enterprise, while in conservatorship or
                                                  appropriate to preserve and conserve                      calendar quarter in 2010, 2011 and                    receivership, to hold 100 percent of the
                                                  the assets and property of each                           2012, less any positive net worth as of               credit risk on MBS that it issues, the
                                                  Enterprise.99 The primary goals of the                    December 31, 2012.102 Accordingly, the                prohibition on hedging related to the
                                                  conservatorships are to help restore                      PSPAs provide support to the relevant                 credit risk that the retaining sponsor is
                                                  confidence in the Enterprises, enhance                    Enterprise should the Enterprise have a               required to retain would limit the ability
                                                  their capacity to fulfill their mission,                  net worth deficit as a result of the                  of the Enterprises to require such pool
                                                  mitigate the systemic risk that                           Enterprise’s guaranty of timely payment               insurance in the future. Because the
                                                  contributed directly to instability in                    on the asset-backed securities it issues.             exception would continue only so long
                                                  financial markets, and maintain the                       By their terms, the PSPA with an                      as the relevant Enterprise operates
                                                  Enterprises’ secondary mortgage market                    Enterprise may not be assigned or                     under the control of FHFA and with
                                                  role until their future is determined                     transferred, or inure to the benefit of,              capital support from the United States,
                                                  through legislation. To these ends,                       any limited-life regulated entity                     the proposed exception from these
                                                  FHFA’s conservatorship of the                             established with respect to the                       restrictions should be consistent with
                                                  Enterprises is directed toward                            Enterprise without the prior written                  the maintenance of quality underwriting
                                                  minimizing losses, limiting risk                          consent of Treasury.                                  standards, in the public interest, and
                                                  exposure, and ensuring that the                              In light of the foregoing, § l.11 of the           consistent with the protection of
                                                  Enterprises price their services to                       proposed rules provides that the                      investors.
                                                  adequately address their costs and risk.                  guaranty provided by an Enterprise                      A sponsor utilizing this section shall
                                                  Any limited-life regulated entity                         while operating under the                             provide to investors, in written form
                                                  established by FHFA to succeed to the                     conservatorship or receivership of                    under the caption ‘‘Credit Risk
                                                  charter of an Enterprise also would                       FHFA with capital support from the                    Retention’’ and, upon request, to FHFA
                                                  operate under the direction and control                   United States will satisfy the risk                   and the Commission, a description of
                                                  of FHFA, acting as receiver of the                        retention requirements of the Enterprise              the manner in which it has met the
                                                  related Enterprise.100                                    under section 15G of the Exchange Act                 credit risk retention requirement of this
                                                     Concurrently with being placed in                      with respect to the mortgage-backed                   part.
                                                  conservatorship under section 1367 of                     securities issued by the Enterprise.
                                                  the Safety and Soundness Act, each                                                                                The Agencies recognize both the need
                                                                                                            Similarly, an equivalent guaranty                     for, and importance of, reform of the
                                                  Enterprise entered into a Senior                          provided by a limited-life regulated
                                                  Preferred Stock Purchase Agreement                                                                              Enterprises. In recent months, the
                                                                                                            entity that has succeeded to the charter              Administration and Congress have been
                                                  (PSPA) with the United States                             of an Enterprise, and that is operating
                                                  Department of the Treasury (Treasury).                                                                          considering a variety of proposals to
                                                                                                            under the direction and control of FHFA               reform the housing finance system and
                                                  Under each PSPA, Treasury purchased                       under section 1367(i) of the Safety and
                                                  senior preferred stock of each                                                                                  the Enterprises. The Agencies expect to
                                                                                                            Soundness Act, will satisfy the risk                  revisit and, if appropriate modify § l.11
                                                  Enterprise. In addition, if FHFA                          retention requirements, provided that
                                                  determines that the Enterprise’s                                                                                of the proposed rules after the future of
                                                                                                            the entity is operating with capital                  the Enterprises and of the statutory and
                                                  liabilities have exceeded its assets under                support from the United States. If either
                                                  generally accepted accounting                                                                                   regulatory framework for the Enterprises
                                                                                                            Enterprise or a successor limited-life                becomes clearer.
                                                  principles (GAAP), Treasury will                          regulated entity were to begin to operate
                                                  contribute cash capital to that Enterprise                other than as provided in the proposed                Request for Comment
                                                  in an amount equal to the difference                      rules, that Enterprise or entity would no
                                                  between its liabilities and assets. In                                                                             79. Is our proposal regarding the
                                                                                                            longer be able to avail itself of the credit          treatment of the Enterprises
                                                  exchange for this cash contribution, the                  risk retention option set forth in § l.11.
                                                  liquidation preference of the senior                                                                            appropriate?
                                                                                                               For similar reasons, the proposed
                                                  preferred stock purchased from each                                                                                80. Would applying the hedging
                                                                                                            rules provide that the premium capture
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                                                                                                                                  prohibition to all of the credit risk that
                                                                                                            cash reserve account requirements in
                                                     98 The charters of Fannie Mae and Freddie Mac                                                                the Enterprises are required to retain
                                                                                                            § l.12, as well as the hedging and
                                                  also place limitations on the types of mortgages that                                                           when using § l.11 to satisfy the risk
                                                  the Enterprises may guarantee and securitize.             financing prohibitions in § l.14(b), (c),
                                                     99 See 12 U.S.C. 4617(b)(2)(D).
                                                                                                                                                                  retention requirements be an unduly
                                                     100 See 12 U.S.C. 4617(i). The affairs of a limited-     101 Under the PSPAs, the rate rises to 12 percent   burdensome result for the Enterprises?
                                                  life regulated entity must be wound up not later          per annum if the dividends are not paid in cash.
                                                  than two years after its establishment, subject to the      102 The PSPAs also provide for the retained           103 Typically, insurers would pay the first losses

                                                  potential for a maximum of three one-year                 portfolios of each Enterprise to be reduced over      on a pool of loans, up to one or two percent of the
                                                  extensions at the discretion of the Director of FHFA.     time.                                                 aggregate unpaid principal balance of the pool.



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                            24113

                                                     81(a). Instead of the broad exception                economic exposure they are required to                  interests in the issuing entity issued as
                                                  from the hedging prohibition for the                    retain.                                                 part of the transaction. In these cases,
                                                  Enterprises, when satisfying the risk                      Accordingly, as proposed, if a sponsor               the proposal uses 100 percent (rather
                                                  retention requirements pursuant to                      structures a securitization to monetize                 than 95 percent) of the par value of the
                                                  § l.11, should the rules prohibit an                    excess spread on the underlying                         ABS interests issued because the
                                                  Enterprise from hedging five percent of                 assets—which is typically effected                      relevant menu options do not require
                                                  the total credit risk in any securitization             through the sale of interest-only                       that the sponsor itself retain any of the
                                                  transaction where the Enterprise acts as                tranches or premium bonds—the                           ABS interests issued in the transaction
                                                  a sponsor (thus ensuring the Enterprise                 proposed rule would ‘‘capture’’ the                     and, accordingly, potentially all of such
                                                  retains at least that amount of exposure                premium or purchase price received on                   interests could be sold to third parties.
                                                  to the credit risk of the assets)? 81(b).               the sale of the tranches that monetize                     Under the proposed rules, a premium
                                                  Would this be consistent with statutory                 the excess spread and require that the                  capture cash reserve account would
                                                  intent? 81(c). Would that be feasible for               sponsor place such amounts into a                       have to be established and funded
                                                  the Enterprises to monitor?                             separate ‘‘premium capture cash reserve                 whenever a positive amount resulted
                                                                                                          account.’’ 104 The amount placed into                   from the relevant calculation described
                                                  9. Premium Capture Cash Reserve                         the premium capture cash reserve                        in the preceding paragraphs. These
                                                  Account                                                 account would be separate from and in                   calculations are designed to capture the
                                                     In many securitization transactions,                 addition to the sponsor’s base risk                     amount of excess spread that a sponsor
                                                  particularly those involving residential                retention requirement under the                         may seek to immediately monetize at
                                                  and commercial mortgages, conducted                     proposal’s menu of options, and would                   closing such as through the issuance of
                                                  prior to the financial crisis, sponsors                 be used to cover losses on the                          an interest-only tranche (which may
                                                  sold premium or interest-only tranches                  underlying assets before such losses                    have a nominal value assigned to it, but
                                                  in the issuing entity to investors, as well             were allocated to any other interest or                 does not have a par value) or premium
                                                  as more traditional obligations that paid               account. As a likely consequence to this                bonds that are sold for amounts in
                                                  both principal and interest received on                 proposed requirements, the Agencies                     excess of their par value. On the other
                                                  the underlying assets. By selling                       expect that few, if any, securitizations                hand, the proposal would not require a
                                                  premium or interest-only tranches,                      would be structured to monetize excess                  sponsor to establish and fund a
                                                  sponsors could thereby monetize at the                  spread at closing and, thus, require the                premium capture cash reserve account if
                                                  inception of a securitization transaction               establishment of a premium capture                      the sponsor does not structure the
                                                  the ‘‘excess spread’’ that was expected to              cash reserve account, which should                      securitization to immediately monetize
                                                  be generated by the securitized assets                  provide the benefits described above.                   excess spread, thus resulting in no
                                                                                                             Specifically, the proposal would                     ‘‘premium’’ that would be captured by
                                                  over time. By monetizing excess spread
                                                                                                          require that a sponsor retaining credit                 the calculations described above.
                                                  before the performance of the
                                                                                                          risk under the vertical, horizontal, L-                 Accordingly, existing types of
                                                  securitized assets could be observed and
                                                                                                          shaped, or revolving asset master trust                 securitization structures that do not
                                                  unexpected losses realized, sponsors
                                                                                                          options of the proposed rules establish                 monetize excess spread at closing would
                                                  were able to reduce the impact of any
                                                                                                          and fund (in cash) at closing a premium                 not trigger establishment of a premium
                                                  economic interest they may have                         capture cash reserve account in an                      capture reserve account. Going forward,
                                                  retained in the outcome of the                          amount equal to the difference (if a                    sponsors would have the ability to
                                                  transaction and in the credit quality of                positive amount) between (i) the gross                  structure their securitization
                                                  the assets they securitized. This created               proceeds received by the issuing entity                 transactions in a manner that does not
                                                  incentives to maximize securitization                   from the sale of ABS interests in the                   monetize excess spread at closing and
                                                  scale and complexity, and encouraged                    issuing entity to persons other than the                would not require the establishment of
                                                  aggressive underwriting.                                sponsor (net of closing costs paid by a                 such a premium capture cash reserve
                                                     In order to achieve the goals of risk                sponsor or the issuing entity to                        account.
                                                  retention, the Agencies propose to                      unaffiliated parties); and (ii) 95 percent                 The proposed rules include a number
                                                  adjust the required amount of risk                      of the par value of all ABS interests in                of conditions and limitations on a
                                                  retention to account for any excess                     the issuing entity issued as part of the                premium capture cash reserve account.
                                                  spread that is monetized at the closing                 transaction. The 95 percent of par value                Specifically, the proposed rules would
                                                  of a securitization transaction.                        amount is designed to take into account                 require that the premium capture cash
                                                  Otherwise, a sponsor could effectively                  the five percent interest that the sponsor              reserve account be held by the trustee,
                                                  negate or reduce the economic exposure                  is required to retain in the issuing entity             or person performing functions similar
                                                  it is required to retain under the                      under each of these options.                            to a trustee, in the name and for the
                                                  proposed rules. Furthermore,                               If the sponsor will retain (or caused to             benefit of the issuing entity. In addition,
                                                  prohibiting sponsors from receiving                     be retained) credit risk under the                      until all ABS interests in the issuing
                                                  compensation in advance for excess                      representative sample, ABCP, or CMBS                    entity (including junior or residual
                                                  spread income expected to be generated                  third-party purchaser options of the                    interests) are paid in full or the issuing
                                                  by securitized assets over time should                  proposed rules, the sponsor would have                  entity is dissolved, amounts in the
                                                  better align the interests of sponsors and              to fund in cash at closing a premium                    account would be required to be
                                                  investors and promote more robust                       capture cash reserve account in an                      released to satisfy payments on ABS
                                                  monitoring by the sponsor of the credit                 amount equal to the difference (if a                    interests in the issuing entity (in order
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  risk of securitized assets, thereby                     positive amount) between (i) the gross                  of the securitization transaction’s
                                                  encouraging the use of sound                            proceeds received by the issuing entity                 priority of payments) on any payment
                                                  underwriting in connection with                         from the sale of ABS interests to persons               date where the issuing entity has
                                                  securitized loans. It also should promote               other than the sponsor (net of the                      insufficient funds to make such
                                                  simpler and more coherent                               closing costs described above), and (ii)                payments. The proposal specifies that,
                                                  securitization structures as sponsors                   100 percent of the par value of the ABS                 the determination of whether
                                                  would receive excess spread over time                                                                           insufficient funds are available must be
                                                  and would not be able to reduce the                       104 See   proposed rules at § l.12.                   made prior to the allocation of any


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                                                  24114                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  losses to (i) any eligible horizontal                   sponsor’s exposure to the credit risk of                   83. The Agencies seek input on
                                                  residual interest held under the                        the underlying assets, thus mitigating                  alternative methods for removing
                                                  horizontal, L-shaped, ABCP, or CMBS                     the concerns of a sponsor trying to                     incentives to monetize excess spread
                                                  third-party purchaser risk retention                    evade the risk retention requirements.                  and whether the proposed premium
                                                  options; or (ii) the class of ABS interests                A sponsor could, however, seek to                    capture reserve account would have any
                                                  in the issuing entity that is allocated                 achieve the same economic benefits that                 adverse effects on securitizations that
                                                  losses before other classes if no eligible              could be achieved from the sale of an                   are inconsistent with the purposes of
                                                  horizontal residual interest in the                     interest-only tranche by retaining an                   section 15G. For example, is the method
                                                  issuing entity is held under such                       interest-only tranche at or near the top                of calculating the premium capture cash
                                                  options (or if the contractual terms of                 of the waterfall that diverts to the                    reserve account appropriate or are there
                                                  the securitization transaction do not                   sponsor excess spread on the underlying                 alternative methodologies that would
                                                  provide for the allocation of losses by                 assets before other interests are paid.                 better achieve the purpose of the
                                                  class, the class of ABS interests that has              For this reason, the proposal requires                  account?
                                                  the most subordinate claim to payment                   that the value of any interest-only                        84. Should amounts from the
                                                  of principal or interest by the issuing                 tranche that the sponsor retains at                     premium capture reserve account be
                                                  entity). Thus, amounts in a premium                     closing be included in the calculation of               used only for amounts due to the senior-
                                                  capture reserve account would be used                   the premium capture reserve account                     most class of ABS interests?
                                                  to cover losses on the underlying assets                (regardless of whether the sponsor                         85(a). Alternatively, are the
                                                  first before any other interest in or                   intends to hold it to maturity) if such                 conditions imposed on the premium
                                                  account of the issuing entity, including                tranche has priority of payment senior                  capture cash reserve account more than
                                                  an eligible horizontal residual interest                to the most subordinated class of                       what is needed to achieve the objectives
                                                  or a horizontal cash reserve account.105                interests in the issuing entity.106                     of the account? 85(b). If so, how?
                                                     In order to prevent a sponsor from                      Sponsors required to fund a premium
                                                                                                          capture cash reserve account under the                  C. Allocation to the Originator
                                                  circumventing the premium capture
                                                  requirements of the proposal by taking                  proposed rules would be required to                        As a general matter, the proposed
                                                  back at closing, and then reselling,                    provide potential investors before the                  rules would provide that the sponsor of
                                                  additional ABS interests (thereby                       sale of asset-backed securities as part of              a securitization transaction is solely
                                                  reducing the gross proceeds received at                 the securitization transaction and, upon                responsible for complying with the risk
                                                  closing from the sale of interests to third             request, the Commission and its                         retention requirements established
                                                  parties), the proposal includes a special               appropriate Federal banking agency (if                  under section 15G of the Exchange Act.
                                                  anti-evasion provision. Under this                      any) disclosures describing the dollar                  However, subject to a number of
                                                  provision, the retaining sponsor would                  amount the sponsor was required to                      considerations, section 15G authorizes
                                                  need to add to the ‘‘gross proceeds’’                   place in the account and the actual                     the Agencies to allow a sponsor to
                                                  amount that is used to calculate the                    amount the sponsor will deposit (or has                 allocate at least a portion of the credit
                                                  amount (if any) that must be placed in                  deposited) in the account at closing. The               risk it is required to retain to the
                                                  the premium capture cash reserve                        sponsor would also be required to                       originator(s) of securitized assets.107
                                                  account an amount equal to the par                      disclose the material assumptions and                   Accordingly, subject to conditions and
                                                  value of any ABS interest (or the fair                  methodology used in (i) determining the                 restrictions discussed below, § l.13 of
                                                  value of the ABS interest if it does not                fair value of any ABS interest in the                   the proposed rules permits a sponsor to
                                                  have a par value) in the issuing entity                 issuing entity that does not have a par                 reduce its required risk retention
                                                  that is directly or indirectly transferred              value (and that was used in calculating                 obligations in a securitization
                                                  to the sponsor in connection with the                   the amount required for the premium                     transaction by the portion of risk
                                                  closing of the securitization transaction               capture cash reserve account) and is                    retention obligations assumed by the
                                                  and that (i) the sponsor does not intend                subject to the anti-evasion provisions                  originator(s) of the securitized assets.
                                                  to hold to maturity; or (ii) represents a               described above; and (ii) the aggregate                    When determining how to allocate the
                                                  contractual right to receive some or all                amount of ABS interests in the issuing                  risk retention requirements, the
                                                  of the interest, and no more than a                     entity, including those pertaining to any               Agencies are directed to consider
                                                  minimal amount of principal payments                    estimated cash flows and the discount                   whether the assets sold to the sponsor
                                                  received by the issuing entity, and that                rate used.                                              have terms, conditions, and
                                                  has a priority of payment of interest (or                                                                       characteristics that reflect low credit
                                                                                                          Request for Comment
                                                  principal, if any) senior to the most                                                                           risk; whether the form or volume of the
                                                                                                             82. Do you believe the premium                       transactions in securitization markets
                                                  subordinated class of interests in the
                                                                                                          capture cash reserve account will be an                 creates incentives for imprudent
                                                  issuing entity. The condition in (i)
                                                                                                          effective mechanism at capturing the                    origination of the type of loan or asset
                                                  above is designed to capture proceeds
                                                                                                          monetization of excess spread,                          to be sold to the sponsor; and the
                                                  from those interests that the sponsor
                                                                                                          promoting sponsor monitoring of credit                  potential impact of the risk retention
                                                  retains at closing, but expects to sell to
                                                                                                          quality, and promoting the sound                        obligations on the access of consumers
                                                  third parties after closing. ABS interests
                                                                                                          underwriting of securitized assets?
                                                  retained and expected to be held to                                                                                107 As discussed above, 15 U.S.C. 78o–11(a)(4)
                                                  maturity by the sponsor increase the                      106 To avoid double counting, the calculation         defines the term ‘‘originator’’ as a person who,
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                                                                          would not include any interest-only tranche             through the extension of credit or otherwise, creates
                                                     105 Until needed to cover losses, amounts in a       required to be retained by a sponsor using the          a financial asset that collateralizes an asset-backed
                                                  premium capture cash reserve account may be             vertical or L-shaped options to meet its risk           security; and who sells an asset directly or
                                                  invested in U.S. Treasury securities with remaining     retention requirement. Also, because an eligible        indirectly to a securitizer (i.e., a sponsor or
                                                  maturities of 1 year or less and in fully-insured       horizontal residual interest, by definition, must       depositor). Because this definition refers only to the
                                                  deposits at one or more insured depository              have the most subordinated claim to payments of         person that ‘‘creates’’ a loan or other receivable, only
                                                  institutions. Interest received on such investments     both principal and interest, a sponsor selecting this   the original creditor of a loan or receivable—and
                                                  could be released from the account to any person        option of risk retention would be required to           not a subsequent purchaser or transferee—would be
                                                  (including the sponsor), but the principal amount       include the value of any excess spread tranche          deemed to be the ‘‘originator’’ for purposes of the
                                                  invested must remain in the account and available       retained by the sponsor in its calculation of gross     proposed rules. See 15 U.S.C. 78o–11(c)(1)(G)(iv);
                                                  to absorb losses.                                       proceeds received by the issuing entity.                (d).



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                          24115

                                                  and businesses to credit on reasonable                  subject to the same restrictions on                    the minimum 20 percent threshold
                                                  terms, which may not include the                        transferring, hedging, and financing the               sufficient to ensure that an originator
                                                  transfer of credit risk to a third party.108            retained interest that would apply to the              allocated risk has an incentive to
                                                     The Agencies are proposing a                         sponsor. Thus, for example, if the                     monitor the quality of the entire
                                                  framework that would permit a sponsor                   sponsor satisfies its risk retention                   collateral pool?
                                                  of a securitization to allocate a portion               requirements by acquiring an eligible                     89(a). Are there alternative
                                                  of its risk retention obligation to an                  horizontal residual interest under the                 mechanisms for allocating risk to an
                                                  originator that contributes a significant               horizontal risk retention option, an                   originator that should be permitted by
                                                  amount of assets to the underlying asset                originator allocated risk under § l.13 of              the Agencies? For example, should the
                                                  pool. The Agencies have endeavored to                   the proposal would have to acquire a                   rules permit or require that an originator
                                                  create appropriate incentives for both                  portion of that horizontal first-loss                  that is allocated risk retention by a
                                                  the securitization sponsor and the                      interest, in an amount not exceeding the               sponsor retain exposure only to the
                                                  originator(s) to maintain and monitor                   percentage of pool assets created by the               assets that the originator itself
                                                  appropriate underwriting standards,                     originator. The sponsor’s risk retention               originates? 89(b). If so, how might such
                                                  respectively, without creating undue                    requirements would be reduced by the                   an allocation mechanism feasibly be
                                                  complexity, which potentially could                     amount allocated to the originator.                    structured, incorporated into the rule,
                                                  mislead investors and confound                             The Agencies believe this approach is               and monitored by investors and
                                                  supervisory efforts to monitor                          a relatively straightforward way to allow              supervisors?
                                                  compliance. Importantly, the proposal                   both the sponsor and the originator to
                                                                                                                                                                    90. Should the rules permit sponsors
                                                  does not mandate allocation to an                       retain credit risk in securitized assets,
                                                                                                                                                                 to allocate risk to a third party, and if
                                                  originator. Therefore, it does not raise                on a basis that should reduce the
                                                  the types of concerns about credit                      potential for confusion by investors in                so, how to ensure that incentives
                                                  availability that might arise if certain                asset-backed securities.                               between the sponsor and investors are
                                                  originators, such as mortgage brokers or                   By limiting this option to originators              aligned in a manner that promotes
                                                  small community banks (that may                         that have originated at least 20 percent               quality underwriting standards?
                                                  experience difficulty obtaining funding                 of the asset pool, the Agencies have                      91. Are the proposed disclosures
                                                  to retain risk positions), were required                sought to ensure that the originator                   sufficient to provide investors with all
                                                  to do so. Mandatory allocation of risk                  retains risk in an amount significant                  material information concerning the
                                                  retention to the originator of the                      enough to function as an actual                        originator’s retained interest in a
                                                  securitized assets also could pose                      incentive for the originator to monitor                securitization transaction, as well as to
                                                  significant operational and compliance                  the quality of all the assets being                    enable investors to monitor the
                                                  problems, as a loan may be sold or                      securitized (and to which it would                     originator(s) and the Agencies to assess
                                                  transferred several times between                       retain some credit risk exposure). In                  the sponsor’s compliance with the rule?
                                                  origination and securitization and,                     addition, by restricting originators to                   92(a). Should additional disclosures
                                                  accordingly, an originator may not know                 holding no more than their proportional                be required? 92(b). If so, what should be
                                                  when a loan it has originated is                        share of the risk retention obligation, the            required and why?
                                                  included in a securitization transaction.               proposal seeks to prevent sponsors from                   93(a). As proposed, the retaining
                                                     The proposed rules would permit a                    circumventing the purpose of the risk                  sponsor is responsible for compliance
                                                  securitization sponsor that satisfies its               retention obligation by transferring an                with the rule and must maintain and
                                                  base risk retention obligation either                   outsized portion of the obligation to an               adhere to policies and procedures
                                                  under the vertical risk retention option                originator that may be seeking to acquire              reasonably designed to monitor
                                                  as set forth in § l.4 or under the                      a speculative investment. These                        compliance by each originator retaining
                                                  horizontal risk retention option through                requirements should also reduce the                    credit risk, including the anti-hedging
                                                  the acquisition of an eligible horizontal               proposal’s potential complexity and                    restrictions. 93(b). What are the
                                                  interest as set forth in § l.5, to allocate             facilitate investor and regulatory                     practical implications if the originator
                                                  a portion of its risk retention obligation              monitoring.                                            fails to comply?
                                                  under such option to any originator of                                                                            94(a). To help ensure that the
                                                  the underlying assets that contributed at               Request for Comment
                                                                                                                                                                 originator has sufficient incentive to
                                                  least 20 percent of the underlying assets                  86(a). Should the proposed rules
                                                                                                                                                                 retain its interest in accordance with the
                                                  in the pool. The amount of the retention                permit allocation to originators where
                                                                                                                                                                 rule, should the rule require that a
                                                  interest held by each originator that is                the sponsor is using other menu
                                                                                                                                                                 sponsor obtain a contractual
                                                  allocated credit risk in accordance with                options, such as the L-shaped risk
                                                                                                                                                                 commitment from the originator to
                                                  the proposal must be at least 20 percent,               retention option in § l.6 of the
                                                                                                                                                                 retain the interest in accordance with
                                                  but could not exceed the percentage of                  proposed rules, and if so, under what
                                                                                                                                                                 the rule? 94(b). If so, how should the
                                                  the securitized assets it originated. The               specific conditions and requirements?
                                                                                                                                                                 Agencies implement this requirement?
                                                  originator would also have to hold its                  86(b). In what cases is it likely that this
                                                  allocated share of the risk retention                   alternative approach actually would be                    95. Are there other methods that
                                                  obligation in the same manner as would                  used? 86(c). What are the specific                     could be implemented to help ensure
                                                  have been required of the sponsor and                   benefits of an alternative approach, and               that a sponsor satisfies its obligations
                                                                                                          do they outweigh concerns regarding                    under the rule?
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                     108 15 U.S.C. 78o–11(d)(2). The Agencies note that
                                                                                                          complexity?                                            D. Hedging, Transfer and Financing
                                                  section 15G(d) appears to contain an erroneous             87. Should the rule permit allocation
                                                  cross-reference. Specifically, the reference at the                                                            Restrictions
                                                  beginning of section 15G(d) to ‘‘subsection             to originators if the sponsor elects the
                                                  (c)(1)(E)(iv)’’ is read to mean ‘‘subsection            horizontal cash reserve account option                    Section 15G(a)(1)(A) provides that the
                                                  (c)(1)(G)(iv)’’, as the former subsection does not      in proposed § l.5(b)?                                  risk retention regulations prescribed
                                                  pertain to allocation, while the latter is the             88(a). Should the proposed rules                    shall ‘‘prohibit a securitizer from
                                                  subsection that permits the Agencies to provide for                                                            directly or indirectly hedging or
                                                  the allocation of risk retention obligations between
                                                                                                          permit allocation of risk to originators
                                                  a securitizer and an originator in the case of a        that have originated less than 20 percent              otherwise transferring the credit risk
                                                  securitizer that purchases assets from an originator.   of the asset pool? 88(b). Alternately, is              that the securitizer is required to retain


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                                                  24116                        Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  with respect to an asset.’’ 109 Consistent                ABS interests or exposures required to                 transactions in which a sponsor is
                                                  with this statutory directive, the                        be retained by the sponsor or its affiliate            required to retain risk under the
                                                  proposed rules would prohibit a                           would not be prohibited under the                      proposed rules.
                                                  sponsor from transferring any interest or                 proposal. Such positions would include                    The proposal would also prohibit a
                                                  assets that it is required to retain under                hedges related to overall market                       sponsor and a consolidated affiliate
                                                  the rule to any person other than an                      movements, such as movements of                        from pledging as collateral for any
                                                  affiliate whose financial statements are                  market interest rates (but not the                     obligation (including a loan, repurchase
                                                  consolidated with those of the sponsor                    specific interest rate risk, also known as             agreement, or other financing
                                                  (a consolidated affiliate). The rule                      spread risk, associated with the ABS                   transaction) any interest or asset that the
                                                  permits a transfer to one or more                         interest that is otherwise considered                  sponsor is required to retain unless the
                                                  consolidated affiliates because the                       part of the credit risk), currency                     obligation is with full recourse to the
                                                  required risk exposure would remain                       exchange rates, home prices, or of the                 sponsor or consolidated affiliate.
                                                  within the consolidated organization                      overall value of a particular broad                    Because the lender of a loan that is not
                                                  and, thus, would not reduce the                           category of asset-backed securities.                   with full recourse to the borrower has
                                                  organization’s financial exposure to the                  Likewise, hedges tied to securities that               limited rights against the borrower on
                                                  credit risk of the securitized assets.                    are backed by similar assets originated                default, and may rely more heavily on
                                                     The proposal also would prohibit a                     and securitized by other sponsors, also                the collateral pledged (rather than the
                                                  sponsor or any consolidated affiliate                     would not be prohibited. On the other                  borrower’s assets generally) for
                                                  from hedging the credit risk the sponsor                  hand, a security, instrument, derivative               repayment, a limited recourse financing
                                                  is required to retain under the rule. The                 or contract generally would be                         supported by a sponsor’s risk retention
                                                  proposal extends the hedging                              ‘‘materially related’’ to the particular               interest may transfer some of the risk of
                                                  prohibition to a sponsor’s consolidated                   interests or assets that the sponsor is                the retained interest to the lender during
                                                  affiliates because the rule would allow                   required to retain if the security,                    the term of the loan. If the sponsor or
                                                  a sponsor to transfer the risk it is                      instrument, derivative or contract refers              consolidated affiliate pledged the
                                                  required to retain to a consolidated                      to those particular interests or assets or             interest or asset to support recourse
                                                  affiliate. Moreover, even absent such a                   requires payment in circumstances                      financing and subsequently allowed
                                                  transfer, if a consolidated affiliate was                 where there is or could reasonably be                  (whether by consent, pursuant to the
                                                  permitted to hedge the risks required to                  expected to be a loss due to the credit                exercise of remedies by the counterparty
                                                  be retained by a sponsor, the net effect                  risk of such interests or assets (e.g., a              or otherwise) the interest or asset to be
                                                  of the hedge on the organization                          credit default swap for which the                      taken by the counterparty to the
                                                  controlling the sponsor would offset the                  particular interest or asset is the                    financing transaction, the sponsor will
                                                  credit risk required to be retained and                   reference asset).                                      have violated the prohibition on
                                                  defeat the purposes of section 15G.                                                                              transfer.
                                                     The proposal prohibits a sponsor and                      The proposal also addresses other                      The proposed rules would specify
                                                  its consolidated affiliates from                          hedges based on indices that may                       that the issuing entity in a securitization
                                                  purchasing or selling a security or other                 include one or more tranches from a                    would not be deemed a consolidated
                                                  financial instrument, or entering into an                 sponsor’s asset-backed securities                      affiliate of the sponsor for the
                                                  agreement (including an insurance                         transactions, as well as tranches of                   securitization even if its financial
                                                  contract), derivative or other position,                  asset-backed securities transactions of                statements are consolidated with those
                                                  with any other person if: (i) Payments                    other sponsors. The proposal provides                  of the sponsor under applicable
                                                  on the security or other financial                        that holding a security tied to the return             accounting standards.110 This provision
                                                  instrument or under the agreement,                        of an index (such as the subprime                      is designed to ensure that an issuing
                                                  derivative, or position are materially                    ABX.HE index) would not be                             entity may continue to engage in
                                                  related to the credit risk of one or more                 considered a prohibited hedge by the                   hedging activities itself because such
                                                  particular ABS interests, assets, or                      retaining sponsor so long as: (i) Any                  activities would be for the benefit of all
                                                  securitized assets that the retaining                     class of ABS interests in the issuing                  investors in the asset-backed
                                                  sponsor is required to retain, or one or                  entity that were issued in connection                  securities.111 However, if an issuing
                                                  more of the particular securitized assets                 with the securitization transaction and                entity were to obtain credit protection or
                                                  that collateralize the asset-backed                       that are included in the index                         hedge the exposure on the particular
                                                  securities; and (ii) the security,                        represented no more than 10 percent of                 interests or assets that the sponsor is
                                                  instrument, agreement, derivative, or                     the dollar-weighted average of all                     required to retain under the proposal,
                                                  position in any way reduces or limits                     instruments included in the index, and                 such credit protection or hedge could
                                                  the financial exposure of the sponsor to                  (ii) all classes of ABS interests in all               negate or limit the sponsor’s credit
                                                  the credit risk of one or more of the                     issuing entities that were issued in                   exposure to the securitized assets.
                                                  particular ABS interests, assets, or                      connection with any securitization                     Accordingly, under the proposal, any
                                                  securitized assets, or one or more of the                 transaction in which the sponsor was                   credit protection by or hedging
                                                  particular securitized assets that                        required to retain an interest pursuant to             protection obtained by an issuing entity
                                                  collateralize the asset-backed securities.                the proposal and that are included in                  may not cover any ABS interest or asset
                                                  The statutory hedging prohibition is                      the index represent, in the aggregate, no              that the sponsor is required to retain
                                                  focused on the credit risk associated                     more than 20 percent of the dollar-                    under the rule. For example, if the
                                                  with the interest or assets that a sponsor                weighted average of all instruments
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                                                                                                                                                                   sponsor uses the vertical approach to
                                                  is required to retain, which itself is                    included in the index. These restrictions
                                                  dependent on the credit risk of the                       are designed to prevent a sponsor (or a                   110 See proposed rules at § __.2 (definition of

                                                  particular securitized assets that                        consolidated affiliate) from evading the               ‘‘consolidated affiliate’’).
                                                  underlie the ABS interests. Therefore,                    hedging restrictions through the                          111 For example, the proposal would not prohibit

                                                  hedge positions that are not materially                   purchase of instruments that are based                 an issuing entity (and indirectly its investors) from
                                                                                                                                                                   being the beneficiary of loan-level private mortgage
                                                  related to the credit risk of the particular              on an index that is composed, to a                     insurance (PMI) taken out by borrowers in
                                                                                                            significant degree, of asset-backed                    connection with the underlying assets that are
                                                    109 15   U.S.C. 78o–11(a)(1)(A).                        securities from securitization                         securitized.



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                      24117

                                                  risk retention, an issuing entity may                   the securitized assets, should all credit                 Agencies reviewed data on mortgage
                                                  purchase (or benefit from) a credit                     protection and hedging by the issuing                     performance supplied by the Applied
                                                  insurance wrap that covers up to 95                     entity (other than interest rate and                      Analytics division (formerly McDash
                                                  percent of the tranches, but not the five               currency risk) be prohibited?                             Analytics) of Lender Processing Services
                                                  percent of such tranches required to be                                                                           (LPS). To minimize performance
                                                                                                          IV. Qualified Residential Mortgages
                                                  retained by the sponsor.                                                                                          differences arising from unobservable
                                                                                                             Section 15G provides that the risk                     changes across products, and to focus
                                                  Request for Comment                                     retention requirements shall not apply                    on loan performance through stressful
                                                     96(a). Under the proposal, a sponsor                 to an issuance of ABS if all of the assets                environments, for the most part, the
                                                  would not be permitted to sell or                       that collateralize the ABS are QRMs.112                   Agencies considered data for prime
                                                  otherwise transfer any interest or assets               Section 15G also directs all of the                       fixed-rate loans originated from 2005 to
                                                  that the sponsor is required to retain to               Agencies to define jointly what                           2008. This dataset included
                                                  any person other than an entity that is                 constitutes a QRM, taking into                            underwriting and performance
                                                  and remains a consolidated affiliated. Is               consideration underwriting and product                    information on approximately 8.9
                                                  the permitted transfer to consolidated                  features that historical loan performance                 million mortgages.
                                                  affiliates appropriate?                                 data indicate result in a lower risk of                      As is typical among data provided by
                                                     96(b). Why or why not?                               default.113 Moreover, section 15G                         mortgage servicers, the LPS data do not
                                                     97. Is the proposed hedging                          requires that the definition of a QRM be                  include detailed information on
                                                  prohibition appropriately structured?                   ‘‘no broader than’’ the definition of a                   borrower income and on other debts the
                                                     98(a). Would the proposal                            ‘‘qualified mortgage’’ (QM), as the term                  borrower may have in addition to the
                                                  inadvertently capture any kinds of                      is defined under section 129C(b)(2) of                    mortgage. For this reason, the Agencies
                                                  hedging that should be permissible?                     the Truth in Lending Act (TILA) (15                       also examined data from the 1992 to
                                                  98(b). If so, please provide specific                   U.S.C. 1639C(b)(2)), as amended by the                    2007 waves of the triennial Survey of
                                                  recommendations on how we can                           Dodd-Frank Act, and regulations                           Consumer Finances (SCF).115 Because
                                                  appropriately tailor the requirements.                  adopted thereunder.114                                    families’ financial conditions will
                                                     99. Does the proposed approach                                                                                 change following the origination of a
                                                                                                          A. Overall Approach to Defining
                                                  appropriately implement the statutory                                                                             mortgage, the analysis of SCF data
                                                                                                          Qualifying Residential Mortgages
                                                  requirement to prohibit direct and                                                                                focused on respondents who had
                                                  indirect hedging?                                         In considering how to define a QRM                      purchased their homes either in the
                                                     100(a). Does the proposal permit                     for purposes of the proposed rules, the                   survey year or the previous year. This
                                                  hedging that is inconsistent with risk                  Agencies were guided by several factors                   data set included information on
                                                  retention and should be prohibited?                     and principles. The sponsor of an ABS                     approximately 1,500 families. The
                                                  100(b). If so, please provide specific                  that is collateralized solely by QRMs is                  Agencies also examined a combined
                                                  recommendations on how we can more                      completely exempt from the risk                           data set of loans purchased or
                                                  appropriately tailor the requirements.                  retention requirement with respect to                     securitized by the Enterprises from 1997
                                                     101. Are the proposed provisions                     such securitization. Accordingly, under                   to 2009. This data set consisted of more
                                                  concerning the pledging of retained                     the statute, a sponsor will not be                        than 75 million mortgages, and included
                                                  assets appropriate? Should the rule                     required to retain any portion of the                     data on loan products and terms,
                                                  instead prohibit the pledging of retained               credit risk associated with the                           borrower characteristics (e.g., income
                                                  assets even where the financial                         securitization of residential mortgages                   and credit score), and performance data
                                                  transaction is recourse to the sponsor or               that meet the requirements to be a QRM.                   through the third quarter of 2010.116
                                                  consolidated affiliate?                                 This requirement suggests that the                           Based on these and other data, the
                                                     102(a). Under the proposal, a sponsor                underwriting standards and product                        underwriting and product features
                                                  (or a consolidated affiliate) would be                  features for QRMs should help ensure                      established by the Agencies for QRMs
                                                  prohibited from transferring the retained               that such residential mortgages are of                    include standards related to the
                                                  interest or assets until the retained                   very high credit quality.                                 borrower’s ability and willingness to
                                                  interest or assets were fully repaid or                   In considering how to determine if a                    repay the mortgage (as measured by the
                                                  extinguished. Is this appropriate, or                   mortgage is of sufficient credit quality,                 borrower’s debt-to-income (DTI) ratio);
                                                  should a sponsor be permitted to freely                 the Agencies also examined data from                      the borrower’s credit history; the
                                                  transfer or hedge its retained exposure                 several sources. For example, the                         borrower’s down payment amount and
                                                  after a specified period of time? 102(b).                                                                         sources; the loan-to-value (LTV) ratio for
                                                                                                            112 See  15 U.S.C. 78o–11(c)(1)(C)(iii).
                                                  If so, should a period of time be                                                                                 the loan; the form of valuation used in
                                                                                                            113 See  id. at sec. 78o–11(e)(4).
                                                  established for different types of                         114 See id. at sec. 78o–11(e)(4)(C). As adopted, the
                                                                                                                                                                    underwriting the loan; the type of
                                                  securitizations?                                        text of section 15G(e)(4)(C) cross-references section
                                                     103. Are the proposal’s requirements                 129C(c)(2) of TILA for the definition of a QM.              115 The SCF is conducted every three years by the

                                                  pertaining to index hedging                             However, section 129C(b)(2), and not section              Board, in cooperation with the Treasury, to provide
                                                  appropriate?                                            129C(c)(2), of TILA contains the definition of a          detailed information on the finances of U.S.
                                                                                                          ‘‘qualified mortgage.’’ The legislative history clearly   families. The SCF collects information on the
                                                     104. Are the 10 percent and 20                                                                                 balance sheet, pension, income, and other
                                                                                                          indicates that the reference in the statute to section
                                                  percent thresholds discussed above                      129C(c)(2) of TILA (rather than section 129C(b)(2)        demographic characteristics of U.S. families. To
                                                  consistent with market practice and the                 of TILA) was an inadvertent technical error. See 156      ensure the representativeness of the study,
                                                  underlying goals of the statutory risk                                                                            respondents are selected randomly using a
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                                                                                                          Cong. Rec. S5929 (daily ed. July 15, 2010)
                                                                                                          (statement of Sen. Christopher Dodd) (‘‘The               scientific sampling methodology that allows a
                                                  retention requirements?                                                                                           relatively small number of families to represent all
                                                                                                          [conference] report contains the following technical
                                                     105. Should credit protection and                    errors: the reference to ‘section 129C(c)(2)’ in          types of families in the nation. Additional
                                                  hedging by the issuing entity of any                    subsection (e)(4)(C) of the new section 15G of the        information on the SCF is available at http://
                                                  portion of the credit risk on the                       Securities and Exchange Act, created by section 941       www.federalreserve.gov/pubs/oss/oss2/
                                                  securitized assets be permitted or,                     of the [Dodd-Frank Act] should read ‘section              method.html.
                                                                                                          129C(b)(2).’ In addition, the references to                 116 Additional information concerning the
                                                  because such credit protection and                      ‘subsection’ in paragraphs (e)(4)(A) and (e)(5) of the    Enterprise data used by the Agencies in developing
                                                  hedges could limit the incentive of                     newly created section 15G should read ‘section.’ We       the proposed QRM standards is provided in
                                                  investors to conduct due diligence on                   intend to correct these in future legislation.’’).        Appendix A in the proposed common rule.



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                                                  24118                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  mortgage involved; and the owner-                        regulation (unless another exemption is                requirements are to be prescribed by the
                                                  occupancy status of the property                         available). However, as discussed                      Agencies no later than 270 days after
                                                  securing the mortgage. A substantial                     further in Part III.B of this                          enactment of the Dodd-Frank Act (April
                                                  body of evidence, both in academic                       Supplementary Information, the                         17, 2011), the Dodd-Frank Act provides
                                                  literature and developed for this                        Agencies have sought to provide                        that the rules implementing the QM
                                                  rulemaking, supports the view that                       sponsors with several options for                      standards must be prescribed before the
                                                  loans that meet the minimum standards                    complying with the risk retention                      end of the 18-month period beginning
                                                  established by the Agencies have low                     requirements of section 15G so as to                   on the transfer date.
                                                  credit risk even in stressful economic                   reduce the potential for these                            In light of these provisions, the
                                                  environments that combine high                           requirements to disrupt securitization                 Agencies propose to incorporate the
                                                  unemployment with sharp drops in                         markets, including those for non-QRM                   statutory QM standards, in addition to
                                                  house prices.117                                         residential mortgages, or materially                   other requirements, into the QRM
                                                     Any set of fixed underwriting rules                   affect the flow or pricing of credit to                requirements and apply those standards
                                                  likely will exclude some creditworthy                    borrowers and businesses. Moreover,                    strictly in setting the QRM requirements
                                                  borrowers. For example, a borrower                       the amount of non-QRM residential                      in order to ensure that, consistent with
                                                  with substantial liquid assets might be                  mortgages should be sufficiently large,                Congress’ directive, the definition of a
                                                  able to sustain an unusually high DTI                    and include enough prudently                           QRM be no broader than a QM. The
                                                  ratio above the maximum established                      underwritten loans, so that ABS backed                 Agencies have proposed this approach
                                                  for a QRM. As this example indicates,                    by non-QRM residential mortgages may                   to minimize any potential for conflicts
                                                  in many cases sound underwriting                         be routinely issued and purchased by a                 between the QRM standards in the
                                                  practices require judgment about the                     wide variety of investors. As a result,                proposed rules and the QM standards
                                                  relative weight of various risk factors                  the market for such securities should be               that ultimately will be proposed or
                                                  (e.g., the tradeoff between LTV and DTI                  relatively liquid, all else being equal.               adopted under TILA, as well as to
                                                  ratios). These decisions are usually                     Indeed, the broader the definition of a                provide the public a reasonable
                                                  based on complex statistical default                     QRM, the less liquid the market                        opportunity to comment on the
                                                  models or lender judgment, which will                    ordinarily would be for residential                    proposed QRM standards, including
                                                  differ across originators and over time.                 mortgages falling outside the QRM                      those that are bounded by the statutory
                                                  However, incorporating all of the                        definition.                                            QM standards. The proposed approach
                                                  tradeoffs that may prudently be made as                     The Agencies also have sought to                    also helps reinforce the goal of ensuring
                                                  part of a secured underwriting process                   make the standards applicable to QRMs                  that QRMs are of very high credit
                                                  into a regulation would be very difficult                transparent to, and verifiable by,                     quality.
                                                  without introducing a level of                           originators, securitizers, investors and                  As noted above, rulemaking authority
                                                  complexity and cost that could                           supervisors. As discussed further below,               for the QM standards is vested initially
                                                  undermine any incentives for sponsors                    whether a residential mortgage meets                   in the Board and, after the transfer date,
                                                  to securitize, and originators to                        the definition of a QRM can and will be                the CFPB. TILA provides the QM
                                                  originate, QRMs.                                         determined at or prior to the time of                  rulewriting agency with the authority to
                                                     The Agencies recognize that many                      origination of the mortgage loan. For                  establish key aspects of the QM
                                                  prudently underwritten residential                       example, the DTI ratio and the LTV ratio               definition (e.g., any qualifying ratios of
                                                  mortgage loans will not meet the                         are measured at or prior to the closing                the borrower’s total debt to monthly
                                                  proposed definition of a QRM. Sponsors                   of the mortgage transaction. The                       income) and to revise, add to, or
                                                  of ABS backed by these mortgages will                    Agencies believe that this approach                    subtract from the criteria for a
                                                  be required to retain some of the credit                 should assist originators of all sizes in              residential mortgage loan to qualify as a
                                                  risk of these mortgage loans in                          determining whether residential                        QM.119 Accordingly, the Agencies
                                                  accordance with the proposed                             mortgages will qualify for the QRM                     expect to monitor the rules adopted
                                                                                                           exemption, and assist ABS issuers and                  under TILA to define a QM and will
                                                     117 For the importance of loan-to-value ratio at      investors in assessing whether a pool of               review those rules to determine whether
                                                  origination, see Quigley, J. and R. Van Order.           mortgages will meet the requirements of                changes to the definition of QRM are
                                                  ‘‘Explicit tests of contingent claims models of          the QRM exemption. In addition, the                    necessary or appropriate to ensure that
                                                  mortgage default,’’ Journal of Real Estate Finance       approach taken by the proposal would
                                                  and Economics, 11, 99–117 (1995) and the                                                                        the definition of a QRM is ‘‘no broader’’
                                                  extensive literature that has followed, including
                                                                                                           allow individual QRM loans to be                       than the definition of a QM as defined
                                                  Foote, C., K. Gerardi and P. Willen, ‘‘Negative equity   modified after securitization without the              in section 129C(b)(2) of TILA and to
                                                  and foreclosures: Theory and evidence,’’ Federal         loan ceasing to be a QRM in order to                   appropriately implement the risk
                                                  Reserve Bank of Boston Public Policy Discussion          avoid creating a disincentive to engage
                                                  Papers Number 08–3. (2008) http://www.bos.frb.org/                                                              retention requirement of section 15G.120
                                                  economic/ppdp/2008/ppdp0803.pdf; for the
                                                                                                           in appropriate loan modifications.                     In light of the different purposes and
                                                  importance of credit history, see Barakova, I., R.          In developing the proposed criteria                 effects of the QRM and the QM
                                                  Bostic, P. Calem, and S. Wachter, ‘‘Does credit          for a QRM, the Agencies also considered                standards,121 as well as the different
                                                  quality matter for homeownership?’’ Journal of           how best to address the interaction
                                                  Housing Economics, 12, 318–336 (2003); for several       between the definitions and standards                    119 See Section 129C(b)(3)(B)(i) of TILA.
                                                  other underwriting criteria see Foote, C., K. Gerardi
                                                  and P. Willen, ‘‘Negative equity and foreclosures:       for QRM and QM, as mandated by the                       120 Under  section 15G(e)(4)(C), future changes to
                                                  theory and evidence,’’ Federal Reserve Bank of           Dodd-Frank Act.118 The Board currently                 the QM definition do not, in and of themselves,
                                                                                                           has sole rulemaking authority for the                  alter the QRM definition. The QRM definition will
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  Boston Public Policy Discussion Papers Number
                                                  08–3 (2008). http://www.bos.frb.org/economic/                                                                   not change until the Agencies have determined,
                                                                                                           QM standards, which authority will                     through joint rulemaking, that the QRM definition
                                                  ppdp/2008/ppdp0803.pdf, Mayer, C., K. Pence and
                                                  S. M. Sherlund ‘‘The rise in mortgage defaults: facts    transfer to the Consumer Financial                     should be altered.
                                                  and myths,’’ Manuscript, Federal Reserve Board,          Protection Bureau (the CFPB) on the                       121 The function of the QM standard is to provide

                                                  Washington, DC. (2008), and S. Sherlund, ‘‘The           designated transfer date, which is set as              lenders with a presumption of compliance with the
                                                  past, present, and future of subprime mortgages,’’       July 21, 2011 (transfer date). In addition,            requirement in section 129C(a) of TILA to assess a
                                                  Finance and Economics Discussion Series No.                                                                     borrower’s ability to repay a residential mortgage
                                                  2008–63, Federal Reserve Board, Washington, DC           while Section 15G’s risk retention                     loan. The purposes of these provisions are to ensure
                                                  (2008). http://www.federalreserve.gov/pubs/feds/                                                                that consumers are offered and receive residential
                                                  2008/200863/200863abs.html.                               118 See   15 U.S.C. 78o–11(e)(4)(C).                  mortgage loans on terms that reasonably reflect



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                           24119

                                                  agencies responsible for implementing                   with respect to the mortgage-backed                    adopted by the Agencies under section
                                                  these standards, the proposed standards                 securities issued by the Enterprise.                   15G.
                                                  for QRMs should not be interpreted in                      A number of the proposed standards
                                                                                                          developed for the QRM exemption (e.g.,                 Request for Comment
                                                  any way as reflecting or suggesting the
                                                  way in which the QM standards under                     the DTI ratios and acceptable sources of                  106. Is the overall approach taken by
                                                  TILA may be defined either in proposed                  borrower funds) are dependent upon                     the Agencies in defining a QRM
                                                  or final form.                                          certain definitions, calculations and                  appropriate?
                                                     As required by section 15G, the                      verification requirements that are                        107. What impact might the proposed
                                                  Agencies also considered information                    critical to the robustness of the QRM                  rules have on the market for
                                                  regarding the credit risk mitigation                    standards. The Agencies believe that it                securitizations backed by QRM and non-
                                                  effects of mortgage guarantee insurance                 is important to provide clarity on what                QRM residential mortgage loans?
                                                  or other credit enhancements obtained                   these definitions, calculations, and                      108. What impact, if any, might the
                                                  at the time of origination.122 If such                  verification requirements include for                  proposed QRM standards have on
                                                  guarantees are backed by sufficient                     purposes of the QRM standards. The                     pricing, terms, and availability of non-
                                                  capital, they likely lower the credit risk              Agencies considered how best to                        QRM residential mortgages, including to
                                                  faced by lenders or purchasers of                       achieve this goal in a manner that is                  low and moderate income borrowers?
                                                  securities because they typically pay out               transparent, uniform, and familiar to the                 109(a). The Agencies seek general
                                                  when borrowers default. Such                            mortgage industry. After carefully                     comment on the overall approach of
                                                  guarantees have historically been                       considering a variety of options, the                  using certain longstanding HUD
                                                  required for loans with higher LTV                      Agencies propose to incorporate and use                standards for certain definitions and
                                                  ratios, where borrowers have relatively                 certain definitions and key terms                      standards within the QRM exemption
                                                  thin equity cushions.123 Mortgage                       established by HUD and required to be                  and whether the Agencies should adopt
                                                  insurance companies charge a risk-                      used by lenders originating residential                a different approach. 109(b). Are there
                                                  based premium for this insurance, as                    mortgages that are insured by the                      any other existing, transparent, and
                                                  well as impose additional underwriting                  Federal Housing Administration (FHA).                  widely recognized standards that the
                                                  restrictions. The Agencies considered a                 Specifically, the proposed rules                       Agencies should use for ensuring that
                                                  variety of information and reports                      incorporate the definitions and                        lenders follow consistent and sound
                                                  relative to such guarantees and other                   standards currently set out in the HUD                 processes in determining whether a
                                                  credit enhancements. While this                         Handbook 4155.1 (New Version),                         residential mortgage loan meets the
                                                  insurance protects creditors from losses                Mortgage Credit Analysis for Mortgage                  qualifications for a QRM?
                                                  when borrowers default, the Agencies                    Insurance, as in effect on December 31,                   110. The Agencies seek comment on
                                                  have not identified studies or historical               2010 (HUD Handbook) 124 for                            all aspects of the proposed definition of
                                                  loan performance data adequately                        determining and verifying borrower                     a QRM, including the specific terms and
                                                  demonstrating that mortgages with such                  funds and the borrower’s monthly                       conditions discussed in the following
                                                  credit enhancements are less likely to                  housing debt, total monthly debt and                   section.
                                                  default than other mortgages, after                     monthly gross income. This proposed                       111(a). The Agencies seek comment
                                                  adequately controlling for loan                         approach provides a transparent,                       on whether mortgage guarantee
                                                  underwriting or other factors known to                  uniform and well-known basis for                       insurance or other types of insurance or
                                                  influence credit performance, especially                lenders to determine whether a                         credit enhancements obtained at the
                                                  considering the important role of LTV                   residential mortgage loan qualifies as a               time of origination would or would not
                                                  ratios in predicting default. Therefore,                QRM, without requiring the Agencies to                 reduce the risk of default of a residential
                                                  the Agencies are not proposing to                       establish and maintain—and lenders to                  mortgage that meets the proposed QRM
                                                  include any criteria regarding mortgage                 comply with—new requirements.                          criteria but for a higher adjusted LTV
                                                  guarantee insurance or other types of                      In order to facilitate the use of these             ratio. Commenters are requested to
                                                  insurance or credit enhancements at this                standards for QRM purposes, the                        provide historical loan performance
                                                  time. The Agencies note that mortgage                   Agencies propose to include in the                     data or studies and other factual support
                                                  guarantee insurance is a form of credit                 Additional QRM Standards Appendix of                   for their views if possible, particularly
                                                  enhancement accepted by the                             the proposed rules all of the standards                if they control for loan underwriting or
                                                  Enterprises for mortgages with higher                   in the HUD Handbook that are used for                  other factors known to influence credit
                                                  LTV ratios that allows such mortgages to                QRM purposes. The only modifications                   performance. 111(b). If the information
                                                  be securitized through mortgage-backed                  made to the relevant standards in the                  indicates that such products would
                                                  securities guaranteed by the Enterprises.               HUD Handbook would be those                            reduce the risk of default, should the
                                                  For the reasons explained in Part III.B.8               necessary to remove those portions                     LTV ratio limits be increased to account
                                                  of this Supplemental Information, under                 unique to the FHA underwriting process                 for the insurance or credit
                                                  § __.11 of the proposed rules, the                      (e.g., TOTAL Scorecard instructions).                  enhancement? 111(c). If so, by how
                                                  guarantee provided by an Enterprise                     The proposed rules and the Additional                  much?
                                                  while operating under the                               QRM Standards Appendix would not                          112(a). If the proposed QRM criteria
                                                  conservatorship or receivership of                      affect or change any of the standards in               were adjusted for the inclusion of
                                                  FHFA with capital support from the                      the HUD Handbook as they apply to                      mortgage guarantee insurance or other
                                                  United States would satisfy the risk                    FHA-insured mortgages. Moreover, HUD                   types of insurance or credit
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  retention requirements of the Enterprise                continues to have sole authority to                    enhancements, what financial eligibility
                                                                                                          modify the HUD Handbook. Any such                      standards should be incorporated for
                                                  their ability to repay the loans and that are           amendments would not affect the                        mortgage insurance or financial product
                                                  understandable and not unfair, deceptive, or
                                                                                                          Additional QRM Standards Appendix of                   providers and how might those
                                                  abusive. See section 129B(a)(2) of TILA.                                                                       standards be monitored and enforced?
                                                     122 See 15 U.S.C. 78o–11(e)(4)(B)(iv).               the proposed rules unless separately
                                                     123 See National Association of Realtors,
                                                                                                                                                                    112(b). What disclosure regarding the
                                                  ‘‘Financing the Home Purchase: The Real Estate            124 See HUD Handbook, available at http://           entity would be appropriate?
                                                  Professional’s Guide 1993,’’ Chicago: National          www.fhaoutreach.gov/FHAHandbook/prod/                     113. Are there additional ways that
                                                  Association of Realtors, at 20 and 117.                 contents.asp?address=4155-1.                           the Agencies could clarify the standards


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                                                  24120                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  applicable to QRMs to reduce the                        C. Eligibility Criteria                                 on leasehold under a lease for not less
                                                  potential for uncertainty as to whether                                                                         than 99 years which is renewable, or
                                                                                                          1. Eligible Loans, First Lien, No
                                                  a residential mortgage loan qualifies as                                                                        under a lease having a period that is at
                                                                                                          Subordinate Liens, Original Maturity
                                                  a QRM at origination?                                                                                           least 10 years longer than the mortgage,
                                                                                                          and Written Application Requirements
                                                                                                                                                                  and (ii) improved by a residential
                                                  B. Exemption for QRMs                                      The proposed definition limits a QRM                 structure that contains one to four
                                                                                                          to a closed-end first-lien mortgage to                  units.131 A one-to-four family property
                                                     Consistent with section 15G,                         purchase or refinance a one-to-four                     may include an individual
                                                  § l.15(b) of the proposed rules provides                family property, at least one unit of                   condominium or cooperative unit, as
                                                  that a sponsor is exempt from the risk                  which is the principal dwelling of a                    well as a manufactured home that is
                                                  retention requirements of the proposed                  borrower.128 Under the proposal,                        constructed in conformance with the
                                                  rules with respect to any securitization                construction loans, ‘‘bridge’’ loans with               National Manufactured Home
                                                  transaction if all of the securitized assets            a term of twelve months or less, loans                  Construction and Safety Standards and
                                                  that collateralize the ABS are QRMs,                    to purchase time-share properties, and                  erected on, or otherwise affixed to, a
                                                  and none of the securitized assets that                 reverse mortgages could not be QRMs.                    foundation in accordance with
                                                  collateralize the ABS are other ABS.                    Construction loans, bridge loans and                    requirements established by the FHA.
                                                  These conditions implement the                          other loans designed to offer temporary                    If the mortgage transaction is to
                                                  requirements in 15 U.S.C. 78o–                          financing have typically not been                       purchase a one-to-four family property,
                                                  11(c)(1)(C)(iii) and (e)(5).                            securitized in the past, and their                      no other recorded or perfected liens on
                                                     Section l.15(b) of the proposed rules                underwriting is notably more complex                    the one-to-four family property can, to
                                                  includes two additional requirements                    than that of standard mortgage loans.                   the creditor’s knowledge, exist at the
                                                                                                          Thus, expanding the definition of QRMs                  time of the closing of the mortgage
                                                  for a securitization transaction to qualify
                                                                                                          to include such loans would be complex                  transaction. Thus, the proposed rules
                                                  for the QRM exemption. First, the
                                                                                                          and seem to offer few, if any, benefits.                prohibit the use of a junior lien in
                                                  proposal would require that, at the                     Any loan relating to a time share also                  conjunction with a QRM to purchase a
                                                  closing of the securitization transaction,              may not be a QRM, as these types of                     home. Data indicate that, controlling for
                                                  each QRM collateralizing the ABS is                     loans are excluded from the definition                  other factors, including combined LTV
                                                  currently performing (i.e., the borrower                of a ‘‘residential mortgage loan’’ that may             ratio, the use of junior liens at
                                                  is not 30 days or more past due, in                     be a QM under section 103(cc)(5) of                     origination to decrease down
                                                  whole or in part, on the mortgage).125                  TILA.                                                   payments—so-called ‘‘piggyback’’
                                                  Because QRMs are completely exempt                         Even before the financial crisis, the                mortgages—significantly increased the
                                                  from the risk retention requirements, the               overwhelming majority of reverse                        risk of default.132 The proposal would
                                                  proposed rules would not permit a                       mortgages were insured by the FHA.129                   not prohibit the existence of junior liens
                                                  residential mortgage loan that satisfied                Reverse mortgages insured by the FHA                    in connection with the refinancing of an
                                                  the conditions to be a QRM upon                         are separately exempted from the risk                   existing loan secured by an owner-
                                                  origination to be included in an ABS                    retention requirements of section                       occupied one-to-four family property,
                                                  transaction exempt under § l.15(c) of                   15G.130 In addition, reverse mortgages                  provided that the combined LTV ratio at
                                                  the proposed rules if the loan was not                  may be QMs only to the extent that they                 closing of the mortgage transaction does
                                                  currently performing at the time of                     meet certain standards to be determined                 not exceed certain thresholds
                                                  closing of the securitization transaction.              by regulation by the Board or CFPB                      established by the proposed rules.133
                                                  Second, the depositor 126 for the ABS                   under section 129C(b)(2)(A)(ix) of TILA.                The Agencies have not proposed to
                                                  must certify that it evaluated the                      Because the extent to which reverse                     prohibit the existence of a junior lien in
                                                  effectiveness of its internal supervisory               mortgages may be considered a QM                        connection with a refinancing
                                                  controls for ensuring that all of the                   under TILA is not yet known, the                        transaction (subject to certain combined
                                                  assets that collateralize the ABS are                   Agencies have excluded reverse                          LTV limits) because the Agencies
                                                                                                          mortgages from potential QRM status.                    recognize that some borrowers may have
                                                  QRMs and that it has determined that its
                                                                                                             Under the proposal, a QRM must be                    existing home equity loans or lines of
                                                  internal supervisory controls are                       secured by a first-lien, perfected in
                                                  effective. This evaluation must be                                                                              credit and are currently performing on
                                                                                                          accordance with applicable law, on the                  all of their mortgage obligations.134 A
                                                  performed as of a date within 60 days                   one-to-four family property to be
                                                  prior to the cut-off date (or similar date)                                                                     prohibition on junior liens in
                                                                                                          purchased or refinanced. In addition,                   connection with a refinancing
                                                  for establishing the composition of the                 consistent with the QM requirement                      transaction would force such
                                                  collateral pool. The sponsor also must                  under section 129C(b)(2) of TILA, the                   performing borrowers to terminate their
                                                  provide, or cause to be provided, a copy                maturity date of a QRM, at the closing                  existing home equity loans or lines of
                                                  of this certification to potential                      of the mortgage transaction, must not                   credit and obtain a new home equity
                                                  investors a reasonable period of time                   exceed 30 years. A one-to-four family                   loan or line of credit shortly thereafter,
                                                  prior to the sale of ABS and, upon                      property is defined to mean real                        with additional transaction costs
                                                  request, to the Commission and its                      property that is (i) held in fee simple, or
                                                  appropriate Federal banking agency, if                                                                             131 See proposed rules at § l.15(a) (definition of

                                                  any. These evaluation and certification                   128 Closed-end  credit and the related terms          ‘‘one-to-four family property’’).
                                                  conditions implement the requirements                   consumer credit and open-end credit are defined in         132 See Kristopher Gerardi, Andreas Lehnert,
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  in 15 U.S.C. 78o–11(e)(6).127                           a manner consistent with the definition of such         Shane Sherlund, and Paul S. Willen, ‘‘Making Sense
                                                                                                          terms under the Board’s Regulation Z, which             of the Subprime Crisis,’’ Brookings Papers on
                                                                                                          implements TILA.                                        Economic Activity (Fall 2008), at 86, Table 3.
                                                     125 See proposed rules at § l.15(a) (definition of     129 See Hui Shan, ‘‘Reversing the Trend: The             133 See proposed rules at § l.15(d)(9).
                                                  ‘‘currently performing’’ for QRM purposes).             Recent Expansion of the Reverse Mortgage Market            134 As discussed further below, the proposed
                                                     126 See proposed rules at § l.2 (definition of       Finance and Economics Discussion Series,’’ Board        rules would require that the borrower be currently
                                                  ‘‘depositor’’).                                         of Governors of the Federal Reserve System, 2009–       performing on all of the borrower’s debt
                                                     127 For these purposes, the Agencies interpret the   42 (2009), available at http://www.federalreserve.      obligations—including any current first mortgage,
                                                  term ‘‘issuer’’ as used in section 15G(e)(6) to refer   gov/pubs/feds/2009/200942/200942pap.pdf .               home equity loan or line of credit—for any new
                                                  to the depositor for the transaction.                     130 See 15 U.S.C. 78o–11(e)(3)(B).                    mortgage to qualify as a QRM.



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                     24121

                                                  (including a loan origination fee). To                  payments or ever being in foreclosure).                  used often by originators in the loan
                                                  help ensure that the borrower continues                 However, 24.5 percent of residential                     underwriting process. However, the
                                                  to have the ability and incentive to                    mortgage loans taken out by borrowers                    Agencies do not propose to use a credit
                                                  repay a QRM that is originated as part                  with a FICO score of 690 or below                        score threshold as part of the QRM
                                                  of a refinancing transaction, the                       defaulted, compared to a default rate of                 definition because such a standard
                                                  proposal includes certain combined                      7.7 percent among residential mortgage                   would require reliance on credit scoring
                                                  LTV limits on refinancing transactions                  loans taken out by borrowers with a                      models developed and maintained by
                                                  and DTI limits both of which assume                     FICO score greater than 690. Even                        privately owned entities and such
                                                  that any home equity loan or line of                    among the higher-FICO group,                             models may change materially at the
                                                  credit is fully drawn.                                  differences remained: borrowers with                     discretion of such entities. There also
                                                     The proposed rules also would                        FICO scores of 691 to 740 had a default                  may be inconsistencies across the
                                                  require that the borrower complete and                  rate of 11.4 percent, while borrowers                    various credit scoring models used by
                                                  submit to the creditor a written                        with FICO scores above 740 had a                         consumer reporting agencies, as well as
                                                  application for the mortgage transaction.               default rate of 4 percent. Thus, in these                among different scoring models used by
                                                  The application, as supplemented or                     data, mortgage borrowers with a FICO                     a single provider. Consequently, in
                                                  amended prior to closing of the                         score of 690 or below were more than                     order to ensure that creditors could
                                                  mortgage transaction, must include an                   six times as likely to default as                        continue to choose among different
                                                  acknowledgement by the borrower that                    borrowers with FICO scores of above                      credit score providers, the Agencies
                                                  the information provided in the                         740.                                                     would have to determine a cutoff score
                                                  application is true and correct as of the                 A similar pattern emerges from the                     under multiple scoring models and
                                                  date executed by the borrower, and that                 SCF data described above. Although the                   periodically revise the regulation in
                                                  any intentional or negligent                            SCF data do not record the borrower’s                    response to new scoring models that
                                                  misrepresentation of the information                    credit score, they do report several                     might arise.
                                                  provided in the application may result                  important contributors to low credit                        Instead, the proposed rules define a
                                                  in civil liability and/or criminal                      scores. The most important predictor of                  set of so-called ‘‘derogatory factors’’
                                                  penalties under 18 U.S.C. 1001.135 This                 whether a household in the SCF data set                  relating to a borrower that would
                                                  standard is consistent with the written                 was delinquent on its mortgage payment                   disqualify a mortgage for such borrower
                                                  acknowledgement in the Uniform                          was whether it currently was behind on                   from qualifying as a QRM. The Agencies
                                                  Residential Loan Application (Form                      any non-mortgage debt. The second-                       considered how these derogatory factors
                                                  1003) used by the Enterprises.                          most important variable was whether                      related to the credit scores observed in
                                                                                                          the household had filed for bankruptcy                   the data. A 2007 report to Congress by
                                                  Request for Comment                                     within the past five years. Households                   the Board found that, among all persons
                                                     114(a). The Agencies request                         that were current on their non-mortgage                  with a FICO score, 42 percent had
                                                  comment on each of these conditions for                 obligations and had not filed for                        scores below 700, 18 percent had scores
                                                  QRM eligibility. In addition, should a                  bankruptcy within the previous five                      between 700 and 749, and 40 percent
                                                  loan be disqualified from being a QRM                   years had a mortgage delinquency rate                    had scores of 750 or above.138 Thus, the
                                                  if the creditor has ‘‘reason to know’’ of               of 0.2 percent, compared to a                            median FICO score is somewhere
                                                  another recorded or perfected lien on                   delinquency rate of 17.9 percent for                     between 700 and 749. The analysis of
                                                  the property in a purchase transaction?                 other households.                                        the LPS data found that borrowers with
                                                  114(b). If so, what would constitute a                    Data on residential mortgages                          prime fixed-rate mortgages with FICO
                                                  ‘‘reason to know’’ by the creditor?                     purchased or securitized by the                          scores below 700 were substantially
                                                                                                          Enterprises also show the importance of                  more likely than the average of such
                                                  2. Borrower Credit History                              borrower credit scores as a predictor of                 borrowers to default. The Board’s report
                                                     The Agencies’ own analysis, as well                  default. From 1997 through 2002, loans                   to Congress also found that any major
                                                  as work published in academic                           that are estimated to meet the proposed                  derogatory factor, including being
                                                  journals,136 indicates that borrower                    QRM requirements (except for credit                      substantially late on any debt payment
                                                  credit history is among the most                        history) had cumulative rates of serious                 (not just a mortgage), as well as
                                                  important predictors of default. In many                delinquency ranging from 31 to 44 basis                  bankruptcy or foreclosure, would push
                                                  datasets, credit history is proxied using               points if the borrower’s credit score was                a borrower’s credit score down
                                                  a credit score, often the FICO score                    above 690, but ranged from 267 to 356                    substantially. Thus, the relatively
                                                  determined under the credit scoring                     basis points for borrowers with credit                   stringent set of credit history derogatory
                                                  model devised by Fair Isaac                             scores of 690 or lower. The data show                    factors set forth in § l.15(d)(5) of the
                                                  Corporation. Among the residential                      that, in the peak years of the housing                   proposed rules is designed to be a
                                                  mortgage loans in the LPS dataset                       bubble (from 2005 to 2007), rates of                     reasonable proxy for the credit score
                                                  described above, 13 percent of all loans                serious delinquency for loans that were                  thresholds associated with low
                                                  defaulted (defined as ever having                       estimated to meet the proposed QRM                       delinquency rates in the data.
                                                  missed three or more consecutive                        standards with credit scores above 690                      Specifically, under the proposal, a
                                                                                                          ranged from 186 to 272 basis points,                     mortgage loan could qualify as a QRM
                                                    135 See proposed rules at § l.15(d)(9).               while similar loans to borrowers with                    only if the borrower was not currently
                                                    136 See,e.g., Avery, Robert B., Raphael Bostic,       lower credit scores ranged from 833 to                   30 or more days past due, in whole or
                                                                                                                                                                   in part, on any debt obligation, and the
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                                                  Paul S. Calem, and Glenn B. Canner, ‘‘Credit Risk,      1,103 basis points.137
                                                  Credit Scoring, and the Performance of Home                                                                      borrower had not been 60 or more days
                                                  Mortgages,’’ Federal Reserve Bulletin 82(7) 621–48        In developing the proposal, the
                                                  (1996); Pennington-Cross, Anthony, ‘‘Credit History     Agencies carefully considered how to                     past due, in whole or in part, on any
                                                  and the Performance of Prime and Nonprime               incorporate a borrower’s credit history
                                                  Mortgages,’’ Journal of Real Estate Finance and         into the standards for a QRM. The                          138 See Report to the Congress on Credit Scoring

                                                  Economics 27(3) 279–301 (2003); Calem, Paul and                                                                  and Its Effects on the Availability and Affordability
                                                  Susan Wachter, ‘‘Community Reinvestment and             Agencies are aware that credit scores are                of Credit, Board of Governors of the Federal Reserve
                                                  Credit Risk: Evidence from an Affordable-Home-                                                                   System (August 2007), available at http://
                                                  Loan Program,’’ Real Estate Economics 27(1) 105–          137 See   Appendix A in the proposed common            www.federalreserve.gov/boarddocs/rptcongress/
                                                  134 (1999).                                             rule.                                                    creditscore/creditscore.pdf.



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                                                  24122                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  debt obligation within the preceding 24                 credit scores, and (iii) ensures that any              early years of a mortgage loan or other
                                                  months. Further, a borrower must not                    credit scoring methodology used for                    interest rate increases. Section
                                                  have, within the preceding 36 months,                   QRM purposes is and remains                            15G(e)(4)(B)(iii) provides that one of the
                                                  been a debtor in a bankruptcy                           predictive of a borrower’s default risk?               underwriting and product features the
                                                  proceeding, had property repossessed or                   118. The Agencies request comment                    Agencies may take into consideration in
                                                  foreclosed upon, engaged in a short sale                on the appropriateness of the safe                     defining a QRM are those that mitigate
                                                  or deed-in-lieu of foreclosure, or been                 harbor that would allow an originator to               ‘‘the potential for payment shock on
                                                  subject to a Federal or State judgment                  satisfy the documentation and                          adjustable rate mortgages through
                                                  for collection of any unpaid debt.                      verification requirements regarding a                  product features and underwriting
                                                     The proposal would require that the                  borrower’s credit history by obtaining                 standards.’’ Under § l.15(d)(6)(iii) of
                                                  originator verify and document, within                  credit reports from at least two                       the proposed rules, in order for a
                                                  90 days prior to the closing of the                     consumer reporting agencies that                       mortgage that allows the annual rate of
                                                  mortgage transaction, that the borrower                 compile and maintain files on                          interest to increase after the closing of
                                                  satisfied these credit history                          consumers on a nationwide basis.                       the mortgage transaction to be a QRM,
                                                  requirements. The Agencies are                                                                                 the terms of the mortgage must provide
                                                                                                          3. Payment Terms
                                                  proposing a safe harbor that would                                                                             that any such increase may not exceed:
                                                  allow an originator to satisfy the                         Section l.15(d)(6) of the proposed                  (a) Two percent (200 basis points) in
                                                  documentation and verification                          rules addresses the payment terms of a                 any twelve month period and (b) six
                                                  requirements regarding a borrower’s                     QRM, based on the terms of the                         percent (600 basis points) over the life
                                                  credit history by obtaining, no more                    mortgage transaction at closing.                       of the mortgage transaction.142
                                                  than 90 days before the closing of the                  Consistent with the requirements for a                    Section l.15(d)(6)(iv) of the proposed
                                                  mortgage, credit reports from at least                  QM under section 129C(b)(2)(A)(i) of                   rules also would prohibit a QRM from
                                                  two consumer reporting agencies that                    TILA, the proposed rules would                         containing any prepayment penalty. The
                                                  compile and maintain files on                           prohibit QRMs from having, among                       term ‘‘prepayment penalty’’ would be
                                                  consumers on a nationwide basis.139                     other features, payment terms that allow               defined as a penalty imposed solely
                                                  Such credit reports must demonstrate                    interest-only payments or negative                     because the mortgage obligation is
                                                  that the borrower satisfies the credit                  amortization. Under the proposed rules,                prepaid in full or in part. For purposes
                                                  history requirements for a QRM and the                  regularly scheduled principal and                      of this definition, a prepayment penalty
                                                  originator must maintain paper or                       interest payments on the mortgage                      would not include, for example, fees
                                                  electronic copies of such credit reports                transaction may not result in an increase              imposed for preparing and providing
                                                  in the loan file for the mortgage                       of the unpaid principal balance of the                 documents in connection with
                                                  transaction. This safe harbor would not                 mortgage and may not allow the                         prepayment, such as a loan payoff
                                                  be available if the creditor later obtained             borrower to defer payment of interest or               statement, a reconveyance, or other
                                                  an additional credit report before                      repayment of principal.                                document releasing the creditor’s
                                                  closing of the mortgage which indicated                    In addition, consistent with the                    security interest in the one-to-four
                                                  that the borrower did not meet the                      requirements for a QM under section                    family property securing the loan.
                                                  proposed rules’ credit history                          129C(b)(2)(A)(ii) of TILA, the proposed                   When defining a QRM, section 15G
                                                  requirements.                                           rules would prohibit the terms of a QRM                directs the Agencies to take into
                                                                                                          from permitting any ‘‘balloon payment,’’               consideration underwriting and product
                                                  Request for Comment                                     defined for these purposes as a                        features that historical loan performance
                                                     115. Are the proposed credit history                 scheduled payment of principal and                     data indicate result in a lower risk of
                                                  standards useful and appropriate                        interest that is more than twice as large              default, such as a prohibition or
                                                  indicators of the likelihood that a                     as any earlier scheduled payment of                    restriction on the use of prepayment
                                                  borrower might default on a new                         principal and interest. This definition of             penalties.143 In addition, under section
                                                  residential mortgage loan?                              a balloon payment is consistent with the               129C(c)(1)(B) of TILA, prepayment
                                                     116. Are there additional or different               current definition of that term under the              penalties are prohibited or subject to
                                                  standards that should be used in                        Board’s Regulation Z,140 and somewhat                  significant limitations for certain loans
                                                  considering how a borrower’s credit                     more restrictive than the definition of a              even if those loans otherwise meet the
                                                  history may affect the likelihood that                  balloon payment in section                             QM definition under section 129C(b)(2)
                                                  the borrower would default on a new                     129C(b)(2)(A)(ii) of TILA and applicable               of TILA.144
                                                  mortgage?                                               to a QM.141
                                                     117(a). Should the Agencies include                     Under the proposed rules, both fixed-                  142 As described more fully below, an originator

                                                  minimum credit score thresholds as an                   rate and adjustable-rate mortgages may                 also would be required to calculate the borrower’s
                                                  additional or alternative QRM standard?                 qualify as a QRM. However, the                         front-end and back-end DTI ratios based on the
                                                                                                                                                                 maximum interest rate permitted during the first
                                                  117(b). If so, how might the rules                      Agencies are proposing to limit the                    five years of the mortgage transaction.
                                                  incorporate privately developed credit                  amount by which interest rates may                     Consequently, originators of adjustable-rate
                                                  scoring models in a manner that (i)                     increase on adjustable-rate loans that are             mortgages would have to determine that a borrower
                                                  ensures that borrowers, originators, and                QRMs to reduce the risk of default on                  had acceptable DTI ratios even if rates rose as
                                                                                                                                                                 rapidly as possible under the terms of the mortgage
                                                  investors have adequate notice, and an                  QRMs by limiting the potential for                     (subject to the annual and lifetime caps described
                                                  opportunity to comment on, changes to                   consumers to face a ‘‘payment shock’’ in               above).
                                                  scoring methodologies that may affect a                 the event that their monthly mortgage                     143 15 U.S.C. 78o–11(e)(4)(B)(v).
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                                                  borrower’s eligibility for a QRM, (ii)                  payments were to rise rapidly due to                      144 TILA’s prepayment penalty restriction scheme

                                                  maintains a level competitive playing                                                                          is quite complex. Specifically, section 129C(c)(1)(B)
                                                                                                          expiration of ‘‘teaser rate’’ periods in the           of TILA prohibits prepayment penalties for any
                                                  field for providers and developers of                                                                          residential mortgage loan with an adjustable rate, or
                                                                                                            140 See 12 CFR 226 Supplement I, comment
                                                                                                                                                                 for those loans where the annual percentage rate
                                                    139 The proposal defines a ‘‘consumer reporting       32(d)(1)(i)–1 and 12 CFR 226.18(s)(5)(i).              exceeds certain thresholds over the average prime
                                                  agency that compiles and maintains files on a             141 Section 129C(b)(2)(A)(ii) of TILA defines a      offer rate for a comparable transaction, based on the
                                                  nationwide basis’’ by reference to the definition of    balloon payment for QM purposes as a scheduled         loan’s amount and lien status. In addition, where
                                                  that term in the Fair Credit Reporting Act (15 U.S.C.   payment that is more than twice as large as the        permitted, prepayment penalties may not exceed
                                                  1681a(p)). See the proposed rules at § l.15(a)(7).      average of earlier scheduled payments.                 three percent of the outstanding balance of the loan



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                    24123

                                                  Request for Comment                                      sell their homes or otherwise tap their               proposing a requirement for a LTV ratio
                                                                                                           accumulated home equity. To ensure                    of 80 percent for purchase mortgage
                                                     119(a). The Agencies request
                                                                                                           that QRMs have low default risk                       transactions.
                                                  comment on all aspects of the proposed
                                                                                                           consistent with their complete                           According to the LPS dataset, loans
                                                  rules’ limits on the payment terms of a
                                                                                                           exemption from risk retention                         used to refinance existing mortgages
                                                  QRM. In addition, the Agencies request
                                                                                                           requirements, the Agencies are                        have a greater likelihood of default at
                                                  comment on the following matters.
                                                                                                           proposing that the QRM definition                     every LTV ratio level than those used to
                                                  119(b). Should additional or different
                                                                                                           require a sizable equity contribution.                purchase homes; moreover, the default
                                                  payment terms be established for                            The figure below shows the default
                                                  QRMs? Commenters requesting                                                                                    rates are steeper for refinance loans than
                                                                                                           rate among loans in the LPS dataset                   for purchase loans, suggesting that
                                                  additional or different limits are                       considered by the Agencies (and
                                                  encouraged to provide data indicating                                                                          refinance loans are more sensitive to the
                                                                                                           described above) with the data further                LTV ratio. Thus, to control risk of
                                                  that such additional or different terms                  restricted to those loans with fully
                                                  would result in a lower risk of default.                                                                       default in a manner consistent with the
                                                                                                           documented income in order to better                  complete exemption afforded QRMs, the
                                                  119(c). Would different interest rate                    match the proposed underwriting
                                                  caps, such as a one percent (100 basis                                                                         Agencies are proposing that these loans
                                                                                                           characteristics of QRMs. These loans are              have tighter LTV ratio requirements
                                                  points) increase in any twelve month                     divided by their purpose: To purchase
                                                  period, be more appropriate than the                                                                           than purchase loans.
                                                                                                           a home, to refinance an existing loan
                                                  caps set forth in the proposal? 119(d).                                                                           The proposed rules put a combined
                                                                                                           without increasing its principal balance
                                                  Recognizing the very damaging effects                    (a so-called ‘‘rate and term’’ refinancing),          LTV ratio cap for QRMs of 75 percent
                                                  that prepayment penalties had on some                    or to refinance an existing loan and                  on rate and term refinance loans and 70
                                                  borrowers during the recent housing                      increase the principal balance (a so-                 percent for cash-out refinance loans.147
                                                  market distress, the proposed rules do                   called ‘‘cash out’’ refinancing). Different           Again, estimates of the performance of
                                                  not permit any loans with prepayment                     types of mortgage transactions (i.e.,                 these loans vary across datasets.
                                                  penalties to qualify as a QRM. Often, the                purchase, rate and term refinancing, and              However, because they have historically
                                                  borrower that suffered because of the                    cash-out refinancing) had varying rates               performed worse than purchase loans,
                                                  existence of such penalties were those                   of default.                                           and because they are more sensitive to
                                                  with large, unaffordable payment shocks                     As shown in the figure below, default              LTV ratios than purchase loans, the
                                                  as low initial rates expired or those                    rates increase noticeably among loans                 lower combined LTV ratio caps on
                                                  whose credit standing improved after                     used to purchase homes at LTV ratios                  refinance loans should work to reduce
                                                  origination of the loan, but who were                    above 80 percent. The precise size of                 risk of default on these loans.
                                                  not able to benefit from such                            this increase and the LTV ratio at which                 Again, the data from the Enterprises
                                                  improvements by refinancing into a                       it occurs are likely to vary across                   indicates that these LTV ratio caps
                                                  potentially lower rate loan. Given the                   datasets and over time. Nonetheless,                  should significantly reduce the default
                                                  tight credit and product standards                       lenders have long experience                          rate on QRMs that are refinancing
                                                  proposed for QRMs, such conditions are                   underwriting loans with LTV ratios of                 transactions. These data show that rate
                                                  less likely to be relevant to QRM                        80 percent or less and there is                       and term refinancings that are estimated
                                                  borrowers, and some QRM borrowers                        substantial data indicating that loans                to meet other QRM standards, but are
                                                  might reasonably benefit from an                         with LTV ratios of 80 percent or less                 estimated to have exceeded the
                                                  opportunity to obtain a mortgage with                    perform noticeably better than those                  proposed combined LTV cap, had
                                                  modest prepayment penalties in the                       with LTV ratios above 80 percent.145                  serious delinquency rates 32 to 70 basis
                                                  early years of the loan in exchange for                  Data from the Enterprises concerning                  points higher when examining loans
                                                  lower interest rate. Should the Agencies                 loans purchased or securitized by the                 originated from 1997 to 2002, and 196
                                                  permit prepayment penalties in QRM                       Enterprises also show that first-lien                 to 539 basis points higher for loans
                                                  loans (to the extent otherwise possible                  purchase loans with high LTV ratios are               originated from 2005 to 2007. For cash-
                                                  within the limits established for QMs)?                  riskier. The data show that purchase                  out refinancings that are estimated to
                                                  119(e). If so, what, if any, limitations                 loans estimated to meet other QRM                     meet other QRM standards, but are
                                                  should apply to such penalties?                          standards, but that exceeded the                      estimated to have exceeded the
                                                                                                           proposed LTV ratio cap, had serious                   proposed combined LTV cap, such
                                                  4. Loan-to-Value Ratio
                                                                                                           delinquency rates 80 to 128 basis points              loans had serious delinquency rates 42
                                                    Borrowers with substantial equity in                   higher when examining loans originated                to 81 basis points higher when
                                                  their properties—that is, a low LTV                      from 1997 to 2002, and 287 to 443 basis               examining loans originated between
                                                  ratio—should in principle default                        points higher for loans originated from               1997 and 2002, and 255 to 405 basis
                                                  infrequently. If faced with financial                    2005 to 2007.146 Based on historical                  points higher when examining loans
                                                  hardship, such borrowers typically can                   loan performance data, the Agencies are               originated from 2005 to 2007.



                                                  in the first year, two percent in the second year, and   which defines a ‘‘high-cost’’ mortgage loan as any    underwriting of these loans may well require the
                                                  one percent in the third year. Creditors who offer       mortgage (regardless of its cost or other terms) in   prudent use of judgment about the borrower’s
                                                  a consumer a loan with a prepayment penalty must         which the creditor may charge prepayment fees or      ability to repay the loan and other risk mitigants
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  also offer the consumer a loan without a                 penalties more than 36 months after the closing of    that are likely to change over time and vary from
                                                  prepayment penalty. Under section                        the transaction, or in which the fees or penalties    borrower to borrower. Such judgments are difficult
                                                  129C(b)(2)(A)(vii) of TILA, the total ‘‘points and       exceed, in the aggregate, more than two (2) percent   to incorporate accurately and effectively into a rule
                                                  fees’’ for a QM may not exceed three percent of the      of the amount prepaid. And under section 129(c) of    without introducing substantial complexity and
                                                  total loan amount, and under section 103(aa)(4) of       TILA, as amended by the Dodd-Frank Act, high-cost     cost.
                                                  TILA, the definition of ‘‘points and fees’’ now          mortgage loans may not contain prepayment               146 See Appendix A in the proposed common

                                                  includes the maximum prepayment penalties and            penalties.                                            rule.
                                                  fees which may be charged or collected under the           145 While many creditworthy homebuyers seeking        147 See proposed rules at § l.15(a) for the

                                                  terms of the credit transaction. TILA also limits        to purchase a home will likely not have the 20        proposed definition of a ‘‘rate and term refinancing’’
                                                  prepayment penalties in section 103(aa)(1)(A)(iii),      percent down payment required for a QRM, sound        and a ‘‘cash-out refinancing.’’



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                                                  24124                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules




                                                  Request for Comment                                     that reflects a $100,000 market value as                specified in the Additional QRM
                                                    120. The Agencies seek comment on                     follows: (i) $10,000 in closing costs;                  Standards Appendix to the proposed
                                                  the appropriateness of the proposed                     plus (ii) $20,000 (based on 20 percent of               rules. The acceptable sources of funds
                                                  LTV and combined LTV ratios for the                     the $100,000 purchase price which is                    included in the Additional QRM
                                                  different types of mortgage transactions.               less than or equal to the $100,000                      Standards Appendix are those that
                                                                                                          market value); plus (iii) $0 (due to                    would be considered acceptable sources
                                                  5. Down Payment                                         purchase price being less than or equal                 under the ‘‘Acceptable Sources of
                                                     If a mortgage transaction is for the                 to the market value of the property).                   Borrower Funds’’ section in the HUD
                                                  purchase of a one-to-four family                        However, the down payment amount                        Handbook (e.g., savings and checking
                                                  property, then the proposed rules                       would equal $40,000 on a mortgage                       accounts, cash saved at home, stocks
                                                  require that the borrower provide a cash                transaction with $10,000 in closing                     and bonds, and gifts, including eligible
                                                  down payment in an amount equal to at                   costs, and where the purchase price
                                                                                                                                                                  downpayment assistance programs).
                                                  least the sum of:                                       equaled $110,000 on a property with a
                                                     (i) The closing costs payable by the                 qualifying appraisal that reflects a                       While the down payment must come
                                                  borrower in connection with the                         $100,000 market value as follows: (i)                   from acceptable sources of borrower
                                                  mortgage transaction;                                   $10,000 in closing costs; plus                          funds, which as noted above can
                                                     (ii) 20 percent of the lesser of—                    (ii) $20,000 (based on 20 percent of the                include gifts, the Agencies are
                                                     (A) The estimated market value of the                $100,000 market value which is less                     proposing to prohibit the use of any
                                                  one-to-four family property as                          than the $110,000 purchase price); plus                 funds subject to a contractual obligation
                                                  determined by a qualifying appraisal (as                (iii) $10,000 (difference between the                   by the borrower to repay and any funds
                                                  described in the following section); and                $110,000 purchase price and the                         from a person or entity with an interest
                                                     (B) The purchase price of the one-to-                $100,000 market value).                                 in the sale of the property (other than
                                                  four family property to be paid in                         Because historical data indicate that                the borrower). In addition, the Agencies
                                                  connection with the mortgage                            borrowers with a meaningful equity                      are proposing to require originators to
                                                  transaction; and                                        interest in their properties exhibit a                  verify and document the borrower’s
                                                     (iii) If the estimated market value of               lower risk of default,148 the proposal                  compliance with the down payment
                                                  the one-to-four family property as                      does not permit the dilution of a                       requirements in accordance with the
                                                  determined by a qualifying appraisal is                 borrower’s equity position by allowing                  verification and documentation
                                                  less than the purchase price of the one-                the financing of closing costs.
                                                                                                                                                                  standards set forth in the Additional
                                                  to-four family property to be paid in                      The proposal also provides that the
                                                                                                          funds used by the borrower to meet the                  QRM Standards Appendix. Again, these
                                                  connection with the mortgage
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                                                                          20 percent down payment requirement                     standards are based on the standards in
                                                  transaction, the difference between
                                                                                                          must come from one or more acceptable                   the HUD Handbook.
                                                  these amounts.
                                                     For example, the down payment                        sources of the borrower’s own funds as                  Request for Comment
                                                  amount would equal $30,000 on a
                                                  mortgage transaction with $10,000 in                      148 See Austin Kelly, ‘‘Skin in the Game: Zero          121. The Agencies request comment
                                                  borrower-paid closing costs, and where                  Down Payment Mortgage Default,’’ Federal Housing        on the proposed amount and acceptable
                                                                                                          Finance Agency, Journal of Housing Research, Vol.
                                                  the purchase price equaled $100,000 on                  19, No. 2, 2008, available at http://papers.ssrn.com/   sources of funds for the borrower’s
                                                                                                                                                                  down payment.
                                                                                                                                                                                                              EP29AP11.002</GPH>




                                                  a property with a qualifying appraisal                  sol3/papers.cfm?abstract_id=1330132.



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                      24125

                                                  6. Qualifying Appraisal                                  of the borrower’s mortgage payment to                  maximum of 33 to 36 percent, with the
                                                     After considering a variety of                        his gross income (often known as the                   higher ratios only available to borrowers
                                                  valuation information sources, the                       ‘‘front-end ratio’’) and the ratio of all of           with relatively large down payments.154
                                                  Agencies are proposing that a QRM be                     the borrower’s debt payments to his                    As noted above and described more
                                                  supported by a written appraisal that                    gross income (often known as the ‘‘back-               fully in Appendix A to this
                                                  conforms to generally accepted                           end ratio’’).152                                       Supplementary Information, loan
                                                  appraisal standards, as evidenced by the                     The Agencies’ review found that                    performance data from the Enterprises
                                                  Uniform Standards of Professional                        historical loan performance data did not               indicate that these ratios are likely to
                                                  Appraisal Practice, the appraisal                        always contain information on the                      help contribute to a set of QRM
                                                  requirements of the Federal banking                      borrowers’ monthly income and debt                     standards indicative of loans of very
                                                  agencies, and applicable laws.149 The                    obligations and, where such data were                  high credit quality.
                                                  Agencies believe these requirements                      provided, the information was not                         For purposes of calculating these
                                                  will help ensure that the appraisal is                   always captured in a consistent manner,                proposed ratios, the proposal would
                                                  prepared by an independent third party                   making it difficult to aggregate for                   require originators to use the borrower’s
                                                  with the experience, competence, and                     statistical analysis. For example, the                 monthly gross income, as determined in
                                                  knowledge necessary to provide an                        loan performance data from the                         accordance with the effective income
                                                  accurate and objective valuation based                   Enterprises reflect that borrowers with                standards set forth in the HUD
                                                  on the property’s actual physical                        lower DTI ratios had lower default rates               Handbook, which have been
                                                  condition. These requirements are                        before consideration of other                          incorporated into the Additional QRM
                                                  intended to ensure the integrity of the                  underwriting factors. These data show                  Standards Appendix to the proposed
                                                  appraisal process and the accuracy of                    that, among all loan types, loans that are             rules. In addition, originators would be
                                                  the estimate of the market value of the                  estimated to meet the other proposed                   required to use the borrower’s monthly
                                                  residential property.                                    QRM standards, but had a front-end                     housing debt in calculating the front-
                                                                                                           ratio of more than 28 percent or a back-               end ratio, and the borrower’s total
                                                  Request for Comment                                      end ratio of more than 36 percent, had                 monthly debt in calculating the back-
                                                     122. Should other valuation                           serious delinquency rates 20 to 39 basis               end ratio, as such debt amounts are
                                                  approaches be considered in                              points higher when examining loans                     defined in the HUD Handbook and
                                                  determining the value of the real                        originated from 1997 to 2002, and 236                  incorporated into the Additional QRM
                                                  property pledged on the mortgage                         to 359 basis points higher for loans                   Standards Appendix. The proposed
                                                  transaction?                                             originated from 2005 to 2007.153                       rules, however, specifically provide that
                                                                                                               However, in the LPS data described                 an originator must include in the
                                                  7. Ability To Repay                                                                                             borrower’s monthly housing debt and
                                                                                                           above, payment to income ratios did not
                                                     Section 15G provides that, in defining                add significant predictive power once                  total monthly debt any monthly pro rata
                                                  QRMs, the Agencies should take into                      the effects of credit history, loan type,              payments for real estate taxes,
                                                  consideration underwriting and product                   and LTV were considered. These results                 insurance, ground rent, special
                                                  features that historical loan performance                could be due to different originators                  assessments, and homeowner and
                                                  data indicate result in a lower risk of                  using different definitions of income                  condominium association dues. This
                                                  default, such as standards with respect                  and non-mortgage debt burdens.                         requirement is intended to help ensure
                                                  to the borrower’s residual income,150                    Additionally, loan officers and brokers                that the borrower has the capacity to
                                                  after taking account of all monthly                      may only verify and report the                         meet these ongoing, housing-related
                                                  obligations, the ratio of the borrower’s                 minimum income necessary to qualify a                  monthly obligations, even where the
                                                  housing payment to the borrower’s                        borrower for a loan (or for the type of                borrower does not pay these obligations
                                                  monthly income, or the ratio of the                      loan or interest rate sought). For                     on a monthly basis.
                                                  borrower’s total monthly installment                     example, two borrowers with the same                      The proposed rules also require that
                                                  payments to the borrower’s income.151                    loan type and the same reported front-                 originators verify and document the
                                                     Intuitively, a measure of a borrower’s                end DTI ratio might actually have                      borrower’s monthly gross income,
                                                  debt service burden ought to be an                       different incomes because one                          monthly housing debt, and monthly
                                                  important predictor of default. These                    borrower’s spouse works, but this                      total debt in accordance with the
                                                  burdens are often measured as the ratio                  additional income was not necessary to                 verification and documentation
                                                                                                           qualify for the loan and so was not                    standards of the HUD Handbook, as
                                                     149 The appraisal regulations and guidance
                                                                                                           reported.                                              incorporated into the Additional QRM
                                                  promulgated by the Federal banking agencies
                                                  generally do not apply to real estate-related                The rule proposes a front-end ratio                Standards Appendix.155 The proposed
                                                  financial transactions that qualify for sale to a U.S.   limit of 28 percent and a back-end ratio               rules also require the originator to
                                                  government agency or to the Enterprises, or in           limit of 36 percent, which are consistent              determine the amount of the monthly
                                                  which the appraisal conforms to the appropriate                                                                 first-lien mortgage payment and, in the
                                                  Enterprise’s appraisal standards applicable to that
                                                                                                           with the overall conservative nature of
                                                  category of real estate. See 12 CFR 34.43(a)(10)         the QRM standards. These ratios are                    case of refinancing transactions, the
                                                  (OCC); 12 CFR 225.63(a)(10); (Board); 12 CFR             consistent with the standards widely                   monthly payment for other debt secured
                                                  323(a)(10) (FDIC). The Interagency Appraisal and         used in the early 1990s that limited                   by the property (including any open-end
                                                  Evaluation Guidelines clarify that such transactions                                                            credit transaction as if fully drawn) that
                                                  are expected to meet all of the underwriting
                                                                                                           front-end ratios to a maximum of 25 to
                                                  requirements of the appropriate agency or                28 percent and back-end ratios to a                    to the creditor’s knowledge would exist
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  Enterprise, including its appraisal requirements.                                                               at the closing of the refinancing
                                                  Residential mortgage loans sold to the Enterprises          152 The Agencies’ assessment of the available
                                                  will, in any case, continue to be required to meet       information suggested that the residual income            154 See National Association of Realtors,
                                                  appraisal standards of the appropriate Enterprise        method for assessing the borrowers’ ability to repay   ‘‘Financing the Home Purchase: The Real Estate
                                                  applicable to that category of real estate.              is neither widely used nor consistently calculated.    Professional’s Guide,’’ Chicago: National
                                                     150 Residual income is the borrower’s remaining       Therefore, the Agencies are not proposing to require   Association of Realtors (1993), at 20.
                                                  or ‘‘residual’’ monthly income after all of the          the use of the residual income method for purposes        155 Section 129C(b)(2)(A)(iii) of TILA requires that
                                                  borrower’s monthly obligations, including the            of determining a borrower’s ability to repay.          the originator of a QM verify and document the
                                                  residual mortgage loan, have been paid.                     153 See Appendix A to this Supplementary            income and financial resources relied upon in
                                                     151 See 15 U.S.C. 78o–11(e)(4)(B)(ii).                Information.                                           qualifying the borrower for the loan.



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                                                  24126                       Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  transaction. These determinations                          Under the proposal, in order for a                         future payment of taxes), unless the
                                                  would be based on the maximum                              mortgage to be a QRM, the total points                     charge is reasonable, the creditor and
                                                  interest rate chargeable during the first                  and fees payable by the borrower in                        mortgage originator receive no direct or
                                                  five years after the date on which the                     connection with the mortgage                               indirect compensation in connection
                                                  first regular periodic payment will be                     transaction may not exceed three                           with the charge, and the charge is not
                                                  due and a payment schedule that fully                      percent of the total loan amount, which                    paid to an affiliate of the creditor or
                                                  amortizes the mortgage over the full                       would be calculated in the same manner                     mortgage originator; (4) Premiums or
                                                  term of the loan, which cannot exceed                      as in Regulation Z.158 Under Regulation                    other charges payable at or before
                                                  30 years. These requirements are based                     Z, the ‘‘total loan amount’’ is calculated                 closing for any credit life, credit
                                                  on those that apply to QMs under                           by taking the ‘‘amount financed,’’ as                      disability, credit unemployment, or
                                                  section 129C of TILA.156                                   defined in 12 CFR 226.18(b), and                           credit property insurance, or any other
                                                                                                             deducting any ‘‘points and fees’’ that are                 accident, loss-of-income, life or health
                                                  Request for Comment
                                                                                                             financed by the creditor and not                           insurance, or any payments made
                                                     123. The Agencies seek comment on                       otherwise deducted in calculating the                      directly or indirectly for any debt
                                                  the appropriateness of the proposed                        amount financed. In this way, the three                    cancellation or suspension agreement or
                                                  front-end ratio limit of 28 percent and                    percent limit on points and fees for                       contract; 161 and (5) All prepayment fees
                                                  the proposed back-end ratio limit of 36                    QRMs will be based on the amount of                        or penalties that are incurred by the
                                                  percent.                                                   credit extended to the borrower without                    consumer if the consumer refinances a
                                                  8. Points and Fees                                         taking into account the financed points                    previous loan made or currently held by
                                                                                                             and fees themselves.                                       the same creditor or an affiliate of the
                                                     Section l.15(d)(7) of the proposed                         For QRMs, the proposed rules would                      same creditor.162
                                                  rules reflects the restriction on ‘‘points                 define ‘‘points and fees’’ consistent with
                                                  and fees’’ for QMs contained in section                                                                                  Items excluded from the finance
                                                                                                             the current definition of ‘‘points and                     charge under 12 CFR 226.4(c), 226.4(d)
                                                  129C(b)(2)(A)(vii) of TILA. As with                        fees’’ under the Board’s Regulation Z,
                                                  other standards set forth in TILA for                                                                                 and 226.4(e) would be excluded from
                                                                                                             but would include the additional items                     the proposal’s definition of ‘‘points and
                                                  QMs, the Agencies have considered the                      added to the TILA definition of ‘‘points
                                                  statutory provisions governing points                                                                                 fees,’’ unless those items are specifically
                                                                                                             and fees’’ by the Dodd-Frank Act.                          included elsewhere in the definition of
                                                  and fees for QMs and have sought to                        Specifically, the term ‘‘points and fees’’
                                                  ensure that the standards applicable to                                                                               ‘‘points and fees.’’ The proposed rules do
                                                                                                             would include: (1) All items required to                   not exclude ‘‘bona fide discount points’’
                                                  QRMs would be no broader than those                        be disclosed as ‘‘finance charges’’ under
                                                  that may potentially apply to QMs.157                                                                                 or certain bona fide third-party charges
                                                                                                             Regulation Z (12 CFR 226.4(a) and                          from ‘‘points and fees.’’ The Agencies are
                                                                                                             226.4(b)), except interest or the time-                    also not proposing an adjustment to the
                                                    156 See  section 129C(b)(2)(A)(iv) and (v) of TILA.
                                                    157 Section
                                                                                                             price differential; (2) All compensation                   limitation on points and fees for smaller
                                                                 129C(b)(2)(C) of TILA defines the term
                                                  ‘‘points and fees’’ with reference to the definition of    paid directly or indirectly by a                           loans as required for QMs under section
                                                  ‘‘points and fees’’ in section 103(aa)(4) of TILA,         consumer or creditor to a ‘‘mortgage                       129C(b)(2)(D) of TILA.
                                                  which deals with ‘‘high-cost’’ mortgages. Under            originator’’ (as defined in section
                                                  section 103(aa)(4) of TILA, as amended by the              103(cc)(2) of TILA) from any source,159                    Request for Comment
                                                  Dodd-Frank Act, points and fees include: (i) All
                                                  items included in the ‘‘finance charge’’ under TILA,       including a mortgage originator that is                       124(a). The Agencies request
                                                  except interest or the time-price differential; (ii) All   also the creditor in a table-funded                        comment on all aspects of the proposed
                                                  compensation paid directly or indirectly by a              transaction; 160 (3) All items excluded                    definition of ‘‘points and fees’’ for QRM
                                                  consumer or creditor to a mortgage originator (as          from the ‘‘finance charge’’ under
                                                  defined in section 103(cc)(2) of TILA) from any                                                                       purposes. In addition, the Agencies seek
                                                  source, including a mortgage originator that is also       Regulation Z listed in 12 CFR                              comment on the following matters.
                                                  the creditor in a table-funded transaction; (iii) Each     226.4(c)(7) (other than amounts held for                   124(b). Should the exclusion for ‘‘bona
                                                  of the charges listed in section 106(e) of TILA
                                                  (except an escrow for future payment of taxes) that
                                                                                                                                                                        fide discount points’’ and certain bona
                                                                                                             that are incurred by the consumer if the consumer          fide third-party charges be included in
                                                  are excluded from the definition of the ‘‘finance          refinances a previous loan made or currently held
                                                  charge’’ (under section 106(e) of TILA, the following
                                                                                                             by the same creditor or an affiliate of the creditor;      the final rule? 124(c). If so, in what
                                                  items when charged in connection with any                                                                             manner? 124(d) Would an adjustment to
                                                                                                             and (vii) Such other charges as the Board
                                                  extension of credit secured by an interest in real
                                                  property are not included in the computation of the
                                                                                                             determines to be appropriate.                              the limitation on points and fees for
                                                  finance charge with respect to that transaction: fees        For purposes of a ‘‘qualified mortgage,’’ section        smaller loans, if implemented under
                                                                                                             129C(b)(2)(C) of TILA provides some exceptions to
                                                  or premiums for title examination, title insurance,
                                                                                                             the definition of ‘‘points and fees’’ under section
                                                                                                                                                                        section 129C(b)(2)(D) of TILA, be
                                                  or similar purposes; fees for preparation of loan-                                                                    appropriate for QRMs?
                                                  related documents; escrows for future payments of          103(aa)(4) of TILA. In calculating points and fees for
                                                  taxes and insurance; fees for notarizing deeds and         purposes of the three percent limit applicable to
                                                                                                             QMs, points and fees do not include bona fide third        9. Assumability Prohibition
                                                  other documents; appraisal fees, including fees
                                                  related to any pest infestation or flood hazard            party charges not retained by the mortgage                   Under the proposed rules, a QRM
                                                  inspections conducted prior to closing; and fees or        originator, creditor, or an affiliate of the creditor or
                                                                                                             mortgage originator. See section 129C(b)(2)(C)(i) of       could not be assumable by any person
                                                  charges for credit reports), unless the charge is
                                                  reasonable, the creditor receives no direct or             TILA. In addition, for purposes of computing the           who was not a borrower under the
                                                  indirect compensation, and the charge is paid to a         total points and fees for the three percent QM limit,
                                                  third party unaffiliated with the creditor; (iv)           the total points and fees excludes certain bona fide          161 All such charges are included in ‘‘points and

                                                  Premiums or other charges payable at or before             discount points if certain conditions are met. See         fees’’ under section 103(aa)(4)(D) of TILA and, thus,
                                                  closing for any credit life, credit disability, credit     section 129C(b)(2)(C)(ii)–(iv) of TILA.                    are included in points and fees under the proposal.
                                                                                                               158 See 12 CFR 226.32(a)(1)(ii) and (b)(1).
                                                                                                                                                                        Another amendment to TILA added by the Dodd-
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                                                  unemployment, or credit property insurance, or any
                                                                                                               159 Under section 103(aa)(4)(B) of TILA, as              Frank Act (Section 129C(d) of TILA), restricts
                                                  other accident, loss-of-income, life or health
                                                  insurance, or any payments made directly or                amended by the Dodd-Frank Act, compensation                creditors from financing certain of these charges.
                                                  indirectly for any debt cancellation or suspension         paid to a mortgage originator ‘‘from any source’’ is       This prohibition will be implemented when the
                                                  agreement or contract, except that insurance               included in ‘‘points and fees.’’                           Board or CFPB implements that section of TILA.
                                                  premiums or debt cancellation or suspension fees             160 For clarity, the proposal does not include the          162 Section 103(aa)(4) of TILA also includes in

                                                  calculated and paid in full on a monthly basis are         phrase ‘‘from any source’’ because the proposal            ‘‘points and fees’’ the maximum prepayment fees
                                                  not considered financed by the creditor; (v) The           would include all compensation paid directly or            and penalties which may be charged or collected
                                                  maximum prepayment fees and penalties that may             indirectly by a consumer or creditor to a mortgage         under the terms of the credit transaction. However,
                                                  be charged or collected under the terms of the credit      originator, which would necessarily include                under the proposed rule, QRMs would not be
                                                  transaction; (vi) All prepayment fees or penalties         compensation from any source.                              permitted to have prepayment penalties.



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                       24127

                                                  original mortgage transaction. If a                     creditor will implement procedures for                   mortgages, including bank and bank-
                                                  mortgage were assumable after                           addressing any whole loan owned by                       affiliated servicers and servicers that are
                                                  origination or its securitization, it is                the creditor (or any of its affiliates) and              not affiliated with a bank.164 These
                                                  possible that the new borrower would                    secured by a subordinate lien on the                     standards would apply to residential
                                                  not satisfy the QRM requirements,                       same property that secures a QRM if the                  mortgages regardless of whether the
                                                  which could result in the credit quality                borrower becomes more than 90 days                       mortgages are QRMs, are securitized or
                                                  of the mortgage being significantly and                 past due on the QRM. If the QRM will                     are held in portfolio by a financial
                                                  negatively affected. While the rule could               collateralize any asset-backed securities,               institution. The primary objective of this
                                                  require that the loan essentially be re-                the creditor must disclose those                         separate interagency effort is to develop
                                                  underwritten using the QRM standards                    procedures or require them to be                         a comprehensive, consistent, and
                                                  in connection with an assumption to                     disclosed to potential investors within a                enforceable set of servicing standards
                                                  address these concerns, such a                          reasonable period of time prior to the                   for residential mortgages that servicers
                                                  requirement could impose significant                    sale of the asset-backed securities. The                 would have to meet. In addition to
                                                  costs on the holder or servicer of the                  Agencies are proposing inclusion of this                 servicing matters covered in this
                                                  mortgage, and potentially increase the                  element in the policies and procedures                   proposal, the separate interagency effort
                                                  cost and reduce the liquidity of QRMs.                  because modification of the QRM could                    on national mortgage servicing
                                                                                                          affect the status of subordinate                         standards is taking into consideration a
                                                  10. Default Mitigation
                                                                                                          mortgages, and the existence of a                        number of other aspects of servicing,
                                                     The proposed rules also would                        subordinate mortgage could affect the                    including the quality of customer
                                                  require that the originator of a QRM                    structuring of actions to mitigate losses                service provided throughout the life of
                                                  incorporate into the mortgage                           on the QRM.                                              a mortgage; the processing and handling
                                                  transaction documents certain                              As proposed, the mortgage originator                  of customer payments; foreclosure
                                                  requirements regarding servicing                        must provide disclosure of the foregoing                 processing; operational and internal
                                                  policies and procedures for the                         default mitigation commitments to the                    controls; and servicer compensation and
                                                  mortgage, including requirements                        borrower at or prior to the closing of the               payment obligations. The agencies
                                                  regarding loss mitigation actions,                      mortgage transaction. Also, the mortgage                 participating in this separate effort
                                                  subordinate liens, and responsibility for               originator would be required to include                  currently anticipate requesting comment
                                                  assumption of these requirements if                     terms in the mortgage transaction                        on proposed standards later this year,
                                                  servicing rights with respect to the QRM                documents under which the creditor                       with the goal of having final standards
                                                  are sold or transferred. Timely initiation              commits to include in its servicing                      issued shortly afterward. At this time,
                                                  of loss mitigation activities often                     policies and procedures that it will not                 with respect to specific servicing
                                                  reduces the risk of subsequent default                  sell transfer, or assign servicing rights                standards, the Agencies are requesting
                                                  on mortgages backing the securitization                 for the mortgage loan unless the transfer                comment only on those particular
                                                  transaction. Disclosure of the policies                 agreement requires the purchaser,                        standards included in this proposed
                                                  and procedures governing loss                           transferee or assignee servicer to abide                 rulemaking.
                                                  mitigation activities also will inform                  by the default mitigation commitments
                                                  borrowers and provide clarity regarding                 of the creditor as if the purchaser,                     Request for Comment
                                                  the consequences of default.                            transferee or assignee were the creditor                    125. The Agencies solicit comment on
                                                     Specifically, the proposed rules                     under this section of the proposed                       whether the definition of QRM should
                                                  would require that the QRM mortgage                     rule.163                                                 include servicing requirements.
                                                  transaction documents include a                            It is noted that there is an ongoing                     126(a). Should the proposed servicing
                                                  provision obliging the creditor of the                  interagency effort among certain Federal                 requirements be more or less robust?
                                                  QRM to have servicing policies and                      regulatory agencies, including some of                   126(b) If so, how should the proposed
                                                  procedures to promptly initiate                         the Agencies joining in this proposed                    servicing requirements be changed?
                                                  activities to mitigate risk of default on               rulemaking, to develop national                             127(a). Should servicers be required,
                                                  the mortgage loan (within 90 days after                 mortgage servicing standards that would                  as is proposed, to have policies and
                                                  the mortgage loan becomes delinquent,                   apply to servicers of residential                        procedures that provide for loss
                                                  if such delinquency has not been cured)                                                                          mitigation activities if the borrower is
                                                  and to take loss mitigation actions, such                  163 As noted above, the policies and procedures       90 days delinquent, but default may not
                                                  as engaging in loan modifications, in the               prescribed under the proposed rule require the           have occurred under the mortgage loan
                                                                                                          creditor’s procedures with respect to subordinate
                                                  event the estimated net present value of                liens held by the creditor or affiliates on the
                                                                                                                                                                   transaction documents?
                                                  such action exceeds the estimated net                   mortgaged property to be disclosed to potential             127(b). Should the policies and
                                                  present value of recovery through                       investors if the creditor subsequently securitizes the   procedures require, or at least not
                                                  foreclosure, without regard to whether                  QRM. In addition, the Agencies expect the                prohibit, initiation of loss mitigation
                                                                                                          creditor’s commitments to have servicing policies        activities, including loan modifications,
                                                  the particular loss mitigation action                   and procedures as specified in the proposed rule
                                                  benefits the interests of a particular                  would be reflected in the servicing agreement(s) for     when default is reasonably foreseeable?
                                                  class of investors in a securitization.                 the securitization, which set forth the terms under         127(c). What would be the practical
                                                  The loss mitigation policies and                        which the servicer will service the securitized          implications of such an approach?
                                                                                                          assets, and would thus be disclosed to potential            128(a). Should servicers be required,
                                                  procedures must also take into account                  investors in a securitization offering covered by the
                                                  the borrower’s ability to repay and other               SEC’s Regulation AB. If the servicing is transferred
                                                                                                                                                                   as is proposed, to have policies and
                                                  appropriate underwriting criteria. The
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                                                                                                          from the creditor to another entity who acts as
                                                                                                          securitization servicer, the Agencies expect these          164 Participating agencies in the effort include the
                                                  policies and procedures must include
                                                                                                          commitments would nevertheless be carried                Federal Reserve Board, the Office of the
                                                  servicing compensation arrangements                     forward to the servicing agreements for the              Comptroller of the Currency, the Federal Deposit
                                                  that are consistent with the creditor’s                 securitizations and disclosed pursuant to                Insurance Corporation, the Office of Thrift
                                                  commitment to engage in loss mitigation                 Regulation AB, because the policies and procedures       Supervision, the Federal Housing Finance Agency,
                                                  activities.                                             prescribed under the proposed rule require the           the Department of Housing and Urban Development
                                                                                                          creditor not to transfer QRM servicing unless the        (including the Government National Mortgage
                                                     In addition, under the proposal, the                 agreement requires the transferee to abide by the        Association (Ginnie Mae)), the Consumer Financial
                                                  creditor’s policies and procedures                      same kind of default mitigation commitments as are       Protection Bureau, and the Department of the
                                                  would be required to provide that the                   required of the creditor.                                Treasury.



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                                                  24128                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  procedures that provide for loss                        mitigation activity maximize the                       of national mortgage servicing standards
                                                  mitigation actions for QRMs (within 90                  recovery based on net present value to                 is a more effective means to address the
                                                  days after delinquency, unless the                      avoid potential conflicts of interests                 problems associated with servicing of
                                                  delinquency is cured) when the                          between different classes of investors?                all loans.
                                                  estimated net present value of the action                  135(b). How would that be
                                                                                                                                                                 D. Repurchase of Loans Subsequently
                                                  would exceed the estimated net present                  determined?
                                                                                                             135(c). Would this approach improve                 Determined To Be Non-Qualified After
                                                  value of recovery through foreclosure?                                                                         Closing
                                                     128(b). Should those policies and                    the ability of servicers to best represent
                                                  procedures be required to include                       the interest of all investors?                            As required by section 15G and
                                                  specific actions, such as (i) restructuring                135(d). What would be the practical                 discussed in greater detail in Part IV.B
                                                  the mortgage loan; (ii) reducing the                    implications under such an approach?                   of this Supplementary Information, the
                                                  borrower’s payments through interest                       136(a). Are the proposed                            proposed rules require that the
                                                  rate reduction, extension of loan                       compensation requirements                              depositor of the asset-backed security
                                                  maturity, or similar actions; (iii) making              appropriate?                                           certify that it has evaluated the
                                                  principal reductions, or (iv) taking other                 136(b). For example, should the                     effectiveness of its internal supervisory
                                                  loss mitigation action in the event that                compensation structure be more                         controls with respect to the process for
                                                  the estimated net present value of that                 specific, depending on the type of risk                ensuring that all assets that collateralize
                                                  action would exceed the estimated net                   mitigation action deemed appropriate?                  the asset-backed security are QRMs and
                                                  present value of recovery though loan                      136(c). If so, how?                                 has concluded that such internal
                                                  foreclosure?                                               137(a). Pursuant to servicers’                      supervisory controls are effective.
                                                     128(c). What would be the practical                  obligations to investors under the terms               Nevertheless, the Agencies recognize
                                                  implications of such an approach?                       of securitization transaction documents,               that, despite the use of robust processes
                                                     129. The Agencies seek comment on                    servicers are generally required to                    and procedures, it is possible that one
                                                  whether other servicing standards                       advance scheduled payments of                          or more loans included in a QRM
                                                  should be included, consistent with the                 principal and interest to investors after              securitization transaction may later be
                                                  statute’s authority.                                    a borrower has become past due for                     determined to have not met the QRM
                                                     130(a). What are the practical                       some period of time (with respect to                   definition due to inadvertent error. For
                                                  implications of the proposed QRM                        private label securities, usually until                example, an originator conducting post-
                                                  servicing standards?                                    foreclosure is started), to the extent that            origination file reviews for compliance
                                                     130(b). Do commenters envision                       such monthly advances are expected to                  or internal audit purposes may find that
                                                  operational issues in implementing the                  be reimbursed from future payments                     some aspects of the documentation
                                                  standards?                                              and collections or insurance payments                  required to verify the borrower’s
                                                     130(c). If so, please describe.                      or proceeds of liquidation of the related              monthly gross income were not
                                                     130(d). Are the standards sufficiently               mortgage loan. These monthly advances                  obtained. If the discovery of such an
                                                  clear?                                                  are intended to maintain a regular flow                error after closing of the securitization
                                                     130(e). If not, which should be                      of scheduled principal and interest                    terminated the securitization’s QRM
                                                  clarified?                                              payments on the certificates rather than               exemption, then sponsors and investors
                                                     131. Would the proposed QRM                          to guarantee or insure against losses.                 may well be unwilling to participate in
                                                  servicing conditions restrict or impede                 Does funding of these delinquent                       the securitization of QRMs. On the other
                                                  the ability or willingness of certain                   payments create liquidity constraints for              hand, unless sponsors or depositors face
                                                  classes of originators to originate QRMs?               servicers that incent servicers to take                some penalty for the inclusion in a QRM
                                                     132(a). Is the scope of the QRM                      action (e.g., start foreclosure) that may              securitization transaction of loans that
                                                  servicing standards appropriate?                        not be in the investors’ best interest?                do not meet the QRM standards,
                                                     132(b). Are there alternatives to QRM                   137(b). Should the Agencies put                     sponsors and depositors may not have
                                                  servicing standards that would better                   limits on servicers advancing                          the proper incentives to use all
                                                  address servicing issues?                               delinquent mortgagors’ payments of                     reasonable efforts to ensure that
                                                     133(a). Should the servicing                         principal and interest to investors?                   securitizations relying on the QRM
                                                  requirements be part of the pooling and                    137(c). Would such a limitation harm                exemption are collateralized only by
                                                  servicing agreement rather than part of                 investors’ interests?                                  loans that meet all of the QRM
                                                  the mortgage transaction documents?                        137(d). What are the practical                      standards.
                                                     133(b). Should they be included in                   implications of such an approach?                         The proposal seeks to balance these
                                                  both sets of documentation?                                138(a). Should the Agencies require                 interests by providing that a sponsor
                                                     134(a). If a creditor or an affiliate has            servicing standards for a broader class of             that has relied on the QRM exemption
                                                  an ownership interest in a subordinate                  securitized residential mortgages?                     with respect to a securitization
                                                  lien mortgage and the creditor services                    138(b). If so, how?                                 transaction would not lose the
                                                  the first lien mortgage, should the                        139. For commenters responding to                   exemption, with respect to the
                                                  creditor be required to implement pre-                  any of the foregoing questions or with                 transaction, if, after closing of the
                                                  defined processes to address any                        recommendations for different or                       securitization transaction, it is
                                                  potential conflicts of interest when the                additional approaches to servicing                     determined that one or more of the
                                                  first lien loan becomes 90 days past                    standards, are such approaches                         mortgages collateralizing the ABS do
                                                                                                          consistent with the statutory factors the              not meet all of the criteria to be a QRM,
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                                                  due?
                                                     134(b). What types of processes                      Agencies are directed to take into                     provided that certain conditions are
                                                  should be required?                                     account under the QRM exemption?                       met. First, the depositor must have
                                                     134(c). Would specification of a                        140. The Agencies are in the process                certified that it evaluated the
                                                  particular process unduly limit the                     of developing national mortgage                        effectiveness of its internal supervisory
                                                  ability of the creditor to address                      servicing standards, which would cover                 controls with respect to the process for
                                                  different circumstances that may arise?                 all residential mortgage loans, including              ensuring that all of the loans that
                                                     135(a). Should the Agencies impose a                 QRMs. In light of this, the Agencies seek              collateralize the ABS are QRMs and
                                                  standard requiring that a particular risk               comment on whether the establishment                   concluded that its internal supervisory


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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                          24129

                                                  controls are effective, as required by                  exemption). An alternative approach to                 combined LTV for cash-out
                                                  § l.15(b)(4) of the proposed rules.                     implementing the exemption for QRMs                    refinancings.
                                                  Second, the sponsor must repurchase                     within the context of section 15G would
                                                                                                                                                                 Request for Comment
                                                  the loan(s) determined to not be QRMs                   be to create a broader definition of a
                                                  from the issuing entity at a price at least             QRM that includes a wider range of                        143. The Agencies seek comment on
                                                  equal to the remaining principal balance                mortgages of potentially lower credit                  the potential benefits and costs of the
                                                  and accrued interest on the loan(s). The                quality, and make the risk retention                   alternative approach, with a broader
                                                  sponsor must complete this repurchase                   requirements stricter for non-QRM                      QRM exemption combined with a
                                                  no later than ninety (90) days after the                mortgages, such as by, for example,                    stricter set of risk retention
                                                  determination that the loan(s) does not                 providing sponsors with less flexibility               requirements for non-QRM mortgages.
                                                  satisfy the QRM requirements. Third,                    in how they retain risk (e.g., requiring                  144(a). If such an alternative approach
                                                  the sponsor must promptly notify (or                    vertical risk retention or increasing the              were to be adopted, what stricter risk
                                                  cause to be notified) all investors of the              base risk retention requirement), in                   retention requirements would be
                                                  ABS of any loan(s) that are required to                 order to provide additional incentives to              appropriate in order to provide
                                                  be repurchased by the sponsor pursuant                  originate QRM loans. Under this type of                additional incentives to underwrite a
                                                  to this repurchase obligation, including                alternative approach, the proposed QRM                 greater share of origination volume
                                                  the principal amount of the repurchased                 standards could be modified as                         within the QRM definition?
                                                  loan(s) and the cause for such                          follows—                                                  144(b). Should such stricter
                                                  repurchase.                                                (a) If the mortgage transaction is a                requirements involve the form of risk
                                                     These conditions are intended to                     purchase transaction or rate and term                  retention or a higher amount of risk
                                                  provide a sponsor with the opportunity                  refinancing, the combined LTV ratio of                 retention?
                                                  to correct inadvertent errors by                        the mortgage transaction could not                        144(c). Are there other changes that
                                                  promptly repurchasing any non-                          exceed 90 percent (with no restriction                 would achieve the same objective?
                                                  qualified loan(s) and removing such                     on the existence of a subordinate lien at                 145. How would this approach help to
                                                  non-qualifying loan(s) from the pool,                   closing of a purchase transaction);                    ensure high quality loan underwriting
                                                  while protecting investors. Moreover, in                   (b) If the mortgage transaction is a                standards and align the interests of
                                                  light of this buy-back requirement,                     cash-out refinancing, the combined LTV                 investors?
                                                  sponsors should continue to have a                      ratio of the mortgage transaction could                   146(a). Would this approach have the
                                                  strong economic incentive to ensure that                not exceed 75 percent;                                 practical effect of exempting the
                                                  all loans backing a QRM securitization                     (c) The borrower’s required cash                    securitization of most residential loans
                                                  satisfy all of the conditions applicable to             down payment on a purchase mortgage                    from the risk retention requirement?
                                                  QRMs prior to closing of the transaction.               could be reduced to—                                      146(b). If so, how would this
                                                                                                             (1) 10 percent (rather than the                     positively and/or negatively affect
                                                  Request for Comment                                     proposed 20 percent) of the lesser of the              investors in such securitizations?
                                                     141(a). Should the Agencies require,                 property’s market value or purchase                       146(c). Would an offering of an ABS
                                                  as a condition to qualify for the QRM                   price, plus                                            backed by loans complying with the
                                                  exemption, that the sponsor repurchase                     (2) The closing costs payable by the                lower standards in the alternative
                                                  the entire pool of loans collateralizing                borrower in connection with the                        approach adequately promote the
                                                  the ABS if the amount or percentage of                  mortgage transaction; and                              necessary alignment of incentives
                                                  the loans that are required to be                          (d) A borrower’s maximum front-end                  among originators, sponsors, and
                                                  repurchased due to the failure to meet                  DTI ratio could be increased to—                       investors?
                                                  the QRM standards reaches a certain                        (1) 33 percent, if payments under the                  147. What impact might a broader
                                                  threshold?                                              mortgage could not increase by more                    QRM definition have on the pricing,
                                                     141(b). If so, what threshold would be               than 20 percent over the life of the                   liquidity, and availability of loans that
                                                  appropriate?                                            mortgage; or                                           might fall outside the broader QRM
                                                     142(a). Should the Agencies permit a                    (2) 28 percent, if payments under the               boundary?
                                                  sponsor, within the first four months                   mortgage could increase by more than                      148. Would the lower QRM standards
                                                  after the closing of a QRM                              20 percent over the life of the mortgage;              under the alternative approach be
                                                  securitization, to substitute a                            (e) A borrower’s maximum back-end                   consistent with the requirement that
                                                  comparable QRM loan for a residential                   DTI ratio would be increased to—                       QRMs be fully exempted from section
                                                  mortgage loan that is determined, post-                    (1) 41 percent, if payments under the               15G’s risk retention requirements?
                                                  closing, to not be a QRM (in lieu of                    mortgage could not increase by more                       149. How could this type of
                                                  purchasing the loan for cash)?                          than 20 percent over the life of the                   alternative approach be designed to
                                                     142(b). If so, is four months an                     mortgage; or                                           limit the likelihood that loans with
                                                  appropriate period or should the rule                      (2) 38 percent, if payments under the               significant credit risk are included in
                                                  allow more or less time?                                mortgage could increase by more than                   the pool and thus not subject to risk
                                                                                                          20 percent over the life of the mortgage;              retention?
                                                  E. Request for Comment on Possible                      and
                                                  Alternative Approach                                       (f) Mortgage guarantee insurance or                 V. Reduced Risk Retention
                                                     As discussed previously, the                         other types of insurance or credit                     Requirements for ABS Backed by
                                                  approach taken by the proposal to                       enhancements provided by third parties                 Qualifying Commercial Real Estate,
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  implementing the exemption for QRMs                     could be taken into account in                         Commercial or Automobile Loans
                                                  within the broader context of section                   determining whether the borrower met                      Under Section 15G, the regulations
                                                  15G is to limit QRMs to mortgages of                    the applicable combined LTV                            issued by the Agencies must include
                                                  very high credit quality, while                         requirement, but such insurance or                     underwriting standards for residential
                                                  providing sponsors considerable                         enhancements would not alter the 90                    mortgages, commercial real estate (CRE)
                                                  flexibility in how they meet the risk                   percent maximum combined LTV for                       loans, commercial loans, and
                                                  retention requirements for loans that do                purchase transactions and rate and term                automobile loans, as well as any other
                                                  not qualify as QRMs (or for another                     refinancings and 75 percent maximum                    asset class that the Federal banking


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                                                  24130                        Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  agencies and the Commission deem                          loans and automobile loans) capture a                  inclusion of mortgage guarantee
                                                  appropriate.165 These underwriting                        predominance of all ABS issuances by                   insurance or other types of insurance or
                                                  standards, which are to be established                    dollar volume where the underlying                     credit enhancements, what financial
                                                  by the Federal banking agencies, must                     pool is comprised of relatively                        eligibility standards should be
                                                  specify terms, conditions, and                            homogeneous assets. Moreover, general                  incorporated for mortgage insurance or
                                                  characteristics of a loan within such                     information for ABS issuances                          financial product providers?
                                                  asset class that indicate low credit risk                 collateralized exclusively by CRE,                        152. Should additional asset classes
                                                  with respect to the loan.166 Section 15G                  commercial, and automobile loans is                    beyond those specified in section 15G
                                                  provides that the Agencies must allow                     widely available and, due to the                       be established and, if so, how should
                                                  a securitizer to retain less than five                    homogeneity of the underlying pool,                    the associated underwriting standards
                                                  percent of the credit risk of loans within                lends itself to the establishment of                   for such additional asset classes be
                                                  an asset class that meet the                              uniform underwriting standards                         defined? Commenters are encouraged to
                                                  underwriting standards set jointly by                     establishing low credit risk for all of the            provide supporting data regarding the
                                                  the Federal banking agencies if such                      assets within the pool. These                          prevalence of each asset class in the
                                                  loans are securitized through the                         characteristics also should facilitate the             ABS market, as well as loan-level
                                                  issuance of an ABS.167                                    ability of investors and supervisors to                performance data that provides
                                                     The following discussion addresses                     monitor a sponsor’s compliance with                    information on the characteristics,
                                                  the underwriting standards established                    the proposed standards and disclosure                  terms, and conditions of the underlying
                                                  by the Federal banking agencies for CRE                   requirements in a timely and                           loans and that may be useful in
                                                  loans, commercial loans, and                              comprehensive manner.                                  developing standards that identify loans
                                                  automobile loans.                                           In contrast, many of the other types of              within such asset class that have low
                                                                                                            ABS issuances are collateralized by                    credit risk.
                                                  A. Asset Classes
                                                                                                            assets that exhibit significant
                                                     As directed by section 15G, § l.18 to                                                                         B. ABS Collateralized Exclusively by
                                                                                                            heterogeneity, or assets that by their
                                                  § l.20 of the proposed rules include                                                                             Qualifying CRE Loans, Commercial
                                                                                                            nature exhibit relatively high credit risk.
                                                  underwriting standards for CRE loans,                                                                            Loans, or Auto Loans
                                                                                                            Such factors make it difficult to develop
                                                  commercial loans, and automobile loans                    underwriting standards establishing low                   Section 15G(c)(1)(B)(ii) provides that
                                                  that would allow ABS backed                               credit risk that can be, as a practical                a sponsor of an ABS issuance
                                                  exclusively by loans that meet these                      matter, applicable to an entire class of               collateralized exclusively by loans that
                                                  underwriting standards to qualify for a                   underlying assets in the manner                        meet the underwriting standards
                                                  less than five percent risk retention                     described under section 15G.                           prescribed by the Federal banking
                                                  requirement. As discussed in further                      Accordingly, for purposes of the                       agencies under section 15G(c)(2)(B)
                                                  detail in Part IV of this Supplementary                   proposed rules, the Federal banking                    shall be required to retain less than five
                                                  Information, the proposed rules provide                   agencies and the Commission do not                     percent of the credit risk of the
                                                  a complete exemption from the risk                        propose to establish asset classes in                  securitized loans. The Agencies are
                                                  retention requirements for securitization                 addition to those set forth in section                 proposing a zero percent risk retention
                                                  transactions that are collateralized                      15G.                                                   requirement (that is, the sponsor would
                                                  solely by residential mortgages that                                                                             not be required to retain any portion of
                                                  qualify as QRMs. Accordingly, the                         Request for Comment                                    the credit risk) for ABS issuances
                                                  proposed rules do establish separate                         150(a). Should underwriting                         collateralized exclusively by loans from
                                                  rules for securitizations of residential                  standards be developed for residential                 one of the asset classes specified in the
                                                  mortgages that have terms, conditions                     mortgage loans that are different from                 proposed rules, and which meet the
                                                  and characteristics that indicate a low                   those proposed for the QRM definition                  proposed underwriting standards. In
                                                  credit risk as required by section                        and under which a sponsor would be                     proposing a zero risk retention
                                                  15G(c)(2)(B). The Agencies do not                         required to retain more than zero but                  requirement for ABS backed by
                                                  propose to establish additional                           less than five percent of the credit risk?             qualifying loans within these asset
                                                  underwriting standards for residential                       150(b). If so, what should those                    classes, the Agencies considered several
                                                  mortgages that would be different from                    underwriting standards be and how                      factors. As discussed below, the
                                                  those set forth in the QRM standards. In                  should they differ from those                          underwriting standards the Agencies
                                                  determining not to propose additional                     established under the QRM provisions?                  propose are, as is appropriate for a zero
                                                  standards, the Agencies considered,                          150(c). For example, should such                    percent risk retention requirement, very
                                                  among other things, whether requiring                     underwriting standards allow for a loan-               conservative. In addition, the Agencies
                                                  risk retention greater than zero percent                  to-value ratio of up to 90 percent for                 were concerned that establishing a risk
                                                  but less than five percent would provide                  purchase mortgage loans if there is                    retention requirement between zero and
                                                  an adequate incentive to sponsors and                     mortgage insurance that would provide                  five percent for qualifying assets within
                                                  originators to underwrite assets meeting                  investors similar amounts of loss                      these asset classes may not sufficiently
                                                  those standards.                                          protection upon default as would be                    incent securitizers to allocate the
                                                     Although the Agencies recognize that                   provided by a mortgage with a loan-to-                 resources necessary to ensure that the
                                                  securitization markets include                            value ratio of 80 percent?                             collateral backing an ABS issuance
                                                  securitizations collateralized by various                    150(d). If additional underwriting                  satisfies the proposed underwriting
                                                                                                            standards were established for                         standards, as there may be significant
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                                                  subcategories of assets with unique
                                                  characteristics, the Agencies believe that                residential mortgages, what amount of                  compliance costs to structure and
                                                  the asset classes specified in section                    risk retention less than five percent                  maintain the retention piece of a
                                                  15G (e.g., residential mortgages,                         should be required for loans meeting                   securitization structure (irrespective of
                                                  commercial mortgages, commercial                          such standards, and should it be                       how it is calibrated) and provide
                                                                                                            required to be held in a particular form?              required disclosures to investors.
                                                    165 See 15 U.S.C. 78o–11(c)(2)(A). 
                       151. If any new underwriting                           Sections l.18 to l.20 of the
                                                    166 See id. at sec. 78o–11(c)(2)(B). 
                  standards for residential mortgages were               proposed rules establish underwriting
                                                    167 See id. at sec. 78o–11(c)(1)(B)(ii). 
              to be established and permit the                       standards for CRE loans, commercial


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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                     24131

                                                  loans, and automobile loans that are                    issuances collateralized exclusively by                overall debt obligations during the next
                                                  designed to ensure that loans in these                  qualifying CRE, commercial, or                         two years, based on reasonable
                                                  asset classes, which qualify for a zero                 automobile loans that meet the                         projections. A commercial loan would
                                                  risk retention requirement, are of very                 underwriting standards set forth in                    meet the standards in the proposed
                                                  low credit risk. The proposed                           § l.18 to § l.20 of the proposed rules.                rules only if the originator determines
                                                  underwriting standards are based on the                 Commenters who support a partial                       that, during the borrower’s two most
                                                  Federal banking agencies’ expertise and                 exemption are encouraged to provide                    recently completed fiscal years and the
                                                  supervisory experience with respect to                  information regarding the methodology                  two-year period after the closing of the
                                                  the credit risk of the loans in each of the             the Agencies should use to calibrate the               commercial loan, the borrower had, or
                                                  prescribed asset classes. Commercial,                   retention requirement, in a manner that                is expected to have: (1) A total liabilities
                                                  CRE and automobile loans that meet the                  considers the relative risk of the                     ratio 168 of 50 percent or less; (2) a
                                                  conservative underwriting standards                     securitization transaction, both within                leverage ratio 169 of 3.0 or less; and (3)
                                                  included in the proposed rules are                      and across the proposed asset classes.                 a debt service coverage (DSC) ratio 170 of
                                                  referred to as ‘‘qualifying’’ commercial,                                                                      1.5 or greater.
                                                                                                          C. Qualifying Commercial Loans                            Under the proposed rules, the loan
                                                  CRE and automobile loans.
                                                     The Federal banking agencies have                      For an ABS issuance collateralized                   payments under the commercial loan
                                                  sought to make the standards for                        exclusively by commercial loans to                     must be determined based on straight-
                                                  qualifying commercial loans, CRE loans                  qualify for a zero percent risk retention              line amortization of principal and
                                                  and automobile loans, transparent to,                   requirement, the commercial loans must                 interest that fully amortize the debt over
                                                  and verifiable by, originators,                         satisfy the underwriting standards set                 a term that does not exceed five years
                                                  securitizers, investors and supervisors.                forth in § l.18 of the proposed rules.                 from the closing date for the loan. In
                                                  To facilitate compliance with the rule,                 The proposed rules define a commercial                 addition, the loan documentation must
                                                  as well as the supervision and                          loan as any secured or unsecured loan                  require payments no less frequently
                                                  enforcement of the rule, the proposed                   to a company or an individual for                      than quarterly over a term that does not
                                                  standards are generally prescriptive,                   business purposes, other than a loan to                exceed five years. The Federal banking
                                                  rather than principle-based.                            purchase or refinance a one-to-four                    agencies believe these proposed
                                                     The Agencies recognize that many                     family residential property, a loan for                methods for assessing a borrower’s
                                                  prudently underwritten CRE,                             the purpose of financing agricultural                  financial condition and ability to repay
                                                  commercial and automobile loans will                    production, or a loan for which the                    are consistent with industry standards
                                                  not meet the underwriting standards set                 primary source (that is, 50 percent or                 for evaluating the financial condition
                                                  forth in § l.18 to § l.20 of the                        more) of repayment is expected to be                   and repayment capacity of a borrower.
                                                  proposed rules. For example, the                        derived from rents collected from                         The proposal does not require that a
                                                  Agencies note that the proposed                         persons or entities that are not affiliates            commercial loan be secured by
                                                  standards are significantly more prudent                of the borrower. Commercial loans                      collateral in order to be a qualifying
                                                  and conservative than those required to                 encompass a wide variety of credit types               commercial loan. However, where the
                                                  attain a ‘‘pass’’ credit under the Federal              and terms. However, these loans                        loan is made on a secured basis, the
                                                  banking agencies’ supervisory practices.                generally are similar in that the primary              proposed rules include several
                                                  Sponsors of ABS backed by loans that                    source of repayment is revenue from the                conditions designed to ensure that the
                                                  do not meet the underwriting standards                  business operations of the borrower.                   collateral is maintained and available to
                                                  will be required to retain some of the                  The standards for a qualifying                         be used to satisfy the borrower’s
                                                  credit risk of the securitized loans in                 commercial loan use measures that are                  obligations under the loan, if necessary.
                                                  accordance with the proposed                            consistent with, but more prudent and                  For example, if the commercial loan is
                                                  regulation (unless another exemption is                 conservative than, industry standards                  originated on a secured basis, the
                                                  available). However, as noted                           for evaluating the financial condition                 originator must obtain a first-lien
                                                  previously, the proposed rules provide                  and repayment capacity of a borrower.                  security interest on the pledged
                                                  sponsors with several options for                                                                              property and include covenants in the
                                                                                                          1. Ability To Repay
                                                  complying with the risk retention                                                                              loan agreement that require the
                                                  requirements of section 15G so as to                       The historical performance of a                     borrower to maintain the condition of
                                                  reduce the potential for these                          borrower with respect to its outstanding               the collateral and permit the originator
                                                  requirements to disrupt securitization                  loan obligations is, generally, a useful               to inspect the collateral and the books
                                                  markets or materially affect the flow or                measure for evaluating whether the                     and records of the borrower. The loan
                                                  pricing of credit to borrowers and                      borrower will likely satisfy new debt                  documentation for the commercial loan
                                                  businesses. Moreover, the national pool                 obligations. However, even where a                     also must include covenants that require
                                                  of commercial loans, CRE loans and                      borrower has a consistent and                          the borrower to: (a) Pay all applicable
                                                  automobile loans that do not meet the                   documented record of satisfactory                      taxes, fees, charges and claims where
                                                  standards set forth in § l.18 to § l.20                 performance on prior debt obligations,
                                                  of the proposed rules should be                         the originator also must ensure that the                  168 Total liabilities ratio equals the borrower’s

                                                                                                          borrower’s financial condition has not                 total liabilities, determined in accordance with
                                                  sufficiently large, and include enough                                                                         GAAP divided by the sum of the borrower’s total
                                                  prudently underwritten loans, so that                   changed in a way that could adversely                  liabilities and equity, less the borrower’s intangible
                                                  ABS backed by such loans will be                        affect its capacity to satisfy new loan                assets, with each component determined in
                                                                                                          obligations. Accordingly, under § l.18
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                                                  routinely issued and purchased by a                                                                            accordance with GAAP.
                                                                                                                                                                    169 The leverage ratio equals the borrower’s total
                                                  wide variety of investors. As a result,                 of the proposed rules, the originator of
                                                                                                                                                                 debt divided by the borrower’s annual income
                                                  the market for such securities should be                a qualifying commercial loan must                      before expenses for interest, tax, depreciation, and
                                                  relatively liquid.                                      verify and document the financial                      amortization (EBITDA), as determined in
                                                                                                          condition of the borrower as of the end                accordance with GAAP.
                                                  Request for Comment                                     of the borrower’s two most recently                       170 The DSC ratio equals the borrower’s EBITDA,

                                                                                                                                                                 as of the most recently completed fiscal year
                                                    153. The Agencies request comment                     completed fiscal years. In addition, the               divided by the sum of the borrower’s annual
                                                  on the appropriateness of a total                       originator must conduct an analysis of                 payments for principal and interest on any debt
                                                  exemption for sponsors of ABS                           the borrower’s ability to service its                  obligation.



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                                                  24132                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  nonpayment could give rise to a lien                    collateral and the books and records of                replacement reserves to support the
                                                  against the collateral; (b) take any action             the borrower; and (e) maintain the                     payment of principal and interest over
                                                  necessary to perfect or defend the                      physical condition of any collateral for               the full term of the CRE loan, as well as
                                                  security interest (or priority of the                   the loan.                                              the financial condition of the borrower
                                                  security interest) of the originator (or                                                                       (independent of the CRE property’s NOI
                                                                                                          Request for Comment
                                                  any subsequent holder of the loan) in                                                                          less replacement reserves) to repay other
                                                  the collateral against claims adverse to                  154(a). Are the proposed standards                   outstanding debt obligations.
                                                  the lender’s interest; and (c) maintain                 appropriate for a qualifying commercial                Specifically, the proposed rules
                                                  insurance that protects against loss on                 loan? 154(b) Are these standards                       generally require the borrower to have a
                                                  the collateral at least up to the amount                sufficient and appropriate to ensure that              DSC ratio 172 of 1.7 or greater. The
                                                  of the loan, and that names the                         qualifying commercial loans are of very                proposed rules, however, would allow a
                                                  originator (or any subsequent holder of                 low credit risk?                                       CRE loan on properties with a
                                                  the loan) as an additional insured or                     155. Are the metrics to measure a                    demonstrated history of stable NOI to
                                                  loss payee.                                             borrower’s financial capacity, and the                 have a slightly lower (1.5) DSC ratio. To
                                                                                                          specified parameter for each metric, an                qualify for the lower DSC ratio
                                                  2. Risk Management and Monitoring                       appropriate standard?                                  requirement, the CRE loan must be
                                                  Requirements
                                                                                                                                                                 secured by either (1) a residential
                                                     To mitigate default risk during                      D. Qualifying CRE Loans
                                                                                                                                                                 property (other than a hotel, motel, inn,
                                                  periods of economic stress or when the                     Section l.19 of the proposed rules                  hospital, nursing home, or other similar
                                                  financial condition of the borrower                     provides the underwriting standards for                facility where dwellings are not leased
                                                  otherwise deteriorates, the proposed                    qualifying CRE loans. Such standards                   to residents) that consists of five or more
                                                  rules require the loan documentation to                 focus predominately on the following                   dwelling units primarily for residential
                                                  include covenants that restrict the                     criteria: The borrower’s ability to repay              use, and where at least 75 percent of the
                                                  borrower’s ability to incur additional                  the loan; the value of, and the                        CRE property’s NOI is derived from
                                                  debt or transfer or pledge its assets.                  originator’s security interest in, the                 residential rents and tenant amenities
                                                  Specifically, the proposed rules require                collateral; the LTV ratio; and whether                 (such as a swimming pool, gym
                                                  the loan documentation to provide                       the loan documentation includes the                    membership, or parking fees); or (2)
                                                  certain covenants, including a covenant                 appropriate covenants to protect the                   commercial nonfarm real property
                                                  to provide to the originator (or any                    collateral.                                            (other than a multi-family property or a
                                                  subsequent holder) and the servicer                        For purposes of the proposed rules, a               hotel, inn or similar property) that is
                                                  financial information and supporting                    CRE loan is defined as a loan secured                  occupied by, and derives at least 80
                                                  schedules on an ongoing basis, but not                  by a property with five or more single-                percent of its aggregate gross revenue
                                                  less frequently than quarterly. The                     family units, or by nonfarm non-                       from, one or more ‘‘qualified tenants.’’
                                                  covenants must also prohibit the                        residential real property, the primary                 Under the proposed rules, a qualified
                                                  borrower from retaining or entering into                source (50 percent or more) of                         tenant is defined as a tenant that (1) is
                                                  a debt arrangement that permits                         repayment for which is expected to be                  subject to a triple net lease 173 that is
                                                  payments-in-kind, and place limitations                 derived from: (a) The proceeds of the                  current and performing with respect to
                                                  on the transfer of any of the borrower’s                sale, refinancing, or permanent                        the CRE property, or (2) was subject to
                                                  assets, on the borrower’s ability to create             financing of the property; or (b) rental               a triple net lease that has expired,
                                                  other security interests with respect to                income associated with the property                    currently is leasing the property on a
                                                  any of its assets, and on any change to                 other than rental income that is derived               month-to-month basis, has occupied the
                                                  the name, location, or organizational                   from any affiliate of the borrower.                    property for at least three years prior to
                                                  structure of the borrower (or any other                 However, under the proposal, a CRE                     closing, and is current and performing
                                                  party that pledges collateral for the                   loan does not include a land                           with respect to all obligations associated
                                                  loan). The loan documentation must                      development and construction loan                      with the CRE property. All outstanding
                                                  also include covenants designed to                      (including one-to-four family residential              triple net leases must have a remaining
                                                  protect the value of any collateral                     or commercial construction loans),                     maturity of at least six months, unless
                                                  pledged to secure the loan that require                 loans on raw or unimproved land, a                     the tenant leases the property on a
                                                  the borrower (and any other party that                  loan to a real estate investment trust                 month-to-month basis as described
                                                  pledges collateral for the loan) to: (a)                (REIT), or an unsecured loan.                          above.
                                                  Maintain insurance protecting against                                                                             Under the proposed rules, the
                                                  loss on any collateral at least up to the               1. Ability To Repay                                    originator of a qualifying CRE loan must
                                                  amount of the loan and names the                           The Federal banking agencies believe                also determine whether the borrower
                                                  originator (or any subsequent holder) as                that prudent underwriting standards                    has the ability to service its other
                                                  an additional insured, loss payee, or                   should require the originator to verify                outstanding debt obligations, net of any
                                                  similar beneficiary; (b) pay any taxes,                 and document the capacity of the                       income generated from the CRE (based
                                                  charges, claims and fees where                          borrower, or income from the                           on the NOI). This requirement is
                                                  nonpayment could give rise to a lien                    underlying collateral, to repay the loan.              intended to ensure that the CRE remains
                                                  against any collateral securing the loan;               For qualifying CRE loans, the proposed                 a reliable source of repayment and
                                                  (c) take any action necessary to perfect                underwriting standards focus on both
                                                  or defend the security interest of the
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                                                                                                                                                                   172 Under § l.16 of the proposed rules (definition
                                                                                                          the sufficiency of the CRE property’s net
                                                  originator or any subsequent holder of                                                                         of ‘‘Debt service coverage (DSC) ratio’’), the DSC
                                                                                                          operating income (NOI) 171 less                        ratio for a CRE loan equals the CRE property’s
                                                  the loan in the collateral for the                                                                             annual NOI less the annual replacement reserve of
                                                  commercial loan or the priority thereof,                   171 Section l.16 of the proposed rules defines      the CRE property at the time of origination divided
                                                  and to defend the collateral against                    NOI as income generated by a CRE property, net of      by the sum of the borrower’s annual payments for
                                                  claims adverse to the lender’s interest;                all expenses that have been deducted for federal       principal and interest on any debt obligation.
                                                                                                          income tax purposes (except depreciation, debt           173 For purposes of the proposed rules, a triple net
                                                  (d) permit the originator or any                        service expenses, and federal and state income         lease means a lease pursuant to which the lessee is
                                                  subsequent holder of the loan, and the                  taxes) and any unusual or nonrecurring income          required to pay rent as well as taxes, insurance, and
                                                  servicer of the loan, to inspect the                    items.                                                 maintenance expenses associated with the property.



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                          24133

                                                  security for the CRE loan, and not other                interest rate swap rate 174 plus 300 basis             include a reduction in the loan amount
                                                  debts of the borrower, over the full loan               points, the maximum CLTV ratio                         sufficient to reflect potential losses;
                                                  term. Accordingly, under the proposed                   requirement will be 60 percent to                      however, where the assessment reveals
                                                  rules, the originator must conduct an                   mitigate the effect of an artificially low             significant environmental hazards,
                                                  analysis of the borrower’s ability, and                 capitalization rate.                                   originators are encouraged to reconsider
                                                  determine that the borrower has the                                                                            the primary loan decision. The
                                                                                                          3. Valuation of the Collateral
                                                  ability, to service all outstanding debt                                                                       originator can have a qualified third
                                                  obligations over the two years following                   Because the credit risk of a CRE loan               party perform the assessment, but
                                                  the origination date for the loan, based                is closely linked with the commercial                  remains responsible for ensuring that
                                                  on reasonable projections and including                 real estate collateralizing the loan, the              appropriate measures are taken to
                                                  the new debt obligation. A borrower’s                   proposed rules include several                         mitigate any risk of loss due to
                                                  historical performance in satisfying debt               conditions relating to the collateral. For             environmental risks.
                                                  obligations is often an indicator of                    example, under § l.19(b) of the
                                                                                                          proposed rules, the originator of a                    4. Risk Management and Monitoring
                                                  whether the borrower will satisfy a new                                                                        Requirements
                                                  debt obligation. Accordingly, as part of                qualifying CRE loan must determine
                                                                                                          whether the purchase price for the CRE                    Under § l.19(b) of the proposed
                                                  this analysis, the originator also must
                                                                                                          property that secures the loan reflects                rules, the CRE loan documentation must
                                                  document and verify that the borrower
                                                                                                          the current market value of the property,              provide certain covenants that are
                                                  has satisfied all debt obligations over a
                                                                                                          so as to ensure that the collateral is                 generally designed to facilitate the
                                                  look-back period of at least two years.
                                                                                                          sufficient to recover any unpaid                       ability of the originator to monitor and
                                                     The proposed rules generally require                 principal in the event of default, and                 manage credit risk over the full term of
                                                  that a qualifying CRE loan have a fixed                 that the borrower has sufficient equity                the loan. In developing the proposed
                                                  stated interest rate to reduce the                      in the property to incent continued                    covenants, the Federal banking agencies
                                                  potential for the borrower to experience                performance of all loan obligations                    reviewed the supporting loan
                                                  payment shock. However, the proposed                    during an economic downturn or when                    documentation for several recent ABS
                                                  rules allow the interest rate to be                     the CRE property’s NOI may not be                      issuances collateralized by CRE loans.
                                                  adjustable if the borrower obtains, prior               sufficient to cover loan payments. To                  The proposed covenants are generally
                                                  to or concurrently with the origination                 determine the value of the CRE                         consistent with those provided in such
                                                  date for the CRE loan, a derivative                     property, the proposed rules require the               loan documentation and, therefore,
                                                  product that effectively results in the                 originator to obtain an appraisal                      should reflect current industry practice
                                                  borrower paying a fixed interest rate on                prepared not more than six months                      and impose minimal compliance
                                                  the CRE loan. Commercial borrowers                      before the origination date for the loan,              burden.
                                                  often purchase a derivative (such as an                 in accordance with the Uniform                            As with the covenants required for
                                                  interest rate swap) that effectively                    Standards of Professional Appraisal                    commercial loans (as discussed in the
                                                  ‘‘convert’’ an adjustable rate into a fixed             Practice and the appraisal requirements                previous section), the covenants for CRE
                                                  rate. In addition, the proposed standards               of the Federal banking agencies for the                loans require certain information be
                                                  for qualifying CRE loans would prohibit                 CRE property securing the loan. The                    provided to the originator (or any
                                                  terms that (1) permit the borrower to                   appraisal report must provide an ‘‘as is’’             subsequent holder) and the servicer
                                                  defer principal or interest payments; (2)               opinion of the current market value of                 financial on an ongoing basis.
                                                  allow the originator to establish an                    the CRE property, which includes an                    Additionally, with respect to CRE loans
                                                  interest reserve to fund all or part of a               income approach that uses a discounted                 in particular, such information must
                                                  payment on the loan; or, (3) provide a                  cash flow analysis based on the CRE                    include information on existing,
                                                  maturity date that is earlier than ten                  property’s actual NOI. These                           maturing, and new leasing or rent-roll
                                                  years following the closing date for the                requirements are intended to help                      activity, as appropriate for the CRE
                                                  loan. Further, the loan payment amount                  ensure that the appraisal is prepared by               property. This should assist the
                                                  must be based on straight-line                          an independent third party with the                    originator in monitoring volatility in the
                                                  amortization of the debt over the term                  experience, competence, and knowledge                  repayment capacity of the borrower,
                                                  of the loan not to exceed twenty (20)                   necessary to provide an accurate and                   with respect to the CRE property’s NOI
                                                  years, with payments made no less                                                                              and the borrower’s financial condition.
                                                                                                          objective valuation based on the CRE
                                                                                                                                                                    The loan documentation for a
                                                  frequently than monthly over a term of                  property’s actual physical condition.
                                                                                                                                                                 qualifying CRE loan also must include
                                                  at least ten (10) years.                                   Environmental hazards, such as
                                                                                                                                                                 covenants restricting the ability of the
                                                                                                          ground water contamination and the
                                                  2. Loan-to-Value Requirement                                                                                   borrower to create additional security
                                                                                                          presence of lead or other harmful
                                                                                                                                                                 interests with respect to the CRE
                                                    The Agencies believe that prudent                     chemicals or substances, may
                                                                                                                                                                 property and covenants designed to
                                                  underwriting standards should limit the                 potentially jeopardize the value of CRE
                                                                                                                                                                 help maintain the value of, and protect
                                                  amount an originator may advance                        property as well as the borrower’s
                                                                                                                                                                 the originator’s (or any subsequent
                                                  relative to the market value of the CRE                 ability to repay the loan. Accordingly,
                                                                                                                                                                 holder’s) security interest in, the
                                                  property. Therefore, the Federal banking                under the proposed rules, the originator
                                                                                                                                                                 collateral. These covenants are
                                                  agencies are proposing to require a                     also must conduct an environmental
                                                                                                                                                                 substantially the same as the covenants
                                                  combined loan-to-value (CLTV) ratio of                  risk assessment of the CRE property
                                                                                                                                                                 required for commercial loans (as
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  less than or equal to 65 percent for                    securing a qualifying CRE loan and,
                                                                                                                                                                 discussed above). Additionally, a
                                                  qualifying CRE loans. However, the                      based on this assessment, take
                                                                                                                                                                 covenant must be included that requires
                                                  recent crisis has demonstrated that the                 appropriate measures to mitigate any
                                                                                                                                                                 the borrower to comply with all legal or
                                                  use of very low capitalization rates                    risk of loss to the value of the CRE
                                                                                                                                                                 contractual obligations applicable to the
                                                  generally results in significantly higher               property. Appropriate measures may
                                                                                                                                                                 collateral. Finally, the loan
                                                  market values for some CRE properties.                    174 The 10-year interest rate swap rate is as        documentation must include a covenant
                                                  Where the capitalization rate used in the               reported on the previous day’s Federal Reserve         that prohibits the borrower from
                                                  appraisal is less than the 10-year                      Statistical Release H.15: Selected Interest Rates.     pledging the CRE property as security


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                                                  24134                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  for another loan, even where doing so                   underwriting standards commonly used                      qualifying automobile loan. The Federal
                                                  results in the creation of a subordinate                by the industry for unsecured                             banking agencies have sought to balance
                                                  lien. The Agencies note, however, that                  installment credits. The proposed rules                   these considerations in developing the
                                                  the proposed rules provide an exception                 define an automobile loan as a loan to                    proposed underwriting standards.
                                                  for loans that finance the purchase of                  an individual to finance the purchase of,                   Under the proposed rules, the
                                                  machinery and equipment that is                         and secured by a first lien on, a                         borrower under a qualifying automobile
                                                  pledged as additional collateral for the                passenger car or other passenger                          loan must have a monthly DTI ratio of
                                                  CRE loan. This restriction is intended to               vehicle, such as a minivan, van, sport-                   less than or equal to 36 percent,
                                                  ensure that the CRE property remains a                  utility vehicle, pickup truck, or similar                 consistent with the proposed DTI ratio
                                                  reliable source of repayment and                        light truck for personal, family, or                      requirement for QRM loans. The
                                                  security for the CRE loan and the                       household use. Under the proposed                         originator must make this
                                                  borrower does not become                                rules, an automobile loan would not                       determination, and document the
                                                  overleveraged, which could threaten the                 include: (a) Any loan to finance fleet                    underlying analysis, upon origination of
                                                  borrower’s ability to repay the CRE loan.               sales; (b) a personal cash loan secured                   the loan.
                                                  The proposed covenants must be                          by a previously purchased automobile;                       Originators typically consider a
                                                  applicable to the borrower as well as                   (c) a loan to finance the purchase of a                   borrower’s income and debts in the
                                                  any other party who provides collateral                 commercial vehicle or farm equipment                      credit approval process; however, the
                                                  for the loan.                                           that is not used for personal, family, or                 income history requirements of and the
                                                                                                          household purposes; (d) any lease                         type of information considered by the
                                                  Request for Comment                                                                                               originator vary widely across the
                                                                                                          financing; or (e) a loan to finance the
                                                     156(a). Are the proposed requirements                purchase of a vehicle with a salvage                      industry. The Agencies believe that the
                                                  for a qualifying CRE loan appropriate?                  title.175 A qualifying automobile loan                    use of consistent underwriting
                                                     156(b). Are these standards sufficient               may be for a new 176 or used vehicle.177                  standards, to the extent practical and
                                                  to ensure that qualifying CRE loans have                                                                          consistent with industry practice,
                                                  very low credit risk?                                   1. Ability To Repay                                       should reduce implementation burden
                                                     157. Are the DSC metrics employed                       A borrower’s ability to repay an                       and ensure that all ABS issuances that
                                                  for measuring a borrower’s financial                    automobile loan primarily hinges on the                   qualify for an exemption from the risk
                                                  capacity, and the specified parameter                   amount of the borrower’s monthly total                    retention requirement of the proposed
                                                  for each type of CRE property, an                       debt obligations in relation to the                       rules are collateralized by high-quality,
                                                  appropriate standard?                                   borrower’s monthly income. The                            low credit risk loans. Based on the
                                                     158. The Agencies are proposing the                  Agencies have sought to establish                         Federal banking agencies’ supervisory
                                                  same DSC ratio (1.5) for qualifying                     standards for the verification and                        experience in overseeing automobile
                                                  leased CRE loans and qualifying                         documentation of a borrower’s ability to                  lending, and in an effort to address
                                                  multifamily CRE loans, where the DSC                    repay an automobile loan that will help                   these inconsistencies, the Federal
                                                  analysis is based on at least two years                 ensure that the loan is of very low credit                banking agencies propose to require that
                                                  of actual performance. The Agencies                     risk. At the same time, the proposed                      originators verify and document the
                                                  request comment whether the risk of                     standards seek to reflect the nature of                   borrower’s income using payroll stubs,
                                                  default for qualifying non-Enterprise                   automobile loans and allow originators                    tax returns, profit and loss statements,
                                                  multifamily CRE loans is demonstrably                   to make qualifying automobile loans                       or other similar documentation, and that
                                                  lower as to justify a lower DSC ratio                   without undue burden or disruption to                     originators verify that all outstanding
                                                  (such as 1.3). For example, the Agencies                existing methods for making automobile                    debts reported in a borrower’s credit
                                                  acknowledge that several highly-                        loans. For example, originators of                        report are incorporated into the
                                                  publicized defaults on large multifamily                automobile loans typically do not verify                  calculation of the borrower’s ratio of
                                                  CRE loans had a much weaker structure                   all of a borrower’s income and debt                       total debt to monthly income (DTI ratio).
                                                  (e.g., pro-forma underwritten DSC ratio                 obligations prior to making an                            For the borrower’s monthly debt
                                                  or DSC ratio lower than 1.2) than what                  automobile loan and requiring an                          obligations, the Agencies propose to
                                                  is contained in the proposed rules.                     originator to do so could significantly                   require the originator to obtain
                                                  Commenters should provide relevant                      limit any incentive an originator might                   information from the borrower about all
                                                  criteria to be applied to qualify for a                 otherwise have to underwrite loans in                     monthly housing payments (rent- or
                                                  reduced DSC ratio and multifamily CRE                   accordance with the standards for a                       mortgage-related, including any
                                                  loan performance data supporting the                                                                              property taxes, insurance, and home
                                                  conclusion that multifamily loans                          175 Under the proposed rules, a new vehicle is
                                                                                                                                                                    owners association fees), plus any of the
                                                  meeting such criteria, as a class, have a               one that is not a used vehicle and has not been           following that are dependent on the
                                                                                                          previously sold to an end user. A used vehicle is
                                                  correspondingly reduced risk of default                 any vehicle driven more than the limited use              borrower’s income for payment: (1)
                                                  to support a reduced DSC ratio for such                 necessary in transporting or road testing the vehicle     Monthly payments on all debt and lease
                                                  loans.                                                  prior to the initial sale of the vehicle and does not     obligations (such as installment loans or
                                                                                                          include any vehicle sold only for scrap or parts          credit card loans), including the
                                                  D. Qualifying Automobile Loans                          (title documents surrendered to the State and a
                                                                                                                                                                    monthly amount due on the automobile
                                                                                                          salvage certificate issued). Salvage title is a form of
                                                    § l.20 of the proposed rules provides                 vehicle title branding by an insurance company            loan; (2) estimated monthly amortizing
                                                  underwriting standards for qualifying                   paying a claim on the vehicle, where the vehicle          payments for any term debt, debts with
                                                  automobile loans. Although automobile                   title notes that the vehicle has been severely            other than monthly payments, and debts
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                                                                                                          damaged and/or deemed a total loss and
                                                  loans involve secured financing, the                    uneconomical to repair.                                   not in repayment (for example, deferred
                                                  collateral represents a highly                             176 A new vehicle is one that is not a used vehicle    student loans, interest-only loans); and
                                                  depreciable asset. Accordingly, in                      and has not been previously sold to an end user.          (3) any required monthly alimony, child
                                                  developing the proposed underwriting                       177 A used vehicle is any vehicle driven more          support, or court-ordered payments.
                                                  standards for qualifying automobile                     than the limited use necessary in transporting or         These elements are generally consistent
                                                                                                          road testing the vehicle prior to the initial sale of
                                                  loans, the Federal banking agencies                     the vehicle and does not include any vehicle sold
                                                                                                                                                                    many of the elements taken into account
                                                  sought to establish conservative                        only for scrap or parts (title documents surrendered      for the DTI requirement for the QRM
                                                  requirements that are consistent with                   to the State and a salvage certificate issued).           standards.


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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                24135

                                                  2. Loan Terms                                              Similar to the safe harbor proposed in                N.A.D.A. or Kelley Blue Book) based on
                                                                                                          § l.15 of the proposed rules for the                     the manufacturer, year, model, features,
                                                     The Federal banking agencies have                    QRM requirements, the Federal banking                    and condition of the vehicle.
                                                  found that, in supervising credit risk for              agencies are proposing a safe harbor that                  An illustration of how to determine
                                                  such highly depreciable assets as                       would allow an originator to satisfy the                 the minimum down payment is
                                                  automobiles, a fixed payment amount                     documentation and verification                           provided below.
                                                  helps ensure that a borrower will have                  requirements regarding a borrower’s
                                                  the ability to repay a loan over the life               credit history. Under the proposal, an                       DOWN PAYMENT DETERMINATION
                                                  of the credit. Therefore, the proposed                  originator of a qualifying automobile
                                                  rules require qualifying automobile                     loan will be deemed to have complied                     $30,000 .......
    Invoice Purchase Price.
                                                  loans to provide for a fixed interest rate.             with the verification and documentation                  $2,000 .........
   Manufacturer Cash Rebate.
                                                  In addition, under the proposal, the                    requirements related to the borrower’s                   $1,000 .........
   Dealer Incentive.
                                                  monthly payment must be calculated                      credit history (as described above) if, no               $27,000 .......
    Purchase Price.
                                                  using straight-line amortization for the                                                                         $5,400 .........
   20% of Purchase Price.
                                                                                                          more than 90 days before the
                                                  term of the loan, not to exceed five                                                                             $2,700 .........
   Tax, Title, and License.
                                                                                                          automobile loan closing, the originator                  $8,100 .........
   Down Payment Requirement.
                                                  years, with the first payment due within                (1) obtains a credit report regarding the                $18,900 .......
    Maximum Loan Amount.
                                                  45 days of the closing date. The                        borrower from at least two consumer
                                                  proposed rules also prohibit loan terms                 reporting agencies that compile and                      Request for Comment
                                                  that permit a borrower to defer                         maintain files on consumers on a
                                                  repayment of principal or interest.                     nationwide basis (within the meaning of                    159(a). Are the proposed requirements
                                                                                                          15 U.S.C. 1681a(p)); and (2) determines,                 for a qualifying automobile loan
                                                     If the loan is for a new vehicle, the
                                                                                                          based on the information in such credit                  appropriate?
                                                  proposal would require the loan                                                                                    159(b). Are these standards sufficient
                                                  agreement provide a maturity date for                   reports, that the borrower meets the
                                                                                                          credit history requirements related                      and appropriate to ensure that
                                                  the loan that does not exceed 5 years                                                                            qualifying automobile loans have very
                                                  from the date of closing. If the loan is                described above. This safe harbor would
                                                                                                          not be available if the originator obtains               low credit risk?
                                                  for a used vehicle, the loan agreement                                                                             160. Are the DTI ratios employed for
                                                  must provide that the term of the loan,                 a subsequent credit report before the
                                                                                                          closing of the automobile loan                           measuring a borrower’s financial
                                                  plus the difference between the current                                                                          capacity an appropriate standard?
                                                  model year and the vehicle’s model                      transaction that indicates that the
                                                  year, cannot exceed 5 years. In addition,               borrower does not meet the credit                        E. Buy-Back Requirements for ABS
                                                  under the proposed rules, the                           history requirements.                                    Issuances Collateralized Exclusively by
                                                  transaction documents must require that                 4. Loan-to-Value                                         Qualifying Commercial, CRE or
                                                  the originator, subsequent holder of the                                                                         Automobile Loans
                                                                                                             Limitations relative to the amount
                                                  loan, or any agent of the originator or                                                                             Under the proposed rules, for a
                                                                                                          financed are critical for automobile
                                                  subsequent holder maintain physical                                                                              securitizer to qualify for a zero percent
                                                                                                          lending because the collateral is subject
                                                  possession of the vehicle title until the                                                                        risk retention requirement under
                                                                                                          to such rapid depreciation. Therefore,
                                                  loan is repaid in full and the borrower
                                                                                                          under the proposed rules, an originator                  § l.18, § l.19 or § l.20, as applicable,
                                                  has satisfied all obligations under the                 must document that, at the time of the                   the depositor must have (and certify that
                                                  loan agreement.                                         closing of the automobile loan, the                      it has) effective internal supervisory
                                                  3. Reviewing Credit History                             borrower tendered a minimum down                         controls with respect to its process for
                                                                                                          payment from the borrower’s personal                     ensuring that all assets that collateralize
                                                    The supervisory experience of the                     funds and trade-in allowance,178 if any,                 the ABS meet the applicable
                                                  Federal banking agencies has shown                      that is sufficient to pay (1) the full cost              underwriting standards set forth in
                                                  that the historical payment performance                 of vehicle title, tax, and registration fees,            § l.18, § l.19 or § l.20, as applicable,
                                                  of a borrower often is indicative of the                as well as any dealer-imposed fees, and                  of the proposed rules. The Federal
                                                  borrower’s ability to manage debt and                   (2) 20 percent of the purchase price of                  banking agencies recognize that, despite
                                                  willingness to repay a new loan.                        the automobile. Under § l.16 of the                      the use of reasonable processes and
                                                  Accordingly, the proposed rules require                 proposed rules, the purchase price of a                  procedures by a depositor or sponsor, it
                                                  the originator to verify and document,                  new automobile is the net amount the                     is possible that one or more loans
                                                  within 30 days of the origination date                  consumer paid for the vehicle after any                  included in a securitization transaction
                                                  for a qualifying automobile loan, that                  manufacturer, dealer, or financing                       may later be determined to have not met
                                                  the borrower (1) is not currently 30 days               incentive payments or cash rebates are                   the underwriting standards set forth in
                                                  or more past due, in whole or in part,                  applied. However, for a used                             § l.18, § l.19 or § l.20, as applicable,
                                                  on any debt obligation and (2) has not                  automobile, the purchase price is the                    of the proposed rules due to inadvertent
                                                  been 60 days or more past due on, in                    lesser of either the actual purchase price               error. For example, an originator
                                                  whole or in part, on any debt obligation                or the value of the automobile, as                       conducting post-origination file reviews
                                                  within the past 24 months.                              determined by a nationally recognized                    for compliance or internal audit
                                                  Additionally, the originator must verify                automobile pricing agency (for example,                  purposes may find that some aspects of
                                                  and document that, within the previous                                                                           the documentation required to verify the
                                                  36 months, the borrower was not a                          178 Under § l.16 of the proposed rules, a trade-      borrower’s monthly income were not
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                                                  debtor in any bankruptcy proceeding,                    in allowance is the amount a vehicle purchaser is        obtained. The Agencies are concerned
                                                                                                          given as a credit at the purchase of a vehicle for the
                                                  subject to a Federal or State judgment                  fair exchange of the borrower’s existing vehicle to
                                                                                                                                                                   that if an error that is discovered after
                                                  for collection of any unpaid debt or                    compensate the dealer for some portion of the            closing of the securitization were to
                                                  foreclosure, repossession, deed in lieu                 vehicle purchase price, except that such amount          make the issuance ineligible for the
                                                  of foreclosure, or short sale, and has not              shall not exceed the trade-in value of the used          proposed exemption, then sponsors and
                                                                                                          vehicle, as determined by a nationally recognized
                                                  had any personal property repossessed.                  automobile pricing agency and based on the
                                                                                                                                                                   investors may well be less willing to
                                                  These credit history standards are the                  manufacturer, year, model, features, and condition       participate in securitization transactions
                                                  same as those established for QRMs.                     of the vehicle.                                          that are structured to meet the


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                                                  24136                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  underwriting standards of § l.18,                       Request for Comment                                     States.180 Section 15G expressly clarifies
                                                  § l.19 or § l.20, as applicable, of the                    161(a). The Agencies seek comment                    that Fannie Mae, Freddie Mac, and the
                                                  proposed rules. On the other hand, if                   on whether the sponsor should be                        Federal Home Loan Banks are not
                                                  there is no penalty for including in a                  required to repurchase the entire pool of               agencies of the United States,181 and the
                                                  securitization transaction a loan that                  loans collateralizing the ABS if the                    proposed rules include a specific
                                                  does not meet such underwriting                         amount or percentage of the loans that                  provision making clear that the
                                                  standards, sponsors and other                                                                                   exemptions that apply to ABS that is
                                                                                                          are required to be repurchased due to
                                                  participants in the securitization may                                                                          issued, guaranteed or insured by a U.S.
                                                                                                          the failure to meet the underwriting
                                                  not have the proper incentives to ensure                                                                        government agency or that is backed by
                                                                                                          standards under § l.18, § l.19 or
                                                  that the issuance is collateralized                                                                             loans insured or guaranteed by a U.S.
                                                                                                          § l.20, as applicable, of the proposed
                                                  exclusively by qualifying commercial,                                                                           government agency do not apply where
                                                                                                          rules reaches a certain threshold. 161(b).
                                                  CRE, or automobile loans.                                                                                       the issuer, insurer or guarantor is Fannie
                                                                                                          If so, what threshold would be
                                                     The proposal seeks to balance these                                                                          Mae, Freddie Mac, or a Federal Home
                                                                                                          appropriate?
                                                  interests by providing that a sponsor                                                                           Loan Bank.182
                                                  that has relied on an exemption from                    VI. General Exemptions                                     Proposed § l.21(a)(1)(i) would
                                                  the retention requirement under § l.18,                                                                         exempt any securitization transaction
                                                                                                            Section 15G(c)(1)(G) and section
                                                  § l.19 or § l.20, as applicable, of the                                                                         that is collateralized solely (excluding
                                                                                                          15G(e) of the Exchange Act require the
                                                  proposed rules would not lose the                                                                               cash and cash equivalents) by
                                                                                                          Agencies to provide a total or partial
                                                  exemption, if, after closing of the                                                                             residential, multifamily, or health care
                                                                                                          exemption from the risk retention                       facility mortgage loan assets if the assets
                                                  securitization transaction, it is                       requirements for certain types of ABS or
                                                  determined that one or more of the                                                                              are insured or guaranteed as to the
                                                                                                          securitization transactions. In addition,               payment of principal and interest by the
                                                  loans collateralizing the ABS do not                    section 15G(e)(1) permits the Federal
                                                  meet all of the applicable criteria under                                                                       United States or an agency of the United
                                                                                                          banking agencies and the Commission                     States. Currently, the federal
                                                  § l.18, § l.19 or § l.20, as applicable,                jointly to adopt or issue additional
                                                  of the proposed rules provided that:                                                                            government insures or guarantees
                                                                                                          exemptions, exceptions, or adjustments                  residential, multifamily, and healthcare
                                                     (a) The depositor certified the                      to the risk retention requirements of the
                                                  effectiveness of its internal supervisory                                                                       facility loans through a variety of
                                                                                                          rules, including exemptions, exceptions,                programs. Some examples include FHA
                                                  controls for ensuring all of the loans                  or adjustments for classes of institutions
                                                  backing the ABS are qualified loans                                                                             insurance on single family mortgage
                                                                                                          or assets, if the exemption, exception, or              loans which insures the lender at
                                                  under § l.18, § l.19 or § l.20, as                      adjustment would: (A) help ensure high
                                                  applicable, of the proposed rules;                                                                              approximately 100 percent of losses
                                                                                                          quality underwriting standards for the                  including advanced taxes, insurance
                                                     (b) The sponsor repurchases the                      securitizers and originators of assets that             and foreclosure costs. The Department
                                                  loan(s) determined to not meet the                      are securitized or available for                        of Veterans Administration also
                                                  underwriting standards set forth in                     securitization; and (B) encourage                       guarantees between 25 percent and 50
                                                  § l.18, § l.19 or § l.20, as applicable,                appropriate risk management practices                   percent of lender losses in the event of
                                                  of the proposed rules from the issuing                  by the securitizers and originators of                  residential borrower defaults. United
                                                  entity at a price at least equal to the                 assets, improve the access of consumers                 States Department of Agriculture Rural
                                                  remaining principal balance and                         and businesses to credit on reasonable                  Development also guarantees a sliding
                                                  accrued interest on the loan(s) no later                terms, or otherwise be in the public                    amount against loss of up to 90 percent
                                                  than ninety (90) days after the                         interest and for the protection of                      of the original loan amount for single
                                                  determination that the loans do not                     investors.179                                           family loans. Each of the agencies sets
                                                  satisfy the underwriting standards set                    Consistent with these provisions,                     underwriting and servicing standards,
                                                  forth in § l.18, § l.19 or § l.20, as                   section l.21 of the proposed rules                      and in the case of some multifamily
                                                  applicable, of the proposed rules; and                  exempts certain types of ABS or                         programs underwrites the mortgage
                                                     (c) The sponsor discloses to the                     securitization transactions from the                    itself. The agencies charge a fee or
                                                  investors of the ABS any loan(s) that are               credit risk retention requirements of the               premium for the insurance/guaranty,
                                                  repurchased by the sponsor, including                   rule. Certain of these exemptions would                 and monitor the performance of
                                                  the principal amount of such                            appear in the rules of all Agencies, and                participating lenders and borrowers.
                                                  repurchased loan(s) and the cause for                   others would appear only in the rules of                   Proposed § l.21(a)(1)(ii) would
                                                  such repurchase.                                        certain Agencies, reflecting the different              exempt any securitization transaction
                                                     These conditions, which are identical                scope of the Agencies’ rulewriting                      that involves the issuance of ABS if the
                                                  to those applicable to QRMs, are                        authority.                                              ABS are insured or guaranteed as to the
                                                  intended to provide the sponsor with                                                                            payment of principal and interest by the
                                                  the opportunity to correct inadvertent                  A. Exemption for Federally Insured or
                                                                                                          Guaranteed Residential, Multifamily,                    United States or an agency of the United
                                                  errors by repurchasing any non-                                                                                 States and that are collateralized solely
                                                  qualified loan(s) and removing such                     and Health Care Mortgage Loan Assets
                                                                                                                                                                  (excluding cash and cash equivalents)
                                                  non-qualifying loan(s) from the ABS,                       Proposed § l.21(a)(1) would
                                                  while protecting investors. Moreover, in                implement section 15G(e)(3)(B) of the                     180 See  15 U.S.C. 78o–11(e)(3)(B).
                                                  light of the buy-back requirement,                      Exchange Act, which exempts from the                      181 See  15 U.S.C. 78o–11(c)(1)(G)(ii), (e)(3)(B).
                                                  sponsors should continue to have a                      risk retention requirements any
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                                                                                                                                                                     182 See section 15 U.S.C. 78o–11(c)(1)(G) and

                                                  strong economic incentive to ensure that                residential, multifamily, or health care                (e)(3)(B) and the proposed rules at § l.21(c). At this
                                                                                                                                                                  time, the Federal Home Loan Banks do not, and are
                                                  all loans backing a securitization subject              facility mortgage loan asset, or                        not authorized to, issue or guarantee asset-backed
                                                  to zero risk retention under § l.18,                    securitization based directly or                        securities. Similarly, neither Fannie Mae, Freddie
                                                  § l.19 or § l.20, as applicable, of the                 indirectly on such an asset, that is                    Mac, nor the Federal Home Loan Banks insure or
                                                  proposed rules satisfy all of the                       insured or guaranteed by the United                     guarantee individual loans, and none is authorized
                                                                                                                                                                  to do so. These references are included in § l.21(c)
                                                  conditions applicable to such loans                     States or an agency of the United                       in order to conform the rule of construction to that
                                                  under § l.18, § l.19 or § l.20, as                                                                              which is required by section 15G(e)(3) of the
                                                  applicable, of the proposed rules.                        179 See   15 U.S.C. 78o–11(e)(1) and (2).             Exchange Act.



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                   24137

                                                  by residential, multifamily, or health                  health care facility mortgage loans,                   collateral backing the ABS, would be
                                                  care facility mortgage loan assets, or                  comments are requested on the                          backed by the United States or an
                                                  interests in such assets. Thus, proposed                proposed rules where private                           agency of the United States and, thus,
                                                  § l.21(a)(1)(ii) would exempt ABS the                   securitization may be used in the                      the exemption should be appropriate in
                                                  payment of principal and interest on                    following areas. Are there risks in                    the public interest and for the protection
                                                  which is guaranteed by the United                       exempting assets or ABS that are not                   of investors. The federal department or
                                                  States or an agency of the United States                significantly insured or guaranteed by a               agency issuing, insuring or guaranteeing
                                                  and that is collateralized by ABS that                  federal agency? 164(b). If so, what level              the ABS or collateral would monitor the
                                                  itself is backed by residential,                        of federal guarantee or insurance should               quality of the assets securitized,
                                                  multifamily, or health care facility                    be required? 164(c). Would inclusion of                consistent with the relevant statutory
                                                  mortgage loan assets. Examples of                       additional requirements be appropriate                 authority.185
                                                  securitization transactions that would                  in the public interest and for the                        Proposed § l.21(a)(2) provides an
                                                  be exempted under § l.21(a)(1)(ii)                      protection of investors? 164(d). Why or                exemption from the risk retention
                                                  include securities guaranteed by the                    why not? 164(e). Would inclusion of                    requirements of the rules for any
                                                  Government National Mortgage                            additional requirements be disruptive to               securitization transaction that is
                                                  Association (Ginnie Mae). Ginnie Mae                    any federal guarantee or insurance                     collateralized solely (excluding cash
                                                  guarantees the issuance of securities by                programs established or authorized by                  and cash equivalents) by loans or other
                                                  approved lender/issuers. These                          Congress? 164(f). If so, how and to what               assets made, insured, guaranteed, or
                                                  mortgage-backed securities (MBS) are                    extent?                                                purchased by any institution that is
                                                  collateralized solely by federally                                                                             subject to the supervision of the Farm
                                                                                                          B. Other Exemptions                                    Credit Administration, including the
                                                  insured or guaranteed loans. The
                                                  insurance or guarantee protects the                        Section 15G(c)(1)(G)(ii) of the                     Federal Agricultural Mortgage
                                                  lender from some or all of the credit loss              Exchange Act separately requires the                   Corporation. This provision implements
                                                  on the loan in the event of a borrower                  rules of the Agencies to provide for a                 the exemption for these types of assets
                                                  default. Upon issuance of the security,                 total or partial exemption from risk                   included in section 15G(e)(3)(A) of the
                                                  the issuer is obligated to advance from                 retention requirements for                             Exchange Act.186
                                                  its own funds principal and interest to                 securitizations of assets that are issued                 Section 15G(c)(1)(G)(iii) requires that
                                                  the investors if the borrower fails to pay              or guaranteed by the United States or an               the rules of the Agencies provide a total
                                                  the mortgage. Ginnie Mae guarantees to                  agency of the United States as the                     or partial exemption for an ABS if the
                                                  the investors that, in the event the issuer             Federal banking agencies and the                       security is (i) issued or guaranteed by
                                                  defaults on this obligation, Ginnie Mae                 Commission jointly determine                           any State of the United States, or by any
                                                  will ensure the investors are paid.                     appropriate in the public interest and                 political subdivision of a State or
                                                  Ginnie Mae provides a similar guarantee                 the protection of investors.183 This                   territory, or by any public
                                                  for Real Estate Mortgage Investment                     exemptive authority is broader than the                instrumentality of a State or territory
                                                  Conduits (REMICs) and Platinum                          statutory exemption in section                         that is exempt from the registration
                                                  Securities, which are collateralized by                 15G(e)(3)(B) because it permits the                    requirements of the Securities Act by
                                                  Ginnie Mae MBS.                                         exemption of any securitization of assets              reason of section 3(a)(2) of the Securities
                                                     Although, historically, federally                    that are issued or guaranteed by the                   Act 187 or (ii) defined as a qualified
                                                  insured/guaranteed loans have been                      United States or any agency of the                     scholarship funding bond in section
                                                  securitized largely through Ginnie Mae,                 United States (and not just those based                150(d)(2) of the Internal Revenue Code
                                                  and Ginnie Mae is statutorily restricted                on residential, multifamily, or health                 of 1986.188 In light of the special
                                                  to guaranteeing only securities                         care facility mortgage loan assets).                   treatment afforded such securities by
                                                  collateralized by federally insured/                    Proposed § l.21(b)(1) fully exempts any                Congress, the directive in section
                                                  guaranteed loans, this regulation would                 securitization transaction if the asset-               15G(c)(1)(G)(iii), and the role of the
                                                  exempt a private securitization from risk               backed securities issued in the                        State or municipal entity in issuing,
                                                  retention to the extent it is collateralized            transaction are (i) collateralized solely              insuring, or guaranteeing the ABS or
                                                  solely by loans with federal insurance or               (excluding cash and cash equivalents)                  collateral, the Agencies are proposing to
                                                  guarantees. In addition, in cases where                 by obligations issued by the United                    exempt such ABS from the risk
                                                  private securitization may be used the                  States or an agency of the United States;              retention requirements of the rule as an
                                                  proposed rules do not limit the                         (ii) collateralized solely (excluding cash             exemption that is appropriate in the
                                                  exemption based on the federal housing                  and cash equivalents) by assets that are               public interest and for the protection of
                                                  program involved or the nature of the                   fully insured or guaranteed as to the                  investors.189
                                                  government’s insurance or guaranty                      payment of principal and interest by the
                                                                                                                                                                 Request for Comments
                                                  coverage.                                               United States or an agency of the United
                                                                                                          States (other than those referred to in                  165(a). Have the Agencies
                                                  Request for Comments                                    paragraph (a)(1)(i) of this section); 184 or           appropriately implemented the
                                                    162(a). Have the Agencies                             (iii) fully guaranteed as to the timely                exemption in section 15G(e)(3)(A) of the
                                                  appropriately implemented the                           payment of principal and interest by the               Exchange Act and the exemptive
                                                  exemption in section 15G(e)(3)(B) of the                United States or any agency of the
                                                                                                                                                                   185 See  12 U.S.C. 78o–11(e)(2).
                                                  Exchange Act? 162(b). Why or why not?                   United States. This exemption is being                   186 See
                                                    163. Are we correct in believing the                                                                                    15 U.S.C. 78o–11(e)(3)(A).
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                                                                                                          proposed because payments of principal                    187 15 U.S.C. 77c(a)(2).
                                                  federal department or agency issuing,                   and interest on the ABS, or on the                        188 See 26 U.S.C. 150(d)(2). Such bonds are those
                                                  insuring, or guaranteeing the ABS or                                                                           issued by a not-for-profit corporation established
                                                  collateral will monitor the quality of the                183 See 15 U.S.C. 78o–11(c)(1)(G).                   and operated exclusively for the purpose of
                                                  assets securitized?                                       184 To avoid confusion, the proposed rules           acquiring student loans incurred under the Higher
                                                    164(a). While it appears that Congress                provide that these assets do not include the types     Education Act of 1965, and organized at the request
                                                                                                          of federally insured or guaranteed residential,        of a State or a political subdivision of a State. See
                                                  may have intended to exempt all                         mortgage, and health care mortgage loan assets that    10 U.S.C. chapter 28.
                                                  existing federal insurance or guarantee                 are covered by the exemption in proposed                  189 See §§ l.21(a)(3) and (4) of the proposed

                                                  programs for residential, multifamily, or               § l.21(a).                                             rules.



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                                                  24138                       Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  authority in section 15G(c)(1)(G)(ii) and                 structured so that it involves the                      through would neither increase nor
                                                  (iii)? 165(b). Why or why not?                            issuance of only a single class of ABS                  reallocate the credit risk inherent in that
                                                     166(a). Is the proposed exemption for                  interests and provides for the pass-                    underlying 15G-compliant ABS.
                                                  ABS issued or guaranteed by a State or                    through of all principal and interest                   Furthermore, because this type of
                                                  municipal entity appropriate? 166(b). Is                  payments received on the underlying                     resecuritization may be used to combine
                                                  it under or over-inclusive? 166(c). There                 ABS (net of expenses of the issuing                     15G-compliant ABS backed by smaller
                                                  may be some ABS in which the sponsor                      entity) to the holders of such class. The               asset pools, the exemption for this type
                                                  is a municipal entity (i.e., a State or                   holder of a resecuritization ABS                        of resecuritization could improve the
                                                  Territory of the United States, the                       structured as a single-class pass-through               access of consumers and businesses to
                                                  District of Columbia, any political                       has a fractional undivided interest in                  credit on reasonable terms by allowing
                                                  subdivision of any State, Territory or the                the pool of underlying ABS and in the                   for the creation of an additional
                                                  District of Columbia, or any public                       distributions of principal and interest                 investment vehicle for these smaller
                                                  instrumentality of one or more States,                    (including prepayments) from these                      pools. The exemption would allow the
                                                  Territories or the District of Columbia),                 underlying ABS. Accordingly, the                        creation of ABS that may be backed by
                                                  however, the ABS are issued by a                          principal and interest payments                         more geographically diverse pools than
                                                  special purpose entity, that is created at                allocated to each holder are identical                  those that can be achieved by the
                                                  the direction of the municipal entity,                    (less any fees associated with the                      pooling of individual assets as part of
                                                  but are not issued or guaranteed by the                   resecuritization) to those that would                   the issuance of the underlying 15G-
                                                  municipal entity. Should the rules also                   occur if that holder were to hold                       compliant ABS, which could also
                                                  exempt from the risk retention                            individual securities representing the                  improve access to credit on reasonable
                                                  requirements asset-backed securities                      same fractional interest in each of the                 terms.
                                                  where the sponsor is a municipal entity?                  underlying ABS.191 Thus, a
                                                  166(d). There are some municipal ABS                                                                                 Under the proposed rules, sponsors of
                                                                                                            resecuritization ABS structured as a
                                                  that are issued by a municipal entity                                                                             resecuritizations that are not structured
                                                                                                            single-class pass-through would not
                                                  and exempt by reason of Section 3(a)(2)                                                                           purely as single-class pass-through
                                                                                                            alter the level or allocation of credit risk
                                                  of the Securities Act but may include                                                                             transactions would be required to meet
                                                                                                            and interest rate risk on the underlying
                                                  assets originated using the same                                                                                  the credit risk retention requirements
                                                                                                            ABS.
                                                  underwriting criteria as private label                                                                            with respect to such resecuritizations
                                                                                                               The Agencies propose to adopt this
                                                  securitizations. Should the rules, as                                                                             unless another exemption for the
                                                                                                            exemption under the general exemption
                                                  proposed, exempt them?                                                                                            resecuritization is available, regardless
                                                                                                            provisions of section 15G(e)(1) of the
                                                     167(a). Are there any ABS that are                                                                             of whether the sponsor of the initial
                                                                                                            Exchange Act. Under that provision, the
                                                  collateralized solely by obligations                                                                              securitization transaction retained credit
                                                                                                            Agencies may jointly adopt or issue
                                                  issued by the United States or an agency                                                                          risk under the rule or whether an
                                                                                                            exemptions, exceptions, or adjustments
                                                  of the United States where the process                                                                            exemption applied to the initial
                                                                                                            to the risk retention rules, if such
                                                  of packaging and securitizing those                                                                               securitization transaction. Thus,
                                                                                                            exemption, exception, or adjustment
                                                  obligations may raise issues that the risk                                                                        resecuritizations that re-tranche the
                                                                                                            would: (A) help ensure high quality
                                                  retention requirement was designed to                                                                             credit risk of the underlying ABS would
                                                                                                            underwriting standards for the
                                                  address? 167(b). For example, would a                                                                             be subject to separate risk retention
                                                                                                            securitizers and originators of assets that
                                                  securitization by a non-governmental                                                                              requirements under the proposed
                                                                                                            are securitized or available for
                                                  securitizer of debt issued by the                                                                                 rules.193 Similarly, under the proposed
                                                                                                            securitization; and (B) encourage
                                                  Tennessee Valley Authority raise any                      appropriate risk management practices                   rules, resecuritizations that re-tranche
                                                  issues such that the Agencies should                      by the securitizers and originators of                  the prepayment risk of the underlying
                                                  provide only a partial exemption?                         assets, improve the access of consumers                 ABS, or that are structured to achieve a
                                                  167(c). If so, what type of transactions                  and businesses to credit on reasonable                  sequential paydown of tranches, would
                                                  and how should the Agencies determine                     terms, or otherwise be in the public                    not be exempted. In these
                                                  the amount and form of risk retention to                  interest and for the protection of                      resecuritizations, although losses on the
                                                  be required?                                              investors.192 As noted above, all of the                underlying ABS would be allocated to
                                                                                                                                                                    holders in the resecuritization on a pro
                                                  C. Exemption for Certain                                  ABS underlying a resecuritization that
                                                                                                                                                                    rata basis, holders of longer duration
                                                  Resecuritization Transactions                             would be exempted under proposed
                                                                                                                                                                    classes in the resecuritization could be
                                                                                                            § l.21(a)(5) would already have been
                                                     Section l.21(a)(5) of the proposed
                                                                                                            issued in a securitization transaction in
                                                  rules would exempt from the credit risk                                                                              193 For example, under the proposed rules, the
                                                                                                            which the sponsor has retained credit
                                                  retention requirements certain                                                                                    sponsor of a collateralized debt obligation (CDO)
                                                                                                            risk in accordance with the rule, or for                would not meet the proposed conditions of the
                                                  resecuritization transactions that meet
                                                                                                            which an exemption from the rule was                    exemption and therefore would be required to
                                                  two conditions.190 First, the transaction                                                                         retain risk in accordance with the rule with respect
                                                                                                            available. Accordingly, the
                                                  must be collateralized solely by existing                                                                         to the CDO, regardless of whether the underlying
                                                                                                            resecuritization of a single-class pass-
                                                  ABS issued in a securitization                                                                                    ABS have been drawn exclusively from 15G-
                                                  transaction for which credit risk was                                                                             compliant ABS. See 15 U.S.C. 78o–11(c)(1)(F). In a
                                                                                                               191 According to the staff of the FHFA, Fannie
                                                                                                                                                                    typical CDO transaction, a securitizer pools
                                                  retained as required under the rule or                    Mae Mega Certificates are an example of a single-       interests in the mezzanine tranches from many
                                                  which was exempted from the credit                        class pass-through resecuritization. FHFA staff have    existing ABS and uses that pool to collateralize the
                                                  risk retention requirements of the rule                   indicated that these certificates represent a
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                                                                                                                                                                    CDO. Repayments of principal on the underlying
                                                                                                            fractional undivided beneficial ownership interest      ABS interests are allocated so as to create a senior
                                                  (hereinafter 15G-compliant ABS).                          in the pool of underlying ABS (typically MBS,           tranche, as well as supporting mezzanine and
                                                  Second, the transaction must be                           REMICs and other Mega Certificates) and in the          equity tranches of increasing credit risk.
                                                                                                            principal and interest distributions from those         Specifically, as periodic principal payments on the
                                                    190 In a resecuritization transaction, the asset pool   underlying ABS. The proposed exemption in               underlying ABS are received, they are distributed
                                                  underlying the ABS issued in the transaction              § l.21(a)(5) of the proposed rules would be             first to the senior tranche of the CDO and then to
                                                  comprises one or more asset-backed securities. In         available to any sponsor of a securitization            the mezzanine and equity tranches in order of
                                                  this section, we refer to the securities issued in a      transaction that is structured in accordance with the   increasing credit risk, with any shortfalls being
                                                  resecuritization transaction as ‘‘resecuritization        rule’s requirements.                                    borne by the most subordinate tranche then
                                                  ABS.’’                                                       192 15 U.S.C. 78o–11(e)(1).                          outstanding.



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                24139

                                                  exposed to a higher level of credit risk                ensure the exemption is limited to this                requirement there be risk retention on
                                                  than holders of shorter duration classes.               particular structure?                                  the underlying ABS?
                                                     Section 15G does not apply to ABS                       170(a). Should the Agencies provide                   172(a). Is the proposed language for
                                                  issued before the effective date of the                 an exemption for prepayment-tranched                   this exemption appropriate? 172(b).
                                                  Agencies’ final rules.194 As a practical                resecuritizations that are backed solely               Does any portion of the exemption
                                                  matter, private-label ABS issued before                 by 15G-compliant ABS? This form of                     cause an ambiguity that should be
                                                  the effective date of the final rules will              resecuritization involves the sponsor of               addressed?
                                                  typically not be 15G-compliant ABS,                     the resecuritization creating tranches
                                                  because such ABS will not have been                                                                            D. Additional Exemptions
                                                                                                          based on the prepayments of the
                                                  structured to meet the rule’s risk                      underlying ABS (i.e., prepayments                         Consistent with section15G of the
                                                  retention requirements. ABS issued                      received by the ABS in the first-level                 Exchange Act, § l.23(b) of the proposed
                                                  before the effective date that meets the                ABS securitization). One type of                       rules provides that the Federal banking
                                                  terms of an exemption of the type                       prepayment-tranched resecuritization is                agencies and the Commission, in
                                                  proposed under __.21 (General                           a planned amortization class (PAC)                     consultation with FHFA and HUD, may
                                                  exemptions) or __.11 (Fannie Mae and                    resecuritization. PAC bonds receive                    jointly adopt or issue additional
                                                  Freddie Mac ABS) could serve as 15G-                    principal payments based on the level of               exemptions, exceptions or adjustments
                                                  compliant ABS.                                          prepayments and will have their                        to the credit risk retention requirements,
                                                                                                          expected duration if the actual speed of               including exemptions, exceptions or
                                                  Request for Comment
                                                                                                          prepayments on the underlying ABS                      adjustments for classes of institutions or
                                                     168(a). Are there other types of                                                                            assets in accordance with section
                                                                                                          falls within a designated range. In order
                                                  resecuritization transactions backed                                                                           15G(e).195 In addition, § l.23(a) of the
                                                                                                          to create a PAC bond with greater
                                                  solely by 15G-compliant ABS that                                                                               proposed rules recognizes that the
                                                  should be exempt from the risk                          certainty of cash flow than the
                                                                                                          underlying ABS, one or more support                    Agencies with rulewriting authority
                                                  retention requirements? 168(b). If so,                                                                         under section 15G(b) 196 with respect to
                                                  what principles and factors should the                  (SUP) classes that are highly sensitive to
                                                                                                          varying levels of prepayment are created               the type of assets involved may jointly
                                                  Agencies use in considering whether                                                                            provide a total or partial exemption of
                                                  other types of resecuritizations backed                 as part of the same transaction. If the
                                                                                                          rate of prepayments is faster than that                any individual securitization
                                                  by 15G-compliant ABS should be                                                                                 transaction, as such Agencies determine
                                                  exempted from the risk retention                        assumed in the creation of the PAC, the
                                                                                                          SUPs receive more principal in order to                may be appropriate in the public
                                                  requirements of section 15G? 168(c).                                                                           interest and for the protection of
                                                  Should the Agencies consider granting                   prevent an overpayment of principal on
                                                                                                          the PAC. If the rate of prepayment is                  investors, as permitted by section
                                                  an exemption only if it is clear that the                                                                      15G(c)(1)(G)(i).197 The Agencies expect
                                                  resecuritization transaction does not                   slower, principal is redirected from the
                                                                                                          SUPs in order to achieve the specified                 to coordinate with each other to
                                                  expose investors in the resecuritization                                                                       facilitate the processing, review and
                                                  to different levels or types of credit risk             repayment schedule on the PAC. In
                                                                                                          either case, credit losses are allocated on            action on requests for such written
                                                  in the securitized assets than the                                                                             interpretations or guidance, or
                                                  underlying 15G-compliant ABS?                           a pro rata basis based on the unpaid
                                                                                                          principal balance attributable to each                 additional exemptions, exceptions or
                                                     169(a). Should the rule provide an                                                                          adjustments.
                                                  exemption for a sequential-pay                          class. Accordingly, the effect of faster-
                                                  resecuritization that is collateralized                 than-expected rates of prepayment will                 Request for Comments
                                                  only by 15G-compliant ABS? In this                      tend to expose holders of the PAC bonds
                                                                                                                                                                    173(a). Are there securitization
                                                  type of resecuritization, the rights to                 to relatively greater losses than the
                                                                                                                                                                 transactions that would not be covered
                                                  principal repayment of the holders of                   holders of the SUPs, while slower-than-
                                                                                                                                                                 by the exemptions in the proposed rules
                                                  the different classes differ solely with                expected rates of prepayment will tend
                                                                                                                                                                 that should be exempted from risk
                                                  respect to the timing of such                           to have the opposite effect. Moreover, in
                                                                                                                                                                 retention requirements pursuant to
                                                  repayments. Longer duration classes                     transactions where more than one PAC
                                                                                                                                                                 section 15G(e)(3) of the Exchange Act?
                                                  receive no payments of principal until                  bond is created, the distribution of
                                                                                                                                                                 173(b). If so, what are the features and
                                                  shorter duration classes have been paid                 principal repayments to the PACs are
                                                                                                                                                                 characteristics of such securitization
                                                  off in full and principal shortfalls are                based on priority and, therefore, the
                                                                                                                                                                 transactions that would properly
                                                  allocated on a pro-rata basis based upon                holders of the PACs are exposed to
                                                                                                                                                                 exempt them from risk retention
                                                  the unpaid principal balance of each                    levels of credit risk that differ from that
                                                                                                                                                                 requirements pursuant to section
                                                  class. As the shorter duration classes are              of the underlying ABS. 170(b). If an
                                                                                                                                                                 15G(e)(3)?
                                                  paid off, the unpaid principal balances                 exemption of prepayment-tranched
                                                  of the longer duration classes begin to                 resecuritizations or certain types of such             E. Safe Harbor for Certain Foreign-
                                                  represent a larger portion of the total                 resecuritizations (such as PAC                         Related Transactions
                                                  unpaid principal balances of the                        structures) is appropriate, how could an                  The proposed rules include a safe
                                                  underlying ABS and, therefore, the                      exemption be written to ensure that the                harbor provision for certain
                                                  longer duration classes are allocated an                exemption does not extend to other                     predominantly foreign transactions
                                                  ever-increasing percentage of credit                    resecuritizations?                                     based on the limited nature of the
                                                  losses as the ABS matures. 169(b). If an                   171. As noted above, the proposed                   transactions’ connections with the
                                                  exemption for sequential-pay                            exemptions require the underlying ABS
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                                                                                                                                                                 United States and U.S. investors. The
                                                  resecuritizations backed by 15G-                        be 15G-compliant ABS. In practice,                     proposed safe harbor is intended solely
                                                  compliant ABS is appropriate, how                       initially this may mean that only                      to provide clarity that the Agencies
                                                  could such an exemption be written to                   resecuritizations based on ABS                         would not apply the requirements of the
                                                                                                          guaranteed by Fannie Mae and Freddie                   proposed rules to transactions that meet
                                                     194 See 15 U.S.C. 78o–11(i) (regulations become
                                                                                                          Mac will qualify for this exemption.
                                                  effective with respect to residential mortgage-
                                                  backed ABS 1 year after publication of the final
                                                                                                          Does this raise any competitive or other                 195 15 U.S.C. 78o–11(e). 

                                                  rules in the Federal Register, and 2 years for all      issues and if so, how can they be                        196 15 U.S.C. 78o–11(b). 

                                                  other ABS).                                             mitigated without eliminating the                        197 15 U.S.C. 78o–11(c)(1)(G)(i). 





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                                                  24140                       Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  all of the conditions of the safe harbor.                 conditions of the safe harbor, is part of             originated before 2002 or after 2007, but
                                                  The proposed safe harbor should not be                    a plan or scheme to evade the                         it may understate the proposed QRM
                                                  interpreted as reflecting the views of                    requirements of section 15G and the                   definition’s effects, both on volume and
                                                  any Agency as to the potential scope of                   proposed rules.                                       on rates of SDQ, for originations from
                                                  transactions or persons subject to                                                                              2002 to 2007, as second liens were
                                                                                                            Request for Comment
                                                  section 15G or the proposed rules.                                                                              increasingly used during this period.
                                                     As set forth in section l.23 of the                      174(a). Are there any extra or special              (That is, the proposed QRM definition
                                                  proposed rules, the safe harbor provides                  considerations relating to these                      would likely cause a greater decrease in
                                                  that the rule’s risk retention                            circumstances that we should take into                SDQ rates and loan volumes than
                                                  requirements would not apply to a                         account? 174(b). Should the more than                 estimated through the use of this proxy.)
                                                  securitization transaction if certain                     10 percent proceeds trigger be higher or                 Other proposed QRM factors may
                                                  conditions are met, including: (i) The                    lower (e.g., 0 percent, 5 percent, 15                 differ somewhat for this analysis. The
                                                  securitization transaction is not required                percent, or 20 percent)?                              QRM proposal is based on current FHA
                                                  to be and is not registered under the                     Appendix A to the Supplementary                       definitions of income, and standards for
                                                  Securities Act; (ii) no more than 10                      Information                                           full documentation of income and full
                                                  percent of the dollar value by proceeds                                                                         appraisals. The data used in this
                                                                                                               The tables below show the estimated                analysis for purposes of estimating
                                                  (or equivalent if sold in a foreign
                                                                                                            effects of the proposed QRM standards                 whether a loan would meet the DTI and
                                                  currency) of all classes of ABS interests
                                                                                                            based on data for all residential                     LTV ratios in the proposed QRM
                                                  sold in the securitization transaction are
                                                                                                            mortgage loans purchased or securitized               standards, however, is based on
                                                  sold to U.S. persons or for the account
                                                                                                            by the Enterprises between 1997 and                   Enterprise definitions of income, and
                                                  or benefit of U.S. persons; 198 (iii)
                                                                                                            2009. The first set of results shows rates            Enterprise documentation and appraisal
                                                  neither the sponsor of the securitization                 of serious delinquency (SDQ), that is,
                                                  transaction nor the issuing entity is (A)                                                                       requirements that prevailed at the time
                                                                                                            loans that are 90 days or more                        the loans were originated. While there
                                                  chartered, incorporated, or organized                     delinquent, or are in the process of
                                                  under the laws of the U.S., or a U.S.                                                                           may be some circumstances in which
                                                                                                            foreclosure. The second set of results                the different standards and definitions
                                                  State or Territory or (B) the                             shows volume, in dollars of unpaid
                                                  unincorporated branch or office located                                                                         would have led to a different QRM
                                                                                                            principal balance (UPB).                              eligibility estimate, the Agencies do not
                                                  in the U.S. of an entity not chartered,                      Because the data that FHFA routinely
                                                  incorporated, or organized under the                                                                            believe that these differences would
                                                                                                            receives from the Enterprises does not                have a material impact on the analysis.
                                                  laws of the U.S., or a U.S. State or                      include all the factors needed to identify
                                                  Territory (collectively, a U.S.-located                                                                         For example, the Enterprises did not
                                                                                                            QRM eligible loans, the universe of                   always require an interior appraisal in
                                                  entity); (iv) no more than 25 percent of                  loans within the data set that would
                                                  the assets collateralizing the ABS sold                                                                         cases where the default risk was judged
                                                                                                            qualify as a QRM under the proposed                   to be low and the down payment was
                                                  in the securitization transaction were                    standards was estimated based on four
                                                  acquired by the sponsor, directly or                                                                            substantial. While loans originated to
                                                                                                            of the most significant QRM elements:                 these standards would not be QRM
                                                  indirectly, from a consolidated affiliate                 (i) Product type (i.e. excluding non-
                                                  of the sponsor or issuing entity that is                                                                        eligible under this proposal, it is likely
                                                                                                            owner occupied loans, low or no                       that the QRM standard would induce
                                                  a U.S.-located entity.199                                 documentation loans, interest-only or                 originators to require full appraisals
                                                     The safe harbor is intended to exclude                 negative amortization loans, loans with               going forward, and thus cause these
                                                  from the proposed risk retention                          balloon payments, and ARM loans that                  loans to be QRM eligible.
                                                  requirements transactions in which the                    permit payment shocks in excess of the                   For the first set of results concerning
                                                  effects on U.S. interests are sufficiently                range permitted by the proposed QRM                   SDQ rates, the first column shows the
                                                  remote so as not to significantly impact                  standards); (ii) front-end and back-end               ‘‘QRM qualifying’’ population. This is
                                                  underwriting standards and risk                           DTI ratios; (iii) LTV ratios; and (iv)                the SDQ rate for all loans that are
                                                  management practices in the United                        credit history.                                       estimated as meeting the proposed QRM
                                                  States or the interests of U.S. investors.                   Because of data limitations, proxies               standards. The last column in the first
                                                  Accordingly, the conditions for use of                    were used for certain of these QRM                    set of results shows the SDQ rate for all
                                                  the safe harbor limit involvement by                      standards. FHFA does not have                         loans purchased or securitized by the
                                                  persons in the U.S. with respect to both                  individual credit items in the data set               Enterprises in that year. Thus, the
                                                  assets being securitized in a transaction                 used for analysis, such as previous                   difference between the first and last
                                                  and the ABS sold in connection with                       bankruptcies or foreclosures involving                column show the cumulative estimated
                                                  the transaction. The safe harbor would                    the borrower, or current or recent                    effect of the set of proposed QRM
                                                  not be available for any transaction or                   borrower delinquencies on other debt                  standards on SDQ for that cohort of
                                                  series of transactions that, although in                  obligations. However, borrowers with                  loans. The intermediate columns show
                                                  technical compliance with the                             such credit issues would tend to have                 the SDQ rate for the population of loans
                                                     198 The proposed rules include a definition of
                                                                                                            much lower credit scores than other                   in the relevant year that are estimated to
                                                  ‘‘U.S. person’’ that is substantially the same as the
                                                                                                            borrowers (all else being equal). To                  meet every QRM standard other than the
                                                  definition of ‘‘U.S. person’’ in the Commission’s         proxy the credit history restrictions in              standard(s) indicated at the top of the
                                                  Regulation S, although Regulation S relates solely        the proposed QRM definition, borrowers                column. For example, the second
                                                  to the application of section 5 of the Securities Act     with FICO scores below 690 were                       column, headed Product Type, shows
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  (12 U.S.C. 77e). See proposed rules at § l.23 and
                                                  17 CFR 203.902(k). Additionally, the 10 percent
                                                                                                            deemed to not satisfy the proposed                    the estimated effect of allowing low or
                                                  threshold is consistent with other Commission             QRM credit history standards for                      no documentation loans, interest-only
                                                  exemptive rules relating to cross-border offerings        purposes of the analysis.                             or negative amortization loans, loans
                                                  under which the Commission has provided                      In addition, the analysis uses first-lien          with balloon payments, or ARM loans
                                                  accommodations for not applying its rules even            LTV ratios as a proxy for combined LTV                that permit payment shocks in excess of
                                                  though there is a limited offering of securities in the
                                                  United States. See Securities Act Rules 801 and 802       when relevant. The Agencies do not                    the range permitted by the proposed
                                                  (17 CFR 230.801 and 802).                                 believe that this proxy would produce a               QRM standards, while still prohibiting
                                                     199 See proposed rules at § l.23.                      large discrepancy for analysis of loans               loans with credit history (as proxied


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                                                                                     Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                    24141

                                                  through the use of credit scores), an LTV                          estimated to have met the proposed                     Product Type, shows the estimated
                                                  ratio, or debt-to-income ratios that                               QRM standards. The last column shows                   effect on the percentage of Enterprise
                                                  would disqualify them for QRM status.                              total dollar originations purchased or                 volume that would be QRM eligible by
                                                  These columns show the differences                                 securitized by the Enterprises for each                allowing loans that do not conform to
                                                  between the base QRM SDQ rate and the                              year. The first column shows the                       the Product Type standards for
                                                  higher risk population within each                                 percent of that volume estimated to be                 QRMs,200 while still prohibiting loans
                                                  column. The analysis is shown                                      QRM eligible. The intermediate                         with a credit history (as proxied by
                                                  separately for all loans, for purchases,                           columns show the estimated effect on                   credit scores), an LTV ratio, or debt-to-
                                                  for rate and term refinances, and for                              that volume for the population of loans                income ratios that would disqualify the
                                                  cash out refinances.                                               that are estimated to meet the proposed                loan for QRM status. These columns
                                                    The second set of results shows the                              QRM standards other than the one                       show the differences between the base
                                                  volume of Enterprise mortgages                                     identified at the top of the column. For               QRM qualifying percentage and the
                                                  purchased or securitized that are                                  example, the second column, headed                     higher risk population.

                                                                                                                                        ALL LOANS
                                                                     Year                                  QRM             Product type           PTI/DTI             LTV              FICO                  All loans

                                                       Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification 

                                                                                                                Requirements 


                                                  1997   ...........................................            0.42%            +0.05%              +0.39%             +0.61%            +3.08%                      +2.30%
                                                  1998   ...........................................            0.39%            +0.10%              +0.31%             +0.52%            +2.34%                      +1.68%
                                                  1999   ...........................................            0.44%            +0.13%              +0.34%             +0.78%            +3.12%                      +2.31%
                                                  2000   ...........................................            0.32%            +0.43%              +0.20%             +0.83%            +2.94%                      +2.77%
                                                  2001   ...........................................            0.31%            +0.35%              +0.27%             +0.59%            +2.52%                      +2.27%
                                                  2002   ...........................................            0.33%            +0.41%              +0.32%             +0.73%            +2.34%                      +2.09%
                                                  2003   ...........................................            0.55%            +0.64%              +0.66%             +1.06%            +2.95%                      +2.40%
                                                  2004   ...........................................            0.95%            +1.72%              +1.16%             +1.58%            +4.27%                      +4.33%
                                                  2005   ...........................................            1.86%            +5.30%              +2.36%             +2.31%            +6.46%                      +8.13%
                                                  2006   ...........................................            2.72%            +7.49%              +3.35%             +3.73%            +7.90%                     +13.93%
                                                  2007   ...........................................            2.37%            +6.34%              +3.59%             +4.39%            +8.66%                     +17.12%
                                                  2008   ...........................................            0.68%            +1.48%              +1.64%             +1.68%            +5.15%                      +5.94%
                                                  2009   ...........................................            0.04%            +0.06%              +0.11%             +0.09%            +0.50%                      +0.24%

                                                       Total ....................................               0.69%            +2.99%              +1.38%             +0.99%            +3.73%                      +5.27%

                                                                       Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements

                                                  1997   ...........................................            20.44%           +3.75%             +13.04%           +13.74%             +5.81%           $286,497,878,371
                                                  1998   ...........................................            23.29%           +2.17%             +13.30%           +17.10%             +6.24%            691,033,994,509
                                                  1999   ...........................................            19.48%           +3.16%             +14.83%           +12.95%             +5.37%            481,450,519,442
                                                  2000   ...........................................            16.44%           +3.70%             +17.00%            +8.40%             +4.53%            356,779,731,420
                                                  2001   ...........................................            19.37%           +3.01%             +14.33%           +13.11%             +4.62%          1,039,412,013,403
                                                  2002   ...........................................            22.37%           +4.28%             +15.35%           +10.72%             +4.62%          1,385,056,256,240
                                                  2003   ...........................................            24.57%           +4.55%             +16.68%           +10.02%             +4.98%          1,924,265,340,603
                                                  2004   ...........................................            17.03%           +6.35%             +17.68%            +6.25%             +4.34%            937,643,914,289
                                                  2005   ...........................................            14.41%           +6.74%             +18.78%            +5.45%             +3.36%            939,069,358,457
                                                  2006   ...........................................            11.52%           +7.11%             +17.59%            +3.91%             +2.73%            887,443,942,464
                                                  2007   ...........................................            10.72%           +5.44%             +16.14%            +4.95%             +2.24%          1,027,460,511,244
                                                  2008   ...........................................            17.39%           +4.64%             +22.01%            +9.22%             +2.12%            793,136,249,487
                                                  2009   ...........................................            30.52%           +3.38%             +24.47%           +15.26%             +1.74%          1,176,445,135,548

                                                       Total ....................................               19.79%           +4.62%             +17.36%             +9.86%            +3.91%         11,925,694,845,477


                                                                                                                                   PURCHASE LOANS
                                                                     Year                                  QRM             Product type           PTI/DTI             LTV              FICO                  All loans

                                                       Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification 

                                                                                                                Requirements 


                                                  1997   ...........................................
           0.42%            +0.03%              +0.36%             +0.80%            +3.13%                      +2.44%
                                                  1998   ...........................................
           0.46%            +0.04%              +0.30%             +0.90%            +2.70%                      +2.13%
                                                  1999   ...........................................
           0.40%            +0.12%              +0.30%             +0.98%            +3.05%                      +2.23%
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                                                  2000   ...........................................
           0.29%            +0.38%              +0.17%             +0.83%            +2.51%                      +2.29%
                                                  2001   ...........................................
           0.38%            +0.35%              +0.28%             +0.97%            +2.72%                      +2.59%
                                                  2002   ...........................................
           0.48%            +0.50%              +0.32%             +1.28%            +2.61%                      +2.70%
                                                  2003   ...........................................
           0.93%            +0.72%              +0.78%             +1.84%            +3.29%                      +3.50%
                                                  2004   ...........................................
           1.16%            +1.97%              +1.24%             +2.53%            +3.93%                      +4.71%
                                                  2005   ...........................................
           2.13%            +6.18%              +2.49%             +2.87%            +5.94%                      +8.61%

                                                    200 That is, low or no documentation loans,                      with a balloon payment, or ARM loans that permit       payment shocks in excess of the range permitted by
                                                  interest-only or negative amortization loans, loans                                                                       the proposed QRM standards.



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                                                  24142                              Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                                                                                           PURCHASE LOANS—Continued
                                                                     Year                                  QRM             Product type           PTI/DTI             LTV              FICO         All loans

                                                  2006   ...........................................            2.76%            +8.69%              +3.28%             +3.29%           +6.78%            +13.63%
                                                  2007   ...........................................            2.33%            +6.76%              +3.31%             +4.33%           +6.79%            +16.51%
                                                  2008   ...........................................            0.64%            +1.36%              +1.42%             +2.10%           +4.73%             +5.62%
                                                  2009   ...........................................            0.07%            +0.09%              +0.09%             +0.07%           +0.63%             +0.23%

                                                       Total ....................................               1.01%            +3.84%              +1.56%             +1.28%           +3.69%             +6.39%

                                                                       Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements

                                                  1997   ...........................................            20.74%           +4.40%             +14.02%           +12.11%            +5.55%   $171,316,168,314
                                                  1998   ...........................................            22.08%           +2.99%             +15.33%           +13.09%            +6.23%    243,827,154,269
                                                  1999   ...........................................            19.86%           +4.02%             +17.29%           +10.39%            +4.93%    252,736,885,540
                                                  2000   ...........................................            18.17%           +4.21%             +19.37%            +7.56%            +4.45%    259,462,348,244
                                                  2001   ...........................................            19.57%           +4.20%             +18.76%            +7.94%            +4.92%    334,671,388,428
                                                  2002   ...........................................            18.43%           +5.80%             +18.86%            +6.12%            +4.51%    378,648,800,742
                                                  2003   ...........................................            18.03%           +6.81%             +19.38%            +5.32%            +4.42%    428,404,858,343
                                                  2004   ...........................................            16.71%           +9.21%             +20.88%            +3.25%            +3.78%    397,943,548,815
                                                  2005   ...........................................            15.67%          +10.22%             +22.25%            +2.51%            +2.92%    433,917,427,310
                                                  2006   ...........................................            13.57%           +9.37%             +21.75%            +2.02%            +2.48%    459,040,004,449
                                                  2007   ...........................................            12.39%           +6.88%             +19.94%            +3.27%            +1.95%    504,879,485,500
                                                  2008   ...........................................            17.33%           +6.08%             +26.06%            +6.40%            +1.86%    321,485,446,505
                                                  2009   ...........................................            27.06%           +7.02%             +33.83%            +8.18%            +1.89%    225,983,942,704

                                                       Total ....................................               17.57%           +6.69%             +20.69%             +5.89%           +3.63%   4,412,317,459,162


                                                                                                                            NO CASH-OUT REFINANCINGS
                                                                     Year                                  QRM             Product type           PTI/DTI             LTV              FICO         All loans

                                                       Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification 

                                                                                                                Requirements 


                                                  1997   ...........................................            0.37%            +0.06%              +0.43%             +0.32%           +2.94%             +2.00%
                                                  1998   ...........................................            0.33%            +0.11%              +0.27%             +0.36%           +2.15%             +1.41%
                                                  1999   ...........................................            0.46%            +0.17%              +0.43%             +0.66%           +3.26%             +2.47%
                                                  2000   ...........................................            0.40%            +0.66%              +0.31%             +0.70%           +3.69%             +4.11%
                                                  2001   ...........................................            0.27%            +0.32%              +0.24%             +0.50%           +2.21%             +1.97%
                                                  2002   ...........................................            0.28%            +0.27%              +0.28%             +0.65%           +2.01%             +1.63%
                                                  2003   ...........................................            0.46%            +0.42%              +0.54%             +0.88%           +2.69%             +1.71%
                                                  2004   ...........................................            0.77%            +1.01%              +0.97%             +1.25%           +4.09%             +3.36%
                                                  2005   ...........................................            1.43%            +3.09%              +1.92%             +1.96%           +6.46%             +6.54%
                                                  2006   ...........................................            2.74%            +6.44%              +3.70%             +3.72%           +8.57%            +13.99%
                                                  2007   ...........................................            2.86%            +7.94%              +5.20%             +5.39%          +10.27%            +19.45%
                                                  2008   ...........................................            0.70%            +1.80%              +1.94%             +1.55%           +5.25%             +5.78%
                                                  2009   ...........................................            0.04%            +0.03%              +0.11%             +0.10%           +0.48%             +0.24%

                                                       Total ....................................               0.44%            +1.65%              +0.90%             +0.82%           +3.11%             +3.47%

                                                                       Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements

                                                  1997   ...........................................            21.04%           +3.12%             +11.92%           +15.76%            +6.12%    $72,883,400,278
                                                  1998   ...........................................            25.24%           +1.92%             +12.34%           +18.72%            +6.40%    302,723,323,315
                                                  1999   ...........................................            20.34%           +2.44%             +12.42%           +14.98%            +6.23%    140,480,199,806
                                                  2000   ...........................................            13.66%           +2.31%             +11.72%           +10.37%            +5.06%     48,878,241,470
                                                  2001   ...........................................            22.56%           +2.89%             +13.21%           +15.14%            +4.72%    390,566,245,690
                                                  2002   ...........................................            28.69%           +4.46%             +15.27%           +11.65%            +4.90%    584,998,514,202
                                                  2003   ...........................................            31.06%           +4.48%             +16.76%           +11.22%            +5.22%    920,098,549,172
                                                  2004   ...........................................            22.37%           +5.15%             +16.81%            +8.76%            +5.07%    269,562,391,201
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  2005   ...........................................            16.42%           +4.93%             +16.06%            +8.46%            +3.82%    169,162,254,192
                                                  2006   ...........................................            10.24%           +6.22%             +13.03%            +6.20%            +2.73%    131,792,837,483
                                                  2007   ...........................................             9.41%           +5.15%             +12.27%            +6.36%            +2.16%    196,852,210,903
                                                  2008   ...........................................            20.16%           +4.61%             +20.18%           +10.87%            +2.06%    231,714,054,542
                                                  2009   ...........................................            32.80%           +3.01%             +22.10%           +16.44%            +1.63%    637,544,819,174

                                                       Total ....................................               25.50%           +3.95%             +16.25%           +12.53%            +4.23%   4,097,257,041,427




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                                                                                     Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                        24143

                                                                                                                                   CASH-OUT REFINANCINGS
                                                                     Year                                  QRM             Product type              PTI/DTI             LTV              FICO                   All loans

                                                       Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification 

                                                                                                                Requirements 


                                                  1997   ...........................................            0.51%                +0.18%               +0.48%           +0.54%            +3.12%                       +2.20%
                                                  1998   ...........................................            0.39%                +0.20%               +0.37%           +0.42%            +2.09%                       +1.44%
                                                  1999   ...........................................            0.52%                +0.23%               +0.42%           +0.56%            +3.05%                       +2.27%
                                                  2000   ...........................................            0.51%                +0.70%               +0.41%           +0.81%            +4.26%                       +3.88%
                                                  2001   ...........................................            0.31%                +0.33%               +0.23%           +0.52%            +2.67%                       +2.30%
                                                  2002   ...........................................            0.31%                +0.40%               +0.28%           +0.61%            +2.57%                       +2.15%
                                                  2003   ...........................................            0.51%                +0.64%               +0.60%           +1.12%            +3.11%                       +2.57%
                                                  2004   ...........................................            0.89%                +1.29%               +1.08%           +1.51%            +4.92%                       +4.71%
                                                  2005   ...........................................            1.70%                +2.71%               +2.22%           +2.55%            +7.11%                       +8.34%
                                                  2006   ...........................................            2.61%                +3.77%               +3.34%           +4.05%            +9.06%                      +14.42%
                                                  2007   ...........................................            2.14%                +3.46%               +3.37%           +3.84%            +9.99%                      +16.66%
                                                  2008   ...........................................            0.72%                +1.39%               +1.73%           +1.44%            +5.47%                       +6.52%
                                                  2009   ...........................................            0.03%                +0.05%               +0.10%           +0.07%            +0.44%                       +0.24%

                                                       Total ....................................               0.70%                +2.01%               +1.40%           +1.12%            +4.50%                       +5.85%

                                                                       Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements

                                                  1997   ...........................................            18.17%               +2.23%               +10.98%        +16.86%             +6.32%             $42,298,309,778
                                                  1998   ...........................................            21.25%               +1.30%               +11.88%        +20.45%             +5.91%             144,483,516,925
                                                  1999   ...........................................            17.05%               +1.84%               +11.63%        +17.04%             +5.28%              88,233,434,096
                                                  2000   ...........................................            10.03%               +2.40%                +9.66%        +10.90%             +4.46%              48,439,141,706
                                                  2001   ...........................................            15.19%               +1.90%               +11.01%        +16.10%             +4.18%             314,174,379,286
                                                  2002   ...........................................            17.13%               +2.67%               +12.30%        +13.58%             +4.33%             421,408,941,296
                                                  2003   ...........................................            19.05%               +2.99%               +14.53%        +11.60%             +5.00%             575,761,933,088
                                                  2004   ...........................................            12.16%               +3.34%               +13.83%         +8.15%             +4.43%             270,137,974,274
                                                  2005   ...........................................            11.77%               +3.14%               +15.67%         +7.74%             +3.71%             335,989,676,955
                                                  2006   ...........................................             8.93%               +4.00%               +13.17%         +5.81%             +3.12%             296,611,100,532
                                                  2007   ...........................................             8.93%               +3.39%               +12.61%         +6.70%             +2.75%             325,728,814,842
                                                  2008   ...........................................            14.78%               +2.75%               +18.34%        +11.41%             +2.52%             239,936,748,440
                                                  2009   ...........................................            28.36%               +1.52%               +22.56%        +17.99%             +1.87%             312,916,373,670

                                                       Total ....................................               15.81%               +2.75%               +14.39%        +11.78%             +3.89%           3,416,120,344,887



                                                  VII. Solicitation of Comments on Use of                              • What else could we do to make the                     For the reasons provided below, the
                                                  Plain Language                                                     regulation easier to understand?                          OCC certifies that the proposed rule, if
                                                                                                                                                                               adopted in final form, would not have
                                                    Section 722 of the Gramm-Leach-                                  VIII. Administrative Law Matters
                                                                                                                                                                               a significant economic impact on a
                                                  Bliley Act, Public Law 106–102, sec.                               A. Regulatory Flexibility Act                             substantial number of small entities.
                                                  722, 113 Stat. 1338, 1471 (Nov. 12,
                                                                                                                        OCC: The Regulatory Flexibility Act                    Accordingly, a regulatory flexibility
                                                  1999), requires the Federal banking
                                                                                                                     (RFA) generally requires that, in                         analysis is not required.
                                                  agencies to use plain language in all
                                                                                                                     connection with a notice of proposed                         As discussed in the ‘‘Supplementary
                                                  proposed and final rules published after
                                                                                                                     rulemaking, an agency prepare and                         Information’’ above, section 941 of the
                                                  January 1, 2000. The Federal banking
                                                                                                                     make available for public comment an                      Dodd-Frank Act 202 generally requires
                                                  agencies invite your comments on how
                                                                                                                     initial regulatory flexibility analysis that              the Federal banking agencies and the
                                                  to make this proposal easier to
                                                                                                                     describes the impact of a proposed rule                   Commission, and, in the case of the
                                                  understand. For example:
                                                                                                                     on small entities.201 However, the                        securitization of any residential
                                                    • Have we organized the material to                                                                                        mortgage asset, together with HUD and
                                                  suit your needs? If not, how could this                            regulatory flexibility analysis otherwise
                                                                                                                     required under the RFA is not required                    FHFA, to jointly prescribe regulations,
                                                  material be better organized?                                                                                                that (i) require a securitizer to retain not
                                                                                                                     if an agency certifies that the rule will
                                                    • Are the requirements in the                                    not have a significant economic impact                    less than 5 percent of the credit risk of
                                                  proposed regulation clearly stated? If                             on a substantial number of small entities                 any asset that the securitizer, through
                                                  not, how could the regulation be more                              (defined in regulations promulgated by                    the issuance of an asset-backed security
                                                  clearly stated?                                                    the Small Business Administration to                      (ABS), transfers, sells, or conveys to a
                                                    • Does the proposed regulation                                   include banking organizations with total                  third party; and (ii) prohibit a
                                                  contain language or jargon that is not
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                                                                                     assets of less than or equal to $175                      securitizer from directly or indirectly
                                                  clear? If so, which language requires                              million) and publishes its certification                  hedging or otherwise transferring the
                                                  clarification?                                                     and a short, explanatory statement in                     credit risk that the securitizer is
                                                    • Would a different format (grouping                             the Federal Register together with the                    required to retain under section 15G.
                                                  and order of sections, use of headings,                            rule.                                                     Although the proposed rule would
                                                  paragraphing) make the regulation                                     As of September 30, 2010, there were                   apply directly only to securitizers,
                                                  easier to understand? If so, what                                  approximately 590 small national banks.
                                                  changes to the format would make the                                                                                           202 Codified at section 15G of the Exchange Act,

                                                  regulation easier to understand?                                       201 See   5 U.S.C. 601 et seq.                        17 U.S.C. 78o–11.



                                             VerDate Mar<15>2010       18:07 Apr 28, 2011          Jkt 223001   PO 00000   Frm 00055      Fmt 4701   Sfmt 4702   E:\FR\FM\29APP2.SGM   29APP2
                                                  24144                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  subject to certain considerations, section              eligible horizontal residual interest                   balance of assets sold and securitized of
                                                  15G authorizes the Agencies to permit                   acquired by an originator of one or more                $100 million or more.205
                                                  securitizers to allocate at least a portion             securitized assets if certain                              The OCC seeks comments on whether
                                                  of the risk retention requirement to the                requirements are satisfied, including,                  the proposed rule, if adopted in final
                                                  originator(s) of the securitized assets.                the originator must originate at least 20               form, would impose undue burdens, or
                                                     Section 15G provides a total                         percent of the securitized assets, as                   have unintended consequences for,
                                                  exemption from the risk retention                       measured by the aggregate unpaid                        small national banks and whether there
                                                  requirements for securitizers of certain                principal balance of the asset pool. In                 are ways such potential burdens or
                                                  securitization transactions, such as an                 determining whether the allocation                      consequences could be minimized in a
                                                  ABS issuance collateralized exclusively                 provisions of the proposal would have                   manner consistent with section 15G of
                                                  by ‘‘qualified residential mortgage’’                   a significant economic impact on a                      the Exchange Act.
                                                  (QRM) loans, and further authorizes the                 substantial number of small banking                        Board: The Regulatory Flexibility Act
                                                  Agencies to establish a lower risk                      organizations, the Federal banking                      (5 U.S.C. 603(b)) generally requires that,
                                                  retention requirement for securitizers of               agencies reviewed September 30, 2010                    in connection with a notice of proposed
                                                  ABS issuances collateralized by other                   Call Report data to evaluate the                        rulemaking, an agency prepare and
                                                  asset types, such as commercial,                        securitization activity and approximate                 make available for public comment an
                                                  commercial real estate (CRE), and                       the number of small banking                             initial regulatory flexibility analysis that
                                                  automobile loans, which satisfy                         organizations that potentially could                    describes the impact of a proposed rule
                                                  underwriting standards established by                   retain credit risk under allocation                     on small entities.206 Under regulations
                                                  the Federal banking agencies.                           provisions of the proposal.203                          promulgated by the Small Business
                                                     The risk retention requirements of                      The Call Report data indicates that                  Administration, a small entity includes
                                                  section 15G apply generally to a                        approximately 329 small banking                         a commercial bank or bank holding
                                                  ‘‘securitizer’’ of ABS, where securitizer               organizations, 54 of which are national                 company with assets of $175 million or
                                                  is defined to mean (i) an issuer of an                  banks, originate loans for securitization,              less (each, a small banking
                                                  ABS; or (ii) a person who organizes and                 namely ABS issuances collateralized by                  organization).207 The Board has
                                                  initiates an asset-backed transaction by                one-to-four family residential mortgages.               considered the potential impact of the
                                                  selling or transferring assets, either                  The majority of these originators sell                  proposed rules on small banking
                                                  directly or indirectly, including through               their loans either to Fannie Mae or                     organizations supervised by the Board
                                                  an affiliate, to the issuer. Section 15G                Freddie Mac, which retain credit risk                   in accordance with the Regulatory
                                                  also defines an ‘‘originator’’ as a person              through agency guarantees and would                     Flexibility Act.
                                                  who (i) through the extension of credit                 not be able to allocate credit risk to                     For the reasons discussed in Part II of
                                                  or otherwise, creates a financial asset                 originators under this proposed rule.
                                                  that collateralizes an asset-backed                                                                             this Supplementary Information, the
                                                                                                          Additionally, based on publicly-                        proposed rules define a securitizer as a
                                                  security; and (ii) sells an asset directly              available market data, it appears that
                                                  or indirectly to a securitizer.                                                                                 ‘‘sponsor’’ in a manner consistent with
                                                                                                          most residential mortgage-backed                        the definition of that term in the
                                                     The proposed rule implements the                     securities offerings are collateralized by
                                                  credit risk retention requirements of                                                                           Commission’s Regulation AB and
                                                                                                          a pool of mortgages with an unpaid                      provide that the sponsor of a
                                                  section 15G. Section 15G requires the                   aggregate principal balance of at least
                                                  Agencies to establish risk retention                                                                            securitization transaction is generally
                                                                                                          $500 million.204 Accordingly, under the                 responsible for complying with the risk
                                                  requirements for ‘‘securitizers’’. The                  proposed rule a sponsor could
                                                  proposal would, as a general matter,                                                                            retention requirements established
                                                                                                          potentially allocate a portion of the risk              under section 15G. The Board is
                                                  require that a ‘‘sponsor’’ of a                         retention requirement to a small
                                                  securitization transaction retain the                                                                           unaware of any small banking
                                                                                                          banking organization only if such                       organization under the supervision of
                                                  credit risk of the securitized assets in                organization originated at least 20
                                                  the form and amount required by the                                                                             the Board that has acted as a sponsor of
                                                                                                          percent ($100 million) of the securitized               an ABS transaction 208 (based on
                                                  proposed rule. The Agencies believe                     mortgages. As of September 30, 2010,
                                                  that imposing the risk retention                                                                                September 30, 2010 data).209 As of
                                                                                                          only one small banking organization                     September 30, 2010, there were
                                                  requirement on the sponsor of the                       reported an outstanding principal
                                                  ABS—as permitted by section 15G—is                                                                              approximately 2861 small banking
                                                  appropriate in light of the active and                     203 Call Report Schedule RC–S provides
                                                                                                                                                                  organizations supervised by the Board,
                                                  direct role that a sponsor typically has                information on the servicing, securitization, and
                                                                                                                                                                  which includes 2412 bank holding
                                                  in arranging a securitization transaction               asset sale activities of banking organizations. For     companies, 398 state member banks, 9
                                                  and selecting the assets to be                          purposes of the RFA analysis, the Agencies              Edge and agreement corporations and 42
                                                                                                          gathered and evaluated data regarding (1) net
                                                  securitized. The OCC is aware of only                   securitization income, (2) the outstanding principal
                                                  six small banking organizations that                    balance of assets sold and securitized by the
                                                                                                                                                                    205 The OCC notes that this finding assumes that

                                                  currently sponsor securitizations (one of               reporting entity with servicing retained or with        no portion of the assets originated by small banking
                                                                                                          recourse or other seller-provided credit                organizations were sold to securitizations that
                                                  which is a national bank, two are state                                                                         qualify for an exemption from the risk retention
                                                                                                          enhancements, and (3) assets sold with recourse or
                                                  member banks, and three are state                       other seller-provided credit enhancements and not       requirements under the proposed rule.
                                                  nonmember banks based on September                      securitized by the reporting bank.
                                                                                                                                                                    206 See 5 U.S.C. 601 et seq.

                                                  30, 2010 information) and, therefore, the                  204 Based on the data provided in Table 1, page        207 13 CFR 121.201.
                                                                                                                                                                    208 For purposes of the proposed rules, this would
                                                  risk retention requirements of the
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                                                                                                          29 of the Board’s ‘‘Report to the Congress on Risk
                                                                                                          Retention’’, it appears that the average MBS            include a small bank holding company; state
                                                  proposed rule, as generally applicable to                                                                       member bank; Edge corporation; agreement
                                                                                                          issuance is collateralized by a pool of
                                                  sponsors, would not have a significant                  approximately $620 million in mortgage loans (for       corporation; foreign banking organization; and any
                                                  economic impact on a substantial                        prime MBS issuances) or approximately $690              subsidiary of the foregoing.
                                                  number of small national banks.                         million in mortgage loans (for subprime MBS               209 Call Report Schedule RC–S; Data based on the

                                                     Under the proposed rule a sponsor                    issuances). For purposes of the RFA analysis, the       Reporting Form FR 2866b; Structure Data for the
                                                                                                          agencies used an average asset pool size $500           U.S. Offices of Foreign Banking Organizations; and
                                                  may offset the risk retention                           million to account for reductions in mortgage           Aggregate Data on Assets and Liabilities of U.S.
                                                  requirement by the amount of any                        securitization activity following 2007, and to add an   Branches and Agencies of Foreign Banks based on
                                                  vertical risk retention ABS interests or                element of conservatism to the analysis.                the quarterly form FFIEC 002.



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                            24145

                                                  U.S. offices of foreign banking                         sponsor could potentially allocate a                   securitization of any residential
                                                  organizations.                                          portion of the risk retention requirement              mortgage asset, together with HUD and
                                                     The proposed rules permit, but do not                to a small banking organization only if                FHFA, to jointly prescribe regulations,
                                                  require, a sponsor to allocate a portion                such organization originated at least 20               that (i) require a securitizer to retain not
                                                  of its risk retention requirement to one                percent ($100 million) of the securitized              less than 5 percent of the credit risk of
                                                  or more originators of the securitized                  mortgages. As of September 30, 2010,                   any asset that the securitizer, through
                                                  assets, subject to certain conditions                   only one small banking organization                    the issuance of an asset-backed security
                                                  being met. In particular, a sponsor may                 supervised by the Board reported an                    (ABS), transfers, sells, or conveys to a
                                                  offset the risk retention requirement by                outstanding principal balance of assets                third party; and (ii) prohibit a
                                                  the amount of any vertical risk retention               sold and securitized of $100 million or                securitizer from directly or indirectly
                                                  ABS interests or eligible horizontal                    more.212                                               hedging or otherwise transferring the
                                                  residual interest acquired by an                           In light of the foregoing, the proposed             credit risk that the securitizer is
                                                  originator of one or more securitized                   rules would not appear to have a                       required to retain under section 15G.
                                                  assets if certain requirements are                      significant economic impact on                         Although the proposed rule would
                                                  satisfied, including, the originator must               sponsors or originators supervised by                  apply directly only to securitizers,
                                                  originate at least 20 percent of the                    the Board. The Board seeks comment on                  subject to certain considerations, section
                                                  securitized assets, as measured by the                  whether the proposed rules would                       15G authorizes the Agencies to permit
                                                  aggregate unpaid principal balance of                   impose undue burdens on, or have                       securitizers to allocate at least a portion
                                                  the asset pool. A sponsor using this risk               unintended consequences for, small                     of the risk retention requirement to the
                                                  retention option remains responsible for                banking organizations, and whether                     originator(s) of the securitized assets.
                                                  ensuring that the originator has satisfied              there are ways such potential burdens or                  Section 15G provides a total
                                                  the risk retention requirements. In light               consequences could be minimized in a                   exemption from the risk retention
                                                  of this option, the Board has considered                manner consistent with section 15G of                  requirements for securitizers of certain
                                                  the impact of the proposed rules on                     the Exchange Act.                                      securitization transactions, such as an
                                                  originators that are small banking                         FDIC: The Regulatory Flexibility Act                ABS issuance collateralized exclusively
                                                  organizations.                                          (RFA) generally requires that, in                      by ‘‘qualified residential mortgage’’
                                                     The September 30, 2010 regulatory                    connection with a notice of proposed                   (QRM) loans, and further authorizes the
                                                  report data 210 indicates that                          rulemaking, an agency prepare and                      Agencies to establish a lower risk
                                                  approximately 329 small banking                         make available for public comment an                   retention requirement for securitizers of
                                                  organizations, 37 of which are small                    initial regulatory flexibility analysis that           ABS issuances collateralized by other
                                                  banking organizations that are                          describes the impact of a proposed rule                asset types, such as commercial,
                                                  supervised by the Board, originate loans                on small entities.213 However, a                       commercial real estate (CRE), and
                                                  for securitization, namely ABS                          regulatory flexibility analysis is not                 automobile loans, which satisfy
                                                  issuances collateralized by one-to-four                 required if the agency certifies that the              underwriting standards established by
                                                  family residential mortgages. The                       rule will not have a significant                       the Federal banking agencies.
                                                  majority of these originators sell their                economic impact on a substantial                          The risk retention requirements of
                                                  loans either to Fannie Mae or Freddie                   number of small entities (defined in                   section 15G apply generally to a
                                                  Mac, which retain credit risk through                   regulations promulgated by the Small                   ‘‘securitizer’’ of ABS, where securitizer
                                                  agency guarantees and would not be                      Business Administration to include                     is defined to mean (i) an issuer of an
                                                  able to allocate credit risk to originators             banking organizations with total assets                ABS; or (ii) a person who organizes and
                                                  under this proposed rule. Additionally,                 of less than or equal to $175 million)                 initiates an asset-backed transaction by
                                                  based on publicly-available market data,                and publishes its certification and a                  selling or transferring assets, either
                                                  it appears that most residential                        short, explanatory statement in the                    directly or indirectly, including through
                                                  mortgage-backed securities offerings are                Federal Register together with the rule.               an affiliate, to the issuer. Section 15G
                                                  collateralized by a pool of mortgages                      As of September 30, 2010, there were                also defines an ‘‘originator’’ as a person
                                                  with an unpaid aggregate principal                      approximately 2,768 small FDIC-                        who (i) through the extension of credit
                                                  balance of at least $500 million.211                    supervised institutions, which includes                or otherwise, creates a financial asset
                                                  Accordingly, under the proposed rule a                  2,639 state nonmember banks and 129                    that collateralizes an asset-backed
                                                                                                          state chartered savings banks. For the                 security; and (ii) sells an asset directly
                                                     210 Call Report Schedule RC–S provides               reasons provided below, the FDIC                       or indirectly to a securitizer.
                                                  information on the servicing, securitization, and       certifies that the proposed rule, if                      The proposed rule implements the
                                                  asset sale activities of banking organizations. For     adopted in final form, would not have                  credit risk retention requirements of
                                                  purposes of the RFA analysis, the Agencies                                                                     section 15G. The proposal would, as a
                                                  gathered and evaluated data regarding (1) net
                                                                                                          a significant economic impact on a
                                                  securitization income, (2) the outstanding principal    substantial number of small entities.                  general matter, require that a ‘‘sponsor’’
                                                  balance of assets sold and securitized by the           Accordingly, a regulatory flexibility                  of a securitization transaction retain the
                                                  reporting entity with servicing retained or with        analysis is not required.                              credit risk of the securitized assets in
                                                  recourse or other seller-provided credit
                                                                                                             As discussed in the SUPPLEMENTARY                   the form and amount required by the
                                                  enhancements, and (3) assets sold with recourse or                                                             proposed rule. The Agencies believe
                                                  other seller-provided credit enhancements and not       INFORMATION above, section 941 of the
                                                  securitized by the reporting bank.                      Dodd-Frank Act 214 generally requires                  that imposing the risk retention
                                                     211 Based on the data provided in Table 1, page
                                                                                                          the Federal banking agencies and the                   requirement on the sponsor of the
                                                                                                                                                                 ABS—as permitted by section 15G—is
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                                                  29 of the Board’s ‘‘Report to the Congress on Risk      Commission, and, in the case of the
                                                  Retention’’, it appears that the average MBS                                                                   appropriate in view of the active and
                                                  issuance is collateralized by a pool of
                                                  approximately $620 million in mortgage loans (for
                                                                                                            212 The FDIC notes that this finding assumes that    direct role that a sponsor typically has
                                                  prime MBS issuances) or approximately $690              no portion of the assets originated by small banking   in arranging a securitization transaction
                                                  million in mortgage loans (for subprime MBS             organizations were sold to securitizations that        and selecting the assets to be
                                                  issuances). For purposes of the RFA analysis, the       qualify for an exemption from the risk retention
                                                                                                          requirements under the proposed rule.
                                                                                                                                                                 securitized. The FDIC is aware of only
                                                  agencies used an average asset pool size $500
                                                  million to account for reductions in mortgage             213 See 5 U.S.C. 601 et seq.                         six small banking organizations that
                                                  securitization activity following 2007, and to add an     214 Codified at section 15G of the Exchange Act,     currently sponsor securitizations (one of
                                                  element of conservatism to the analysis.                17 U.S.C. 78o–11.                                      which is a national bank, two are state


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                                                  24146                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  member banks, and three are state                       proposed rule a sponsor could                           Paperwork Reduction Act of 1995
                                                  nonmember banks based on September                      potentially allocate a portion of the risk              (‘‘PRA’’), 44 U.S.C. 3501–3521. In
                                                  30, 2010 information) and, therefore, the               retention requirement to a small                        accordance with the requirements of the
                                                  risk retention requirements of the                      banking organization only if such                       PRA, the Agencies may not conduct or
                                                  proposed rule, as generally applicable to               organization originated at least 20                     sponsor, and the respondent is not
                                                  sponsors, would not have a significant                  percent ($100 million) of the securitized               required to respond to, an information
                                                  economic impact on a substantial                        mortgages. As of September 30, 2010,                    collection unless it displays a currently
                                                  number of small state nonmember                         only one small banking organization                     valid Office of Management and Budget
                                                  banks.                                                  reported an outstanding principal                       (OMB) control number. The information
                                                     Under the proposed rule a sponsor                    balance of assets sold and securitized of               collection requirements contained in
                                                  may offset the risk retention                           $100 million or more.217                                this joint notice of proposed rulemaking
                                                  requirement by the amount of any                           The FDIC seeks comment on whether                    have been submitted by the FDIC, OCC,
                                                  vertical risk retention ABS interests or                the proposed rule, if adopted in final                  and the Commission to OMB for
                                                  eligible horizontal residual interest                   form, would impose undue burdens, or                    approval under section 3506 of the PRA
                                                  acquired by an originator of one or more                have unintended consequences for,                       and section 1320.11 of OMB’s
                                                  securitized assets if certain                           small state nonmember banks and                         implementing regulations (5 CFR part
                                                  requirements are satisfied, including,                  whether there are ways such potential                   1320). The Board reviewed the proposed
                                                  the originator must originate at least 20               burdens or consequences could be                        rule under the authority delegated to the
                                                  percent of the securitized assets, as                   minimized in a manner consistent with                   Board by OMB.
                                                  measured by the aggregate unpaid                        section 15G of the Exchange Act.                           Comments are invited on:
                                                  principal balance of the asset pool. In                    SEC: The Commission hereby                              (a) Whether the collections of
                                                  determining whether the allocation                      certifies, pursuant to 5 U.S.C. 605(b),                 information are necessary for the proper
                                                  provisions of the proposal would have                   that the proposed rule, if adopted,                     performance of the agencies’ functions,
                                                  a significant economic impact on a                      would not have a significant economic                   including whether the information has
                                                  substantial number of small banking                     impact on a substantial number of small                 practical utility;
                                                  organizations, the Federal banking                      entities. The proposed rule implements                     (b) The accuracy of the estimates of
                                                  agencies reviewed September 30, 2010                    the risk retention requirements of                      the burden of the information
                                                  Call Report data to evaluate the                        section 15G of the Exchange Act, which,                 collections, including the validity of the
                                                  securitization activity and approximate                 in general, requires the securitizer of a               methodology and assumptions used;
                                                  the number of small banking                             asset-backed securities (ABS) to retain                    (c) Ways to enhance the quality,
                                                  organizations that potentially could                    not less than five percent of the credit                utility, and clarity of the information to
                                                  retain credit risk under allocation                     risk of the assets collateralizing the                  be collected;
                                                  provisions of the proposal.215                          ABS.218 Under the proposed rule, the                       (d) Ways to minimize the burden of
                                                     The Call Report data indicates that                  risk retention requirements would apply                 the information collections on
                                                  approximately 329 small banking                         to ‘‘sponsors’’, as defined in the                      respondents, including through the use
                                                  organizations, 241 of which are state                   proposed rule. Based on our data, we                    of automated collection techniques or
                                                  nonmember banks, originate loans for                    found only one sponsor that would meet                  other forms of information technology;
                                                  securitization, namely ABS issuances                    the definition of a small broker-dealer                 and
                                                  collateralized by one-to-four family                    for purposes of the Regulatory                             (e) Estimates of capital or start up
                                                  residential mortgages. The majority of                  Flexibility Act.219 Accordingly, the                    costs and costs of operation,
                                                  these originators sell their loans either               Commission does not believe that the                    maintenance, and purchase of services
                                                  to Fannie Mae or Freddie Mac, which                     proposed rule, if adopted, would have a                 to provide information.
                                                  retain credit risk through agency                       significant economic impact on a                           All comments will become a matter of
                                                  guarantees, and therefore would not be                  substantial number of small entities.                   public record. Commenters may submit
                                                  allocated credit risk under the proposed                   FHFA: Pursuant to section 605(b) of                  comments on aspects of this notice that
                                                  rule. Additionally, based on publicly-                  the Regulatory Flexibility Act, FHFA                    may affect disclosure requirements and
                                                  available market data, it appears that                  hereby certifies that the proposed rule                 burden estimates at the addresses listed
                                                  most residential mortgage-backed                        will not have a significant economic                    in the ADDRESSES section of this
                                                  securities offerings are collateralized by              impact on a substantial number of small                 Supplementary Information. A copy of
                                                  a pool of mortgages with an unpaid                      entities.                                               the comments may also be submitted to
                                                  aggregate principal balance of at least                                                                         the OMB desk officer for the agencies:
                                                                                                          B. Paperwork Reduction Act
                                                  $500 million.216 Accordingly, under the                                                                         By mail to U.S. Office of Management
                                                                                                          1. Request for Comment on Proposed                      and Budget, 725 17th Street, NW.,
                                                    215 Call Report Schedule RC–S provides                Information Collection                                  #10235, Washington, DC 20503 or by
                                                  information on the servicing, securitization, and
                                                  asset sale activities of banking organizations. For        Certain provisions of the proposed                   facsimile to 202–395–6974, Attention,
                                                  purposes of the RFA analysis, the Agencies              rule contain ‘‘collection of information’’              Commission and Federal Banking
                                                  gathered and evaluated data regarding (1) net           requirements within the meaning of the                  Agency Desk Officer.
                                                  securitization income, (2) the outstanding principal
                                                  balance of assets sold and securitized by the                                                                   2. Proposed Information Collection
                                                  reporting entity with servicing retained or with        issuances). For purposes of the RFA analysis, the
                                                  recourse or other seller-provided credit                agencies used an average asset pool size $500             Title of Information Collection: Credit
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  enhancements, and (3) assets sold with recourse or      million to account for reductions in mortgage           Risk Retention.
                                                  other seller-provided credit enhancements and not       securitization activity following 2007, and to add an
                                                                                                          element of conservatism to the analysis.
                                                                                                                                                                    Frequency of response: Event
                                                  securitized by the reporting bank.
                                                     216 Based on the data provided in Table 1, page         217 The FDIC notes that this finding assumes that    generated.
                                                  29 of the Board’s ‘‘Report to the Congress on Risk      no portion of the assets originated by small banking      Affected Public: 220
                                                  Retention’’, it appears that the average MBS            organizations were sold to securitizations that
                                                  issuance is collateralized by a pool of                 qualify for an exemption from the risk retention          220 The affected public of the FDIC, OCC, and

                                                  approximately $620 million in mortgage loans (for       requirements under the proposed rule.                   Board is assigned generally in accordance with the
                                                                                                             218 See 17 U.S.C. 78o–11.
                                                  prime MBS issuances) or approximately $690                                                                      entities covered by the scope and authority section
                                                  million in mortgage loans (for subprime MBS                219 5 U.S.C. 601 et seq.                             of their respective proposed rule. The affected



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                          24147

                                                    FDIC: Insured state non-member                        retained by the sponsor and the amount                 assumptions and methodology used in
                                                  banks, insured state branches of foreign                required to be retained (§ l.5(c)(1)(i));              determining the aggregate dollar amount
                                                  banks, and certain subsidiaries of these                disclosure of the material terms of the                of ABS interests issued in the
                                                  entities.                                               eligible horizontal residual interest                  transaction (§ l.8(g)(1)(v)); and disclose
                                                    OCC: National banks, Federal savings                  (§ l.5(c)(1)(ii)); disclosure of the dollar            after sale the performance of the pool of
                                                  associations, Federal branches or                       amount to be placed in a cash reserve                  assets in the securitization transaction
                                                  agencies of foreign banks, or any                       account and the amount required to be                  as compared to performance of assets in
                                                  operating subsidiary thereof.                           placed in the account (§ l.5(c)(2)(i)), if             the representative sample (§ l.8(g)(2));
                                                    Board: FDIC-insured state member                      applicable; disclosure of the material                 and disclose to holders of the asset-
                                                  banks. For § l.15(d)(13) the Board’s                    terms governing the cash reserve                       backed securities information
                                                  respondents also include bank holding                   account (§ l.5(c)(2)(ii)), if applicable;              concerning the assets in the
                                                  companies, foreign banking                              and disclosure of material assumptions                 representative sample (§ l.8(g)(3)).
                                                  organizations, Edge or agreement                        and methodology used in determining                       Section l.9 addresses the
                                                  corporations, any nonbank financial                     the aggregate dollar amount of ABS                     requirements for sponsors utilizing the
                                                  company (as defined in § l.1(c)(5)),                    interests issued in the transaction                    ABCP conduit risk retention approach.
                                                  savings and loan holding companies, (as                 (§ l.5(c)(3)).                                         The requirements for the ABCP conduit
                                                  defined in 12 U.S.C. 1467a, on and after                   Section l.6 identifies the                          risk retention approach include
                                                  the transfer date established under                     requirements for sponsors opting to use                disclosure of each originator-seller with
                                                  section 311 of the Dodd-Frank Act (12                   the hybrid L-shaped risk retention                     a retained eligible horizontal residual
                                                  U.S.C. 5411)), or any subsidiary of the                 method, including disclosures in                       interest and the form, amount, and
                                                  foregoing.                                              compliance with those set forth for the                nature of the interest (§ l.9(b)(1));
                                                    SEC: All entities other than those                    vertical and horizontal risk retention                 disclosure of each regulated liquidity
                                                  assigned to the FDIC, OCC, or Board.                    methods (§ l.6(b)).                                    provider providing liquidity support to
                                                    Abstract: The notice sets forth                          Section l.7 requires sponsors using a
                                                                                                                                                                 the ABCP conduit and the form,
                                                  permissible forms of risk retention for                 revolving master trust structure for
                                                                                                                                                                 amount, and nature of the support
                                                  securitizations that involve issuance of                securitizations to disclose the amount of
                                                                                                                                                                 (§ l.9(b)(2)); maintenance of policies
                                                  asset-backed securities. The information                seller’s interest retained by the sponsor
                                                                                                                                                                 and procedures that are reasonably
                                                  requirements in joint regulations                       and the amount the sponsor is required
                                                                                                                                                                 designed to monitor regulatory
                                                  proposed by the three Federal banking                   to retain (§ l.7(b)(1)); the material terms
                                                                                                                                                                 compliance by each originator-seller of
                                                  agencies and the Commission are found                   of the seller’s interest retained by the
                                                                                                                                                                 the eligible ABCP conduit
                                                  in §§ l.4, l.5, l.6, l.7, l.8, l.9,                     sponsor (§ l.7(b)(2)); and the material
                                                                                                                                                                 (§ l.9(c)(2)(i)); and notice to holders of
                                                  l.10, l.12, l.13, l.15, l.18, l.19,                     assumptions and methodology used in
                                                                                                          determining the aggregate dollar amount                the ABS interests issued in the
                                                  and l.20. The Agencies believe that the                                                                        transaction in the event of originator-
                                                  disclosure and recordkeeping                            of ABS issued in the transaction
                                                                                                          (§ l.7(b)(3)).                                         seller regulatory non-compliance
                                                  requirements associated with the                                                                               (§ l.9(c)(2)(ii)).
                                                  various forms of risk retention will                       Section l.8 discusses the
                                                                                                          representative sample method of risk                      Section l.10 sets forth the
                                                  enhance market discipline, help ensure                                                                         requirements for sponsors utilizing the
                                                  the quality of the assets underlying a                  retention and requires that the sponsor
                                                                                                          adopt and adhere to policies and                       commercial mortgage-backed securities
                                                  securitization transaction, and assist                                                                         risk retention option, and includes
                                                  investors in evaluating transactions.                   procedures to, among other things,
                                                                                                          document the material characteristics                  disclosures of the name and form of
                                                  Compliance with the information                                                                                organization of the third-party
                                                                                                          used to identify the designated pool and
                                                  collections would be mandatory.                                                                                purchaser (§ l.10(a)(5)(i)), the third-
                                                                                                          randomly select assets using a process
                                                  Responses to the information collections                                                                       party purchaser’s experience
                                                                                                          that does not take account of any asset
                                                  would not be kept confidential and,                                                                            (§ l.10(a)(5)(ii)), other material
                                                                                                          characteristic other than the unpaid
                                                  except as provided below, there would                                                                          information (§ l.10(a)(5)(iii)), the
                                                                                                          balance (§ l.8(c)); maintaining, until all
                                                  be no mandatory retention period for                                                                           amount and purchase price of eligible
                                                                                                          ABS interests are paid in full,
                                                  proposed collections of information.                                                                           horizontal residual interest retained by
                                                                                                          documentation that clearly identifies
                                                  Section-by-Section Analysis                             the assets included in the representative              the third-party purchaser and the
                                                     Section l.4 sets forth the conditions                sample (§ l.8(c)); obtaining an agreed                 amount that the sponsor would have
                                                                                                          upon procedures report from an                         been required to retain (§ l.10(a)(5)(iv)
                                                  that must be met by sponsors electing to
                                                                                                          independent public accounting firm                     and (v)), a description of the material
                                                  use the vertical risk retention option.
                                                  Section l.4(b)(1) requires disclosure of                (§ l.8(d)(1)); disclose the amount of                  terms of the eligible residual horizontal
                                                                                                          assets included in the representative                  interest retained by the third-party
                                                  the amount of each class of ABS
                                                                                                          sample and retained by the sponsor and                 purchaser (§ l.10(a)(5)(vi)), the material
                                                  interests retained and required to be
                                                                                                          the amount of assets required to be                    assumptions and methodology used to
                                                  retained by the sponsor and § l.4(b)(2)
                                                                                                          retained by the sponsor (§ l.8(g)(1)(i));              determine the aggregate amount of ABS
                                                  requires disclosure of material
                                                                                                          disclose prior to sale a description of the            interests issued by the issuing entity
                                                  assumptions used to determine the
                                                                                                          material characteristics of the                        (§ l.10(a)(5)(vii)), representations and
                                                  aggregate dollar amount of ABS interests
                                                                                                          designated pool (§ l.8(g)(1)(ii));                     warranties concerning the securitized
                                                  issued in the transaction.
                                                                                                          disclose prior to sale a description of the            assets and factors used to determine the
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                                                     Section l.5 specifies the conditions
                                                                                                          policies and procedures used by the                    assets should be included in the pool
                                                  that must be met by sponsors using the
                                                                                                          sponsor to ensure compliance with                      (§ l.10(a)(5)(viii)); sponsor
                                                  horizontal risk retention option,
                                                                                                          random selection and equivalent risk                   maintenance of policies and procedures
                                                  including disclosure of the amount of
                                                                                                          determination requirements                             to monitor third-party compliance with
                                                  the eligible horizontal residual interest
                                                                                                          (§ l.8(g)(1)(iii)); confirm prior to sale              regulatory requirements
                                                  public of the Commission is based on those entities
                                                                                                          that the required agreed upon                          (§ l.10(b)(2)(A)); and sponsor notice to
                                                  not already accounted for by the FDIC, OCC, and         procedures report was obtained                         holders of ABS interests in the event of
                                                  Board.                                                  (§ l.8(g)(1)(iv)); disclose the material               third-party non-compliance with


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                                                  24148                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  regulatory requirements                                 in the mortgage transaction documents                  FDIC
                                                  (§ l.10(b)(2)(B)).                                      under which the creditor commits to                      Number of Respondents: 90 sponsors
                                                     Section l.12 requires the                            having servicing policies and                          and 4,715 creditors.
                                                  establishment of a premium cash                         procedures (§ l.15(d)(13)(i)) and to                     Total Estimated Annual Burden:
                                                  reserve account, in addition to the                     provide disclosure of the foregoing                    59,463 hours.
                                                  sponsor’s base risk retention                           default mitigation commitments to the
                                                  requirement, in instances where the                     borrower at or prior to the closing of the             OCC
                                                  sponsor structures a securitization to                  mortgage transaction (§ l.15(d)(13)(ii)).                Number of Respondents: 30 sponsors
                                                  monetize excess spread on the                             Sections l.18, l.19, and l.20                        and 1,650 creditors.
                                                  underlying assets. The premium cash                     provide exemptions from the risk                         Total Estimated Annual Burden:
                                                  reserve account would be used to                        retention requirements for qualifying                  20,483 hours.
                                                  ‘‘capture’’ the premium received on sale                commercial real estate loans,
                                                  of such tranches for purposes of                        commercial mortgages, and auto loans                   Board
                                                  covering losses on the underlying assets                that meet specified criteria. Each section               Number of Respondents: 20 sponsors
                                                  and would require the sponsor to make                   requires that the depositor of the asset-              and 7,636 creditors.
                                                  disclosures regarding the dollar amount                 backed security certify that it has                      Total Estimated Annual Burden:
                                                  required by regulation to be placed in                  evaluated the effectiveness of its                     70,430 hours.
                                                  the account and any other amounts                       internal supervisory controls and
                                                                                                                                                                 Commission
                                                  placed in the account by the sponsor                    concluded that its controls are effective
                                                  (§ l.12(d)(1)) and the material                         (§§ l.18(b)(7)(i), l.19(b)(10)(i), and                    Number of Respondents: 104 sponsors
                                                  assumptions and methodology used in                     l.20(b)(9)(i)); that the sponsor provide               and 1,500 creditors.
                                                  determining fair value of any ABS                       a copy of the certification to potential                  Total Estimated Annual Burden:
                                                  interest that does not have a par value                 investors prior to the sale of asset-                  37,166 hours.
                                                  and that was used in calculating the                    backed securities (§§ l.18(b)(7)(iii),                    Commission’s explanation of the
                                                  amount required for the premium                         l.19(b)(10)(iii), and l.20(b)(9)(iii));                calculation:
                                                  capture cash reserve account                            and that the sponsor promptly notify the                  To determine the total paperwork
                                                  (§ l.12(d)(2)).                                         holders of the securities of any loan                  burden for the requirements contained
                                                     Section l.13 sets forth the conditions               included in the transaction that is                    in this proposed rule the Agencies first
                                                  that apply when the sponsor of a                        required to be repurchased by the                      estimated the universe of sponsors that
                                                  securitization allocates to originators of              sponsor (§§ l.18(c)(3), l.19(c)(3), and                would be required to comply with the
                                                  securitized assets a portion of the credit              l.20(c)(3)).                                           proposed disclosure and recordkeeping
                                                  risk it is required to retain, including                                                                       requirements. The Agencies estimate
                                                  disclosure of the name and form of                      Estimated Paperwork Burden                             that approximately 243 unique sponsors
                                                  organization of any originator with an                    Estimated Burden per Response:                       conduct ABS offerings per year. This
                                                  acquired and retained interest                          § l.4—Vertical risk retention:                         estimate was based on 2010 data
                                                  (§ l.13(a)(2)); maintenance of policies                     disclosures—2 hours.                               reported on the commercial bank Call
                                                  and procedures that are reasonably                      § l.5—Horizontal risk retention:                       Report (FFIEC 031 and 041) and from
                                                  designed to monitor originator                              disclosures—2.5 hours.                             the ABS database AB Alert. Of the 243
                                                  compliance with retention amount and                    § l.6—L-Shaped risk retention:                         sponsors, the Agencies have assigned
                                                  hedging, transferring and pledging                          disclosures—3 hours.                               8 percent of these sponsors to the Board,
                                                  requirements (§ l.13(b)(2)(A)); and                     § l.7—Revolving master trusts:                         12 percent to the OCC, 37 percent to the
                                                  notice to holders of ABS interests in the                   disclosures—2.5 hours.                             FDIC, and 43 percent to the
                                                                                                          § l.8—Representative sample:                           Commission.
                                                  transaction in the event of originator
                                                                                                              recordkeeping—120 hours;                              Next, the Agencies estimated the
                                                  non-compliance with regulatory
                                                                                                              disclosures—23.25 hours.
                                                  requirements (§ l.13(b)(2)(B)).                                                                                burden per response that would be
                                                                                                          § l.9—Eligible ABCP conduits:
                                                     Section l.15 provides an exemption                                                                          associated with each disclosure and
                                                                                                              recordkeeping—20 hours;                            recordkeeping requirement. In some
                                                  from the risk retention requirements for
                                                                                                              disclosures—3 hours.                               cases, the proposed rule is estimated to
                                                  qualified residential mortgages that
                                                                                                          § l.10—Commercial mortgage-backed
                                                  meet certain specified criteria including                                                                      incur only an incremental burden on
                                                                                                              securities: recordkeeping—20
                                                  certification by the depositor of the                                                                          respondents. For example, in the
                                                                                                              hours; disclosures—19.75 hours.
                                                  asset-backed security that it has                       § l.12—Premium capture cash reserve                    representative sample option, the
                                                  evaluated the effectiveness of its                          account: disclosures—1.75 hours.                   proposed rule requires that the sponsor
                                                  internal supervisory controls and                       § l.13—Allocation of risk retention:                   cause to be disclosed information
                                                  concluded that the controls are effective                   recordkeeping—20 hours;                            regarding the securitized assets, but the
                                                  (§ l.15(b)(4)(i)), and sponsor disclosure                   disclosures—2.5 hours.                             Agencies believe similar information
                                                  prior to sale of asset-backed securities in             § l.15—Exemption for qualified                         regarding the securitized assets are
                                                  the issuing entity of a copy of the                         residential mortgages:                             already being made to investors, and
                                                  certification to potential investors                        recordkeeping—40 hours;                            therefore the proposed rule would only
                                                  (§ l.15(b)(4)(iii)). In addition                            disclosures—9.25 hours.                            incur an incremental burden on
                                                  § l.15(e)(3) provides that a sponsor that               § l.18—Exemption for qualifying CRE                    sponsors.
                                                  has relied upon the exemption shall not                                                                           Next, the Agencies estimated how
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                                                                              loans: recordkeeping—40 hours;
                                                  lose the exemption if it complies with                      disclosures—1.25 hours.                            frequent the entities would make the
                                                  certain specified requirements,                         § l.19—Exemption for qualifying                        required disclosure by estimating the
                                                  including prompt notice to the holders                      commercial mortgages:                              proportionate amount of offerings per
                                                  of the asset-backed securities of any                       recordkeeping—40 hours;                            year for each agency. In making this
                                                  loan repurchased by the sponsor.                            disclosures—1.25 hours.                            determination, the estimate was based
                                                  Section l.15 also contains additional                   § l.20—Exemption for qualifying auto                   on the average number of ABS offerings
                                                  information collection requirements on                      loans: recordkeeping—40 hours;                     from 2004 through 2009, and therefore,
                                                  the mortgage originator to include terms                    disclosures—1.25 hours.                            we estimate the total number of annual


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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                                        24149

                                                  offerings per year to be 1,700.221 We                     The total estimated annual burden for                      costs for retaining outside professionals
                                                  also made the following additional                      each Agency was then calculated by                           totaling $1,211,200. For disclosures
                                                  estimates:                                              multiplying the number of offerings per                      made after the time of sale in a
                                                     • 12 offerings per year will be subject              year per section for such Agency (except                     securitization transaction,226 the
                                                  to disclosure and recordkeeping                         with respect to the recordkeeping                            Commission allocated 75 percent of the
                                                  requirements under sections § l.12 and                  burden hours under § l.8 and                                 total estimated burden hours (892
                                                  § l.13, which are divided equally                       § l.15(d)(13) as described below) by the                     hours) to internal burden for all
                                                  among the four agencies (i.e., 3 offering               number of burden hours estimated for                         sponsors. For the remaining 25 percent
                                                  per year per agency);                                   the respective section, then adding these                    of these hours (297 hours), the
                                                     • 100 offerings per year will be                     subtotals together. For example, under                       Commission uses an estimate of $400
                                                  subject to disclosure and recordkeeping                 § l.4, the Commission multiplied the                         per hour for external costs for retaining
                                                  requirements under section § l.15,                      estimated number of offerings per year                       outside professionals totaling $118,800.
                                                  which are divided proportionately                       per § l.4 (i.e., 91 offerings per year) by                   With respect to the agreed upon
                                                  among the agencies based on the entity                  the disclosure burden hour estimate for                      procedures report by an independent
                                                  percentages described above (i.e., 8                    § l.4 of 2.0 hours. Thus, the estimated                      public accounting firm under the
                                                  offerings per year subject to § l.15 for                annual burden hours for respondents to                       representative sample option, the
                                                  the Board; 12 offerings per year subject                which the Commission accounts for the                        Commission allocated 100 percent of
                                                  to § l.15 for the OCC; 37 offerings per                 burden hours under § l.4 is 182 hours                        the total estimated burden hours (4,160
                                                  year subject to § l.15 for the FDIC; and                (91 * 2.0 hours = 182 hours). For the                        hours 227) to retaining outside
                                                  43 offerings per year subject to § l.15                 recordkeeping burden estimate under                          professionals at an estimate of $400 per
                                                  for the Commission); and                                §§ l.8(c) andl.8(d)(2), instead of using                     hour, for a total cost of $1,664,000.
                                                     • 40 offerings per year will be subject              the number of offerings per year per                           FHFA: The proposed regulation does
                                                  to disclosure and recordkeeping                         base risk retention option, the Agencies                     not contain any FHFA information
                                                  requirements under § l.18, § l.19, and                  multiplied the number of recordkeeping                       collection requirement that requires the
                                                  § l.20, respectively, which are divided                 burden hours by the number of unique                         approval of OMB under the Paperwork
                                                  proportionately among the agencies                      sponsors assigned to such Agency per                         Reduction Act.
                                                  based on the entity percentages                         year (i.e., 104 in the case of the                             HUD: The proposed regulation does
                                                  described above (i.e., 3 offerings per                  Commission).223 The reason for this is                       not contain any HUD information
                                                  year subject to each section for the                    that the Agencies considered it possible                     collection requirement that requires the
                                                  Board, 5 offerings per year subject to                  that sponsors may establish these                            approval of OMB under the Paperwork
                                                  each section for the OCC; 15 offerings                  policies and procedures during the year                      Reduction Act.
                                                                                                          independent on whether an offering was
                                                  per year subject to each section for the                                                                             C. Commission Economic Analysis
                                                                                                          conducted, with a corresponding agreed
                                                  FDIC, and 17 offerings per year subject
                                                                                                          upon procedures report obtained from a                       1. Introduction
                                                  to each section for the Commission).
                                                                                                          public accounting firm each time such
                                                     To obtain the estimated number of                                                                                    As discussed above, Section 15G of
                                                                                                          policies and procedures are established.
                                                  responses (equal to the number of                         To obtain an estimate for the number                       the Exchange Act, as added by section
                                                  offerings) for each option in Part B of                 of burden hours required by                                  941(b) of the Dodd-Frank Act, generally
                                                  the proposed rule, the Agencies                         § l.15(d)(13), the Agencies multiplied                       requires the Agencies to jointly
                                                  multiplied the number of offerings                      the estimate of the number of creditors                      prescribe regulations, that (i) require a
                                                  estimated to be subject to the base risk                assigned to such Agency for purposes of                      sponsor to retain not less than five
                                                  retention requirements (i.e., 1,480) 222                this risk retention rule by an estimate of                   percent of the credit risk of any asset
                                                  by the sponsor percentages described                    the number of hours that it will take                        that the sponsor, through the issuance of
                                                  above. The result was the number of                     creditors to perform a one-time update                       an ABS, transfers, sells, or conveys to a
                                                  base risk retention offerings per year per              to their systems to account for the                          third party, and (ii) prohibit a sponsor
                                                  agency. For the Commission, this was                    requirements of this section, which we                       from directly or indirectly hedging or
                                                  calculated by multiplying 1,480                         estimate to be 8 hours.224 This estimate                     otherwise transferring the credit risk
                                                  offerings per year by 43 percent, which                 was added to the other disclosure and                        that the sponsor is required to retain
                                                  equals 636 offerings per year. This                     recordkeeping burden estimates as                            under section 15G and the Agencies’
                                                  number was then divided by the                          described above to achieve a total                           implementing rules.228
                                                  number of base risk retention options (7)               estimated annual burden for                                     Section 15G of the Exchange Act
                                                  to arrive at the estimate of the number                 respondents assigned to the                                  exempts certain types of securitization
                                                  of offerings per year per agency per base               Commission.                                                  transactions from these risk retention
                                                  risk retention option. For the                            For disclosures made at the time of                        requirements and authorizes the
                                                  Commission, this was calculated by                      the securitization transaction,225 the                       Agencies to exempt or establish a lower
                                                  dividing 636 offerings per year by 7                    Commission allocates 25 percent of                           risk retention requirement for other
                                                  options, resulting in 91 offerings per                  these hours (1,009 hours) to internal                        types of securitization transactions. For
                                                  year per base risk retention option.                    burden for all sponsors. For the                             example, section 15G specifically
                                                                                                          remaining 75 percent of these hours,                         provides that a sponsor shall not be
                                                    221 We use the ABS issuance data from Asset-
                                                                                                          (3,028 hours), the Commission uses an                        required to retain any part of the credit
                                                  Backed Alert on the initial terms of offerings, and                                                                  risk for an asset that is transferred, sold,
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  we supplement that data with information from
                                                                                                          estimate of $400 per hour for external
                                                  Securities Data Corporation (SDC). This estimate
                                                                                                                                                                       or conveyed through the issuance of
                                                                                                            223 243* 43% = 104.
                                                  includes registered offerings and offerings made
                                                                                                                                                                          226 These are the disclosures required by
                                                  under Securities Act Rule 144A. We also note that         224 1,500 creditors * 8 hours = 12,000 hours
                                                  this estimate is for offerings that are not exempted      225 These are the disclosures required by                  §§ l.8(g)(2); l.9(c)(2)(ii); l.10(b)(2)(B);
                                                  under §§ l.21 and l.22 of the proposed rule.            §§ l.4(b)(1)–(2); l.5(c)(1)(i)–(ii), (2)(i)–(ii), and (3);   l.13(b)(2)(B); l15(e)(3); l.18(c)(3); l19(c)(3); and
                                                    222 Estimate of 1,700 offerings per year minus the    l.6(b); l.7(b)(1)–(3); l.8(g)(1)(i)–(iv) and (g)(3);         l.20(c)(3).
                                                  estimate of the number of offerings qualifying for      l.9(b)(1)–(2); l.10(a)(5)(i)–(viii); l.12(d)(1)–(3);            227 40 * 104 = 4,160 hours.

                                                  an exemption under § l.15, § l.18, § l.19, and          l.13(a)(2); l.15(b)(4)(iii); l.18(b)(7)(iii);                   228 See 15 U.S.C. 78o–11(b), (c)(1)(A) and

                                                  § l.20 (220 total).                                     l.19(b)(10)(iii); and l.20(b)(9)(iii).                       (c)(1)(B)(ii).



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                                                  24150                         Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  ABS by the sponsor, if all of the assets                   Agencies have sought to ensure that the                Dodd-Frank Act itself. For instance, the
                                                  that collateralize the ABS are qualified                   amount of credit risk retained is                      analysis below assumes as a baseline
                                                  residential mortgages (QRMs), as that                      meaningful—consistent with the                         that a standard for QRM is in place,
                                                  term is jointly defined by the                             purposes of section 15G—while                          since such a standard is mandated by
                                                  Agencies.229 In addition, section 15G                      reducing the potential for the proposed                statute. Rather than assessing the
                                                  states that the Agencies must permit a                     rules to negatively affect the availability            economic costs and benefits of
                                                  sponsor to retain less than five percent                   and costs of credit to consumers and                   implementing such a standard, the
                                                  of the credit risk of commercial                           businesses.                                            analysis below focuses on the relative
                                                  mortgages, commercial loans, and                              As required by section 15G, the                     costs and benefits of alternative QRM
                                                  automobile loans that are transferred,                     proposed rules provide a complete                      standards. Similarly, the analysis
                                                  sold, or conveyed through the issuance                     exemption from the risk retention                      assumes the following: A risk retention
                                                  of ABS by the sponsor if the loans meet                    requirements for ABS that is                           requirement of at least 5 percent for
                                                  underwriting standards established by                      collateralized solely by QRMs and                      non-qualified mortgages and non-
                                                  the Federal banking agencies.230                           establish the terms and conditions                     qualified assets, 0% for QRMs and less
                                                     Section 15G requires the Agencies to                    under which a residential mortgage                     than 5 percent for qualified assets. Thus,
                                                  prescribe risk retention requirements for                  would qualify as a QRM. In developing                  our analysis below examines the costs
                                                  ‘‘securitizers,’’ which the Agencies                       the proposed definition of a QRM, the                  and benefits of alternative
                                                  interpret are depositors or sponsors of                    Agencies carefully considered the terms                implementations of a risk retention
                                                  ABS. The proposal would require that a                     and purposes of section 15G, public                    requirement meeting the mandates of
                                                  ‘‘sponsor’’ of a securitization transaction                input, and the potential impact of a                   the Dodd-Frank Act, rather than the
                                                  to retain the credit risk of the                           broad or narrow definition of QRMs on                  existence of a risk retention
                                                  securitized assets in the form and                         the housing and housing finance                        requirement. Although our intent is to
                                                  amount required by the proposed rule.                      markets.                                               limit the economic analysis of this rule
                                                  The Agencies believe that imposing the                        As discussed in greater detail in Part              to decisions made by the Commission,
                                                  risk retention requirement on the                          IV of this Supplementary Information,                  to the extent that the Commission’s
                                                  sponsor of the ABS is appropriate in                       the proposed rule would generally                      discretion is exercised to further the
                                                  light of the active and direct role that a                 prohibit QRMs from having product                      benefits intended by the Dodd-Frank
                                                  sponsor typically has in arranging a                       features that contributed significantly to             Act, the two types of benefits might not
                                                  securitization transaction and selecting                   the high levels of delinquencies and                   be entirely separable.
                                                  the assets to be securitized.                              foreclosures since 2007—such as terms                     Section 23(a)(2) of the Exchange Act
                                                     In developing the proposed rules, the                   permitting negative amortization,                      requires the Commission, when making
                                                  Agencies have taken into account the                       interest-only payments, or significant                 rules under the Exchange Act, to
                                                  diversity of assets that are securitized,                  interest rate increases—and also would                 consider the impact on competition that
                                                  the structures historically used in                        establish underwriting standards                       the rules would have, and prohibits the
                                                  securitizations, and the manner in                         designed to ensure that QRMs are of                    Commission from adopting any rule that
                                                  which sponsors may have retained                           very high credit quality consistent with               would impose a burden on competition
                                                  exposure to the credit risk of the assets                  their exemption from risk retention                    not necessary or appropriate in
                                                  they securitize. The proposed rules                        requirements. These underwriting                       furtherance of the Exchange Act.231
                                                  provide several options sponsors may                       standards include, among other things,                 Further, Section 2(b) of the Securities
                                                  choose from in meeting the risk                            maximum front-end and back-end debt-                   Act of 193381 and Section 3(f) of the
                                                  retention requirements of section 15G,                     to-income ratios of 28 percent and 36                  Exchange Act requires the
                                                  including, but not limited to, retention                   percent, respectively; a maximum loan-                 Commission,232 when engaging in
                                                  of a five percent ‘‘vertical’’ slice of each               to-value ratio of 80 percent in the case               rulemaking where we are required to
                                                  class of interests issued in the                           of a purchase transaction (with a lesser               consider or determine whether an action
                                                  securitization or retention of a five                      combined LTV permitted for refinance                   is necessary or appropriate in the public
                                                  percent ‘‘horizontal’’ first-loss interest in              transactions); a 20 percent down                       interest, to consider, in addition to the
                                                  the securitization, as well as other risk                  payment requirement in the case of a                   protection of investors, whether the
                                                  retention options that take into account                   purchase transaction; and credit history               action will promote efficiency,
                                                  the manners in which risk retention                        restrictions.                                          competition and capital formation. The
                                                  often has occurred in credit card                             The proposed rules also would not                   Commission has considered and
                                                  receivable and automobile loan and                         require a sponsor to retain any portion                discussed below the effects of the
                                                  lease securitizations and in connection                    of the credit risk associated with a                   proposed rules on efficiency,
                                                  with the issuance of asset-backed                          securitization transaction if the ABS                  competition, and capital formation, as
                                                  commercial paper. The proposed rules                       issued are exclusively collateralized by               well as the benefits and costs associated
                                                  also include a special ‘‘premium                           qualified assets (QAs)—commercial                      with the Commission’s decisions in the
                                                  capture’’ mechanism designed to                            loans, commercial mortgages, or                        proposed rulemaking.
                                                  prevent a sponsor from structuring an                      automobile loans that meet
                                                                                                             underwriting standards included in the                 2. Risk Retention Methods for Non-
                                                  ABS transaction in a manner that would
                                                                                                             proposed rule for the individual asset                 QRMs and Non-Qualifying Assets
                                                  allow the sponsor to effectively negate
                                                                                                             class.                                                 (‘‘QAs’’)
                                                  or reduce its retained economic
                                                                                                                The Commission is sensitive to the
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                                                  exposure to the securitized assets by                                                                                The proposed rules require not less
                                                  immediately monetizing the excess                          costs and benefits imposed by its rules.               than 5 percent risk retention for all non-
                                                  spread created by the securitization                       The discussion below focuses on the                    QRMs and non-QAs. The form of the
                                                  transaction. In designing these options                    costs and benefits of the decisions made               retention is to be chosen from a menu
                                                  and the proposed rules in general, the                     by the Commission, together with the                   of options, which should provide
                                                                                                             other Agencies, to fulfill the mandates                flexibility to sponsors in meeting the
                                                    229 See   15 U.S.C. 78o–11(c)(1)(C)(iii), (4)(A) and     of the Dodd-Frank Act within its
                                                  (B).                                                       permitted discretion, rather than the                    231 15   U.S.C. 78w(a). 

                                                    230 See   id. at § 78o–11(c)(1)(B)(ii) and (2).          costs and benefits of the mandates of the                232 17   U.S.C. 78c(f). 




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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                            24151

                                                  risk retention requirement mandated by                  improve. If investors are reluctant to                 may hold more if it were economically
                                                  Section 15G, as added by the Dodd-                      invest in ABS where a sponsor has                      optimal.
                                                  Frank Act. Section 15G directs the                      selected such a suboptimal risk
                                                                                                                                                                 Horizontal Risk Retention Method
                                                  Agencies to set appropriate risk                        retention method, risk retention might
                                                  retention rules, which will require the                 not have the effect of facilitating capital               This method exposes a sponsor to the
                                                  retention of no less than 5 percent of the              formation. To the extent that such                     first 5 percent of all pool-asset losses
                                                  credit risk in the securitized assets for               reluctance on part of investors provides               and thus results in the sponsor retaining
                                                  all ABS classes not exempt from the                     sponsors with the incentive to choose                  substantially more than five percent of
                                                  requirement. Section 15G provides for a                 risk retention methods that investors                  the credit risk in a securitization. That
                                                  risk retention exemption for sponsors of                demand, this effect on capital formation               is, a sponsor will be exposed to 100
                                                  ABS backed solely by QRMs and for                       is mitigated.                                          percent of all losses as long as those
                                                  certain other sponsors or ABS asset                        An integral part of the proposed rules              losses are up to 5 percent. Therefore,
                                                  classes as discussed below and a less                   are new risk retention disclosure                      this method imposes a significant
                                                  than five percent risk retention                        requirements specifically tailored to                  disincentive on sponsors of poorly
                                                  requirement for QAs.                                    each of the permissible forms of risk                  underwritten assets. As a result, the
                                                     Empirical evidence points to a                       retention. The required disclosure                     horizontal method of risk retention
                                                  significant heterogeneity of                            would provide investors with                           should benefit investors by aligning
                                                  securitization structures, practices and                information on the sponsor’s retained                  their incentives with those of originators
                                                  risk characteristics across ABS asset                   interest in an ABS transaction, such as                and sponsors when originating and
                                                  classes.233 Accordingly, allowing                       the amount and form of the interest                    underwriting riskier asset classes.
                                                  sponsors to choose a form of risk                       retained and the assumptions used in                      Since the retention of a horizontal
                                                  retention from a menu of options                        determining the aggregate value of ABS                 first-loss position in securitizations
                                                  provides them with the flexibility of                   to be issued. This information would                   leaves the sponsor holding a significant
                                                  choosing the form that best suits their                 benefit investors by providing them                    amount of risk, it is possible that for less
                                                  operational and financing preferences.                  with an efficient mechanism to monitor                 risky asset classes a 5 percent risk
                                                  By including most of the risk retention                 compliance with the proposed rules and                 retention might be unnecessarily high.
                                                  forms currently observed in the                         make informed investment decisions.                    For such asset classes, a sponsor might
                                                  marketplace, the Agencies’ proposal                     However, compliance costs to sponsors                  be constrained to raising external
                                                  benefits sponsors, originators, and                     would increase, since sponsors would                   financing for only 95 percent of the
                                                  investors alike by limiting disruption to               now have to prepare and provide these                  asset pool, while the market might have
                                                  current securitization practices to the                 disclosures to investors.                              allowed for a smaller equity interest. As
                                                  extent possible. Historically, most                        Therefore, the Commission believes                  a result, the sponsor might have to incur
                                                  sponsors have been exposed to some                      that the proposed menu-of-options                      additional financing costs which would
                                                  level of credit risk by retaining an                    approach and the accompanying                          have the effect of impeding capital
                                                  economic interest in the pools they                     disclosures will have no competitive                   formation.
                                                  securitize in the form of first-loss or pro-            effects, and will implement the                           The retention of a first-loss position
                                                  rata positions.234 Thus, the proposed                   mandates of Section 15G without                        has been a common market practice for
                                                  rule allows sponsors that have existing                 causing economic inefficiencies or                     many asset classes, so this method
                                                  risk retention programs to minimize                     hindering capital formation.235                        should not be unnecessarily disruptive
                                                  their compliance costs resultant from                      Vertical Risk Retention Method                      and should therefore impose limited
                                                  the statute’s mandate. Without the                         By requiring the retention of five                  additional costs on sponsors. The effect
                                                  flexibility allowed by a broad menu-of-                 percent of each interest backed by the                 would be that of no decrease in
                                                  options approach, there likely would be                 securitized asset pool, regardless of                  efficiency and no new impediment to
                                                  an increase in borrowing costs to                       whether the interest is certificated or                capital formation.
                                                  sponsors and to the borrowers whose                     not, the vertical risk retention method is
                                                                                                          the most straightforward method to                     Premium Capture Cash Reserve Account
                                                  loans are in the securitized pools. In
                                                  some cases, this increase could be large                implement. The transparency and ease                      Securitization transactions often
                                                  enough to make certain types of                         of verification of this method will likely             contain pools of assets that are expected
                                                  securitizations economically unfeasible.                benefit investors to the extent that they              to earn substantially higher returns
                                                     It is possible that the flexibility                  view their ability to discern a sponsor’s              compared to the financing rates on the
                                                  allowed by the proposed approach to                     risk retention important. This provides                ABS issued in the securitization. This is
                                                  implementing the risk retention                         the sponsor an interest in the entire                  generally referred to as excess spread. In
                                                  mandate of Section 15G might result in                  structure of the securitization                        situations where there is substantial
                                                  some sponsors choosing risk retention                   transaction. However, the vertical risk                excess spread, the sponsor can obtain
                                                  methods that do not align fully their                   retention method requires a sponsor to                 significant economic income by selling
                                                  incentives with those of investors. In                  bear only a small fraction of the losses               an interest based on the excess spread.
                                                  such cases, underwriting standards and                  incurred by the pool, thus possibly                    If the sponsor is able to recover more
                                                  pool selection procedures may not                       failing to align sufficiently originators’             than 5 percent of the balance of the pool
                                                                                                          and sponsors’ interests with those of                  in a short period of time, then the
                                                     233 See Board of Governors of the Federal Reserve    investors when it comes to the                         sponsor would be left with limited
                                                  System, Report to the Congress on Risk Retention,       origination and underwriting of riskier                economic interest in the securitization.
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  October 2010 available at http://federalreserve.gov/    asset classes. Since 5 percent is a lower              This is particularly true if defaults occur
                                                  boarddocs/rptcongress/securitization/
                                                  riskretention.pdf.
                                                                                                          bound on the risk required to be                       later in the life of pool assets. For this
                                                     234 For example, Chen, Liu, and Ryan (2008) show     retained, it is possible some sponsors                 reason, the proposed rules prohibit the
                                                  that banks retain more risk when loans have higher                                                             cash flows from the excess spread (or
                                                  or less externally verifiable credit risk. See            235 As discussed in the introduction, this
                                                                                                                                                                 cash proceeds from selling it) to be
                                                  Characteristics of Securitizations that Determine       statement refers to the choice made by the
                                                  Issuers’ Retention of the Risks of the Securitized,     Commission and other agencies by having proposed
                                                                                                                                                                 distributed to the sponsor. This benefits
                                                  Weitzu Chen, Chi-Chun Liu, and Stephen Ryan             a menu of options rather than the statutory mandate    investors by helping to ensure that the
                                                  (2008), The Accounting Review, 2008.83.5.1181.          to require risk retention.                             incentive-alignment objectives of the


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                                                  24152                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  proposed rules are achieved. However,                   than reporting costs—will not increase                 the approximately 1,500 families, who
                                                  this may reduce the flexibility of                      as a result of the proposed rules.                     purchased their homes in the year prior
                                                  sponsors in structuring their deals, thus               Furthermore, the borrowers whose loans                 to or of the survey. The Agencies also
                                                  imposing a cost.                                        back such securitizations will also likely             examined a combined data set of loans
                                                                                                          experience no increase in their                        purchased or securitized by the
                                                  L-Shaped Method
                                                                                                          borrowing costs.                                       Enterprises from 1997 to 2009. This data
                                                    Another risk retention option in the                                                                         set consisted of more than 78 million
                                                  proposed rules would allow a sponsor,                   Seller’s Interest Method
                                                                                                                                                                 mortgages, and included data on loan
                                                  subject to certain conditions, to use an                   Securitizations of revolving lines of               products and terms, borrower
                                                  equal combination of a vertical risk                    credit, such as credit card accounts or                characteristics (e.g., income and credit
                                                  retention and horizontal risk retention                 dealer floorplan loans, are typically                  score), and performance data through
                                                  as a means of retaining the required five               structured using a revolving master                    the third quarter of 2010.
                                                  percent exposure to the credit risk of the              trust, which issues more than one series                  The analysis of the data described
                                                  securitized assets. This form of risk                   of ABS backed by a single pool of                      above and the conclusions of numerous
                                                  retention is referred to as an ‘‘L-Shaped’’             revolving assets. The proposed rule                    academic studies support a definition of
                                                  form of risk retention because it                       would allow a sponsor of a revolving                   QRM that takes into account the
                                                  combines both vertical and horizontal                   asset master trust that is collateralized              following underwriting and product
                                                  forms. Overall, this has the benefits and               by revolving loans or other extensions of              features: the borrower’s ability to repay
                                                  costs associated with the two                           revolving credit to meet its risk                      the mortgage (as captured the borrower’s
                                                  approaches as described above. Also,                    retention requirement by retaining a                   debt-to-income ratio); the borrower’s
                                                  the proposed requirement that the                       seller’s interest in an amount not less                credit history; the borrower’s down
                                                  sponsor retain 50 percent vertical and                  than 5 percent of the unpaid principal                 payment amount and sources; the loan-
                                                  50 percent horizontal facilitates the                   balance of the pool assets held by the                 to-value ratio for the loan; the form of
                                                  monitoring of the risk retention                        issuer. The definitions of a seller’s                  valuation used in underwriting the loan;
                                                  compliance by investors, Agencies and                   interest and a revolving asset master                  the type of mortgage involved; and the
                                                  other market participants.                              trust are intended to be consistent with               owner-occupancy status of the property
                                                                                                          market practices and, with respect to                  securing the mortgage.236 The
                                                  Representative Sample Method
                                                                                                          seller’s interest, designed to help ensure             Commission believes that selecting this
                                                     The representative sample method                     that any seller’s interest retained by a               subset of features will be beneficial to
                                                  requires risk retention of a randomly                   sponsor under the proposal would                       loan originators, because these are the
                                                  selected loan pool that is ‘‘similar’’ in               expose the sponsor to the credit risk of               features typically considered in the
                                                  risk attributes to the securitized loans                the underlying assets. This should                     mortgage underwriting process.
                                                  prior to a securitization. Since it may be              benefit all parties to the securitization              Although there might be factors among
                                                  costly to ensure the true ‘‘randomness’’                by balancing implementation costs for                  those listed above that loan originators
                                                  of the selection or ‘‘representativeness’’              sponsors utilizing the master trust                    had not previously used in their lending
                                                  of the sample, and since sponsors’ prior                structure with incentive-alignment                     decisions, the Commission believes that
                                                  knowledge of the sample selection bias                  benefits for investors.                                this is unlikely. Thus, the Commission
                                                  might alter their incentives to put well-                                                                      expects that loan originators would not
                                                  underwritten assets into the pool, this                 3. Definition of Qualified Residential
                                                                                                          Mortgages                                              have to incur significant new or
                                                  method may not fulfill its incentive-                                                                          additional costs to collect information
                                                  alignment benefits without mechanisms                      Section 15G requires the Commission,                on these specific underwriting and
                                                  in place to ensure there is no selection                along with the other Agencies, to jointly              product features, which should have the
                                                  bias. Thus, the proposed rules require                  specify underwriting standards for                     effect of not unnecessarily disrupting
                                                  that sponsors have plans and                            QRMs that take into consideration                      existing lending practices. As a result,
                                                  procedures in place, maintain                           underwriting and product features that
                                                  documentation, and have the sampling                    historical loan performance data                          236 See Demyanyk, Yuliya, and Otto Van Hemert,

                                                  procedures agreed upon by an                            indicate result in lower risk of default.              ‘‘Understanding the Subprime Crisis,’’ Working
                                                  independent auditing firm. In addition,                 Section 15G exempts ABS entirely                       paper. St. Louis, Missouri: Federal Reserve Bank of
                                                                                                                                                                 St. Louis (2008); Quercia, Roberto, Michael
                                                  the proposed rules would require                        backed by QRMs from the risk retention                 Stegman, and Walter R. Davis, ‘‘Residential
                                                  ongoing disclosures about the                           mandated by Section 15G. In defining                   Mortgage Default: A Review of the Literature,’’
                                                  performance of the assets in the                        QRMs, the Agencies examined data on                    Journal of Housing Research 3(2): 341–379 (2005);
                                                                                                          mortgage performance supplied by                       Ambrose, Brent W., Michael LaCour-Little, and
                                                  representative sample in the same form,                                                                        Zsuzsa Huszar, ‘‘A Note on Hybrid Mortgages,’’ Real
                                                  level, and manner as is provided                        Lender Processing Services’ (‘‘LPS’’)                  Estate Economics 33(4): 765–782 (2005); Anderson,
                                                  concerning the securitized assets.                      Applied Analytics division (formerly                   Dennis Capozza and Robert Van Order,
                                                  Although this will increase sponsors’                   McDash Analytics). To minimize                         ‘‘Deconstructing the Mortgage Meltdown: A
                                                                                                                                                                 Methodology for Decomposing Underwriting
                                                  compliance costs, the Commission                        performance differences arising from                   Quality,’’ Social Science Research Network.
                                                  believes that it will also further the                  unobservable changes across products,                  http://ssrn.com/abstract=1411782 (2009); Gerardi,
                                                  incentive-alignment benefits                            and to focus on loan performance                       Kristopher, Andreas Lehnert, Shane Sherlund, and
                                                                                                          through stressful environments, the                    Paul Willen ‘‘Making Sense of the Subprime Crisis,’’
                                                  contemplated in Section 15G of the                                                                             Brookings Papers on Economic Activity (Fall 2008),
                                                  Exchange Act.                                           analysis generally used prime fixed-rate               59–145; Austin Kelly, ‘‘Skin in the Game: Zero
                                                     For some asset classes, such as                      loans originated from 2005 to 2008.
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                                                                                                                                 Down Payment Mortgage Default,’’ Federal Housing
                                                  automobile loans, retaining a portion of                Since the LPS data do not include                      Finance Agency, Journal of Housing Research, Vol.
                                                  the loans that would ordinarily be                      detailed borrower information, the                     19, No. 2 (2008); Neil Bhutta, Jane Dokko and Hui
                                                                                                                                                                 Shan, ‘‘The Depth of Negative Equity and Mortgage
                                                  securitized has been used as a method                   Agencies also analyzed data from the                   Default Decisions,’’ Finance and Economics
                                                  of risk retention. Therefore, permitting a              triennial Survey of Consumer Finances                  Discussion Series, Federal Reserve Board, 2010–35
                                                  representative sample risk retention                    (‘‘SCF’’) for the 1992–2007 period. To                 (2010); Deng, Yongheng, John M. Quigley and
                                                                                                                                                                 Robert van Order (2000), ‘‘Mortgage Terminations,
                                                  option with the appropriate safeguards                  isolate the borrower characteristics                   Heterogeneity and the Exercise of Mortgage
                                                  will likely benefit sponsors of such asset              closest in time to the mortgage                        Options,’’ Econometrica, Vol. 68, No. 2 (2000), pp.
                                                  classes, whose compliance costs—other                   origination, the analysis was limited to               275–307.



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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                           24153

                                                  the Commission expects that mortgage                    higher mortgage rates or fees, thus                    retention on sponsors should still have
                                                  rates would not be adversely impacted                   impeding capital formation.                            the effect of improving underwriting
                                                  by the Agencies’ choice of the features                    The QRM standards that the Agencies                 standards. Sponsors would have strong
                                                  used to define QRMs and therefore this                  are proposing prescribe fixed thresholds               incentives to monitor the lending
                                                  choice would not have a negative effect                 for several borrower and loan features.                practices of originators and consider
                                                  on efficiency and capital formation.                    For instance, a QRM cannot have a                      these practices when acquiring pool
                                                     The Agencies also have sought to                     front-end debt-to-income ratio higher                  assets. This likely will align originators’
                                                  make the standards applicable to QRMs                   than 28 percent or a loan-to-value ratio               interests with those of sponsors, whose
                                                  transparent to, and verifiable by,                      higher than 80 percent. The thresholds                 interests would now be aligned with
                                                  originators, securitizers, investors and                chosen in the proposed rule reflect a                  those of investors through risk retention.
                                                  supervisors. The Commission believes                    balance between setting standards that                    The proposed rules allow sponsors to
                                                  that investors will also benefit from the               are over- or under-conservative with                   allocate some of their risk retention
                                                  proposed approach to defining QRMs                      regard to mortgage default risk. If the                responsibilities to originators, which
                                                  using the above subset of mortgage                      Agencies had been more conservative in                 would provide additional flexibility in
                                                  features, since these include the factors               their choices of thresholds such that                  complying with the requirements.
                                                  most commonly considered by the                         fewer mortgages were QRMs, more                        However, the proposed rules do not
                                                  market as determinants of loan quality                  sponsors would have incurred                           allow the allocation of risk to an
                                                  and expected mortgage default.                          compliance costs for risk retention for                originator contributing a small share of
                                                  Therefore, investors will likely be                     non-QRMs. These additional costs                       assets to the securitized pool. Thus, the
                                                  familiar with them, which will have the                 would likely be passed on to borrowers                 proposed allocation of risk retention is
                                                  effect of facilitating investors’                       whose loans comprise the securitized                   likely to benefit small loan originators
                                                  interpretation and understanding of the                 pool, which would have the effect of                   by not allowing sponsors to pass onto
                                                  QRM standard as proposed.                               increasing mortgage rates for a larger                 them their own risk retention costs.
                                                     When considering the underwriting                    proportion of home buyers. On the other                   The Agencies are also proposing to
                                                  and product features to be used in the                  hand, QRM standards that are more                      allow risk retention allocation to a third-
                                                  QRM definition, the Agencies selected                   restrictive and that result in more non-               party purchaser in the securitization of
                                                  features that are transparent or                        QRMs would likely create a larger and                  commercial real estate loans. It has been
                                                  verifiable. The Commission believes                     therefore more liquid secondary market                 a common market practice for a third-
                                                  that this will benefit all entities                     for non-QRMs, and thus reduce the                      party purchaser to retain the first-loss
                                                  involved in the securitization process.                 liquidity premium for non-QRM ABS.                     position in commercial mortgage-backed
                                                  Loan originators will be able to easily                 The reduced liquidity premium, which                   transactions. This third-party buyer,
                                                  discern whether a mortgage is a QRM                     would decrease non-QRM rates, might                    also known as ‘‘B-piece buyer,’’ is
                                                  during the underwriting process.                        counteract the possible increase in non-               typically involved in the securitization
                                                  Sponsors will be able to unambiguously                  QRM rates resulting from risk retention                early on and thus can significantly affect
                                                  determine whether an ABS is backed by                   compliance costs.                                      pool asset selection. The B-piece buyer
                                                  QRMs alone and therefore qualifies for                     The opposite would also have been                   reviews the loans and corresponding
                                                  the risk retention exemption. And                       true. If the Agencies had been less                    mortgage properties, and may ask for
                                                  finally, investors will be able to assess               conservative in their choices of                       loans to be removed from the pool if
                                                  without difficulty whether they are                     thresholds such that a larger fraction of              underwriting issues are uncovered.
                                                  investing in a QRM ABS or not. Thus,                    mortgages would have qualified as                      Thus, the Agencies’ decision to allow a
                                                  the Commission expects that as a result                 QRMs, then non-QRMs might face                         B-piece buyer to meet a sponsor’s risk
                                                  of the transparency and verifiability of                illiquidity in the secondary market.                   retention obligations under Section 15G
                                                  the mortgage features used to define                    However, fewer borrowers would have                    of the Exchange Act, will likely benefit
                                                  QRMs, there will be no reduction in                     had to face increased mortgage rates                   both sponsors and investors. It
                                                  efficiency or impediment to capital                     resulting from compliance costs for risk               accommodates existing market
                                                  formation.                                              retention.                                             practices, thus minimizing sponsors’
                                                     Some of the QRM standards proposed                                                                          compliance costs while aligning the
                                                  by the Agencies rely on definitions and                 4. Risk Retention Allocation for Non-
                                                                                                                                                                 interests of investors with those of
                                                  calculations which may be defined in                    QRMs and Non-QAs
                                                                                                                                                                 parties performing due diligence on the
                                                  multiple ways. To provide clarity, the                     Many securitization transactions are                pool assets. In this way, the proposal
                                                  Agencies are proposing the use of                       brought to the market by aggregators                   should provide incentives for good
                                                  definitions of key terms as established                 who purchase assets from one or many                   underwriting and origination practices.
                                                  in the U.S. Department of Housing and                   originators, combine these assets in a                 Since a sponsor’s risk retention
                                                  Urban Development (HUD) Handbook                        pool, and then issue securities backed                 obligation can be met by a B-piece buyer
                                                  4155.1 (New Version), Mortgage Credit                   by the assets to investors. This                       only under certain conditions described
                                                  Analysis for Mortgage Insurance, as in                  securitization chain allows for the                    earlier, these conditions may increase B-
                                                  effect on December 31, 2010. Since the                  possibility of implementing risk                       piece buyers’ cost of participating in
                                                  HUD definitions have been time-tested                   retention at either the originator or the              CMBS transactions. B-piece buyers may
                                                  and are well understood by the market,                  sponsor level. Risk retention imposed                  be able to pass these costs to borrowers
                                                  the Commission believes this approach                   directly on originators may be more                    with an adverse effect on capital
                                                  will be efficient and beneficial to both                effective in improving underwriting                    formation. However, the Commission
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                  investors and sponsors. On the other                    standards than if imposed on sponsors.                 preliminary believes that the conditions
                                                  hand, loan originators and sponsors                     On the other hand, many of the risk                    help ensure that the B-piece buyer’s risk
                                                  who have been using alternative                         retention forms discussed earlier would                retention is consistent with the intent of
                                                  definitions might incur adjustment                      be unfeasible to implement due to the                  Section 15G and would benefit
                                                  costs, if they have to modify their loan                complexity introduced by the two-stage                 investors, and ultimately facilitating
                                                  origination systems and processes.                      nature of a securitization by an                       capital formation.
                                                  These new lending costs might be                        aggregator. Nonetheless, the Agencies                     As noted earlier, the B-piece buyer in
                                                  passed onto borrowers in the form of                    believe that the imposition of risk                    CMBS transactions often acts in the


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                                                  24154                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  capacity of a special servicer, which can                 Further, the proposed rule avoids an                 receivership of FHFA with capital
                                                  create conflicts of interest between the                outcome in which one originator-seller                 support from the United States, as well
                                                  B-piece buyer and senior tranche                        would have to be exposed to risks                      as for any limited-life regulated entity
                                                  holders. To mitigate these conflicts of                 underwritten by other originator-sellers.              succeeding to the charter and also
                                                  interest, the Agencies are proposing to                 Each originator-seller would be required               operating with such capital support,
                                                  have an operating adviser oversee the                   to retain credit exposure only to its own              avoid unnecessary costs to be incurred
                                                  servicing activities of the B-piece buyer               receivables, thus properly aligning its                by sponsors until the statutory and
                                                  when the B-piece buyer acts in a                        incentives with those of ABCP                          regulatory framework for the Enterprises
                                                  capacity of a special servicer. While                   investors.                                             becomes clearer. The Commission
                                                  such a requirement would increase                                                                              believes that the capital support
                                                                                                          5. Hedging Prohibitions
                                                  compliance costs, it should have the                                                                           provided by the United States
                                                  benefit of minimizing B-piece buyers’                      Hedging helps sponsors manage and                   government makes additional risk
                                                  ability to manipulate cash flows through                mitigate their exposure to unwanted                    retention unnecessary because as a
                                                  special servicing and by limiting B-                    risks. For example, a securitizer may                  result of the support investors in GSE
                                                  piece buyers’ ability to offset the                     want to mitigate the interest rate risk of             ABS are not exposed to any credit
                                                  consequences of poor underwriting                       its ABS portfolio. Hedging is also a                   losses. Thus, there would be no
                                                  through special servicing. In addition, it              beneficial activity from a systemic risk               incremental benefit to be gained by
                                                  should incentivize B-piece buyers to                    perspective because it helps market                    requiring GSEs to retain risk.
                                                  avoid adding into the pool poorly                       participants redistribute risk. Given the
                                                                                                          benefits from hedging, the proposed rule               7. Resecuritization Transactions
                                                  underwritten or originated assets. This
                                                  would be consistent with the purpose of                 aims to implement the risk retention                      The Agencies have identified certain
                                                  Section 15G and would benefit                           mandate of Section 15G without unduly                  resecuritizations where duplicative risk
                                                  investors, thus facilitating capital                    limiting a sponsor’s risk management                   retention requirements would provide
                                                  formation.                                              activities. This is accomplished by                    no added benefit. Resecuritizations
                                                     The Agencies are proposing yet                       prohibiting hedging only to the extent                 collateralized only by existing 15G-
                                                  another option for risk retention                       that hedging would result in a sponsor                 compliant ABS and financed through
                                                  allocation, which is specifically                       no longer being exposed to the risk                    the issuance of a single class of
                                                  designed for asset-backed commercial                    required to be retained by Section 15G                 securities so that all principal and
                                                  paper (‘‘ABCP’’) conduits. This option                  of the Exchange Act.                                   interest payments received are evenly
                                                  takes into account the special structures                  The ability to hedge interest rate risk             distributed to all security holders, are a
                                                  through which this type of ABS is                       and similar risks increases economic                   unique category of resecuritizations. For
                                                  typically issued, as well as the manner                 efficiency and facilitates capital                     them, the resecuritization process
                                                  in which exposure to the credit risk of                 formation, because it allows securitizers              would neither increase nor reallocate
                                                  the underlying assets is typically                      to direct their capital and efforts                    the credit risk of the underlying ABS.
                                                  retained.                                               towards activities of comparative                      Therefore, there would be no cost to
                                                     Although the proposal would allow                    advantage. For instance, a securitizer                 investors from incentive misalignment
                                                  the originator-sellers (rather than the                 might have a superior ability of                       with the securitizing sponsor.
                                                  sponsor) to retain the required eligible                assessing the credit risk of residential               Furthermore, because this type of
                                                  horizontal residual interest, the                       mortgages, but be less skilled in                      resecuritization may be used to
                                                  proposal also imposes certain                           forecasting interest-rate changes. Such a              aggregate 15G-compliant ABS backed by
                                                  obligations directly on the sponsor in                  securitizer might find it more efficient               small asset pools, the exemption for this
                                                  recognition of the key role the sponsor                 to hedge the interest-rate risk of the                 type of resecuritization could improve
                                                  plays in organizing and operating an                    residential mortgages collateralizing an               access to credit at reasonable terms to
                                                  eligible ABCP conduit. Most                             RMBS rather than invest resources in                   consumers and businesses by allowing
                                                  importantly, the proposal provides that                 improving its ability to understand and                for the creation of an additional
                                                  the sponsor of an eligible ABCP conduit                 price this interest-rate risk.                         investment vehicle for these smaller
                                                  that issues ABCP in reliance on this                    Furthermore, since interest-rate                       asset pools. The exemption would allow
                                                  option would be the securitization party                fluctuations are unrelated to                          the creation of ABS that may be backed
                                                  ultimately responsible for compliance                   underwriting deficiencies in the loan                  by more geographically diverse pools
                                                  with the risk retention requirements of                 origination process, allowing a                        than those that can be achieved by the
                                                  Section 15G of the Exchange Act. The                    securitizer to hedge interest-rate risk                pooling of individual assets as part of
                                                  proposal allows for an ABCP sponsor to                  will not compromise the incentive                      the issuance of the underlying 15G-
                                                  be in compliance if each originator-                    alignment contemplated by the Act. The                 compliant ABS. Again, this will likely
                                                  seller retains a five-percent horizontal                ability to hedge also may help                         improve access to credit on reasonable
                                                  residual interest in each intermediate                  competition, because by hedging less                   terms.
                                                  SPV established by or on behalf of that                 diversified companies may be able to                      Under the proposed rule, sponsors of
                                                  originator-seller for purposes of issuing               compete with more diversified                          resecuritizations that do not have the
                                                  interests to an eligible ABCP conduit.                  companies that have weaker hedging                     structure described above would not be
                                                  Since eligible ABCP conduits also                       incentives. Therefore, the proposed                    exempted from risk retention.
                                                  provide full liquidity guarantees to                    rules are designed to promote efficiency,              Resecuritization transactions, which re-
                                                  commercial-paper investors by                                                                                  tranche the credit risk of the underlying
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                                                                          competition and capital formation.
                                                  regulated liquidity providers, the                                                                             ABS, would be subject to risk retention
                                                  flexibility allowed by the proposed rule                6. Treatment of Government-Sponsored                   requirements in addition to the risk
                                                  benefits ABCP sponsors by allowing                      Enterprises                                            retention requirement imposed on the
                                                  them to avoid costly duplicative risk                      The proposed rules, which allows the                underlying ABS. In such transactions,
                                                  retention and should have the effect of                 guarantees of Fannie Mae and Freddie                   there is the possibility of incentive
                                                  promoting capital formation in this                     Mac to satisfy the risk retention                      misalignment between investors and
                                                  important segment of the securitization                 requirements while they are operating                  sponsors just as when structuring the
                                                  market.                                                 under the conservatorship or                           underlying ABS. For such


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                                                                             Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules                                           24155

                                                  resecuritizations, the proposed rule                    for qualified residential mortgages and                    • A major increase in costs or prices
                                                  seeks to ensure that this misalignment is               other qualified assets. The cost of                     for consumers or individual industries;
                                                  addressed by not granting these                         retaining this risk amount has two                      or
                                                  resecuritizations with an exemption                     components. The first is the loss of                       • Significant adverse effects on
                                                  from risk retention. However, the                       origination and servicing fees on the                   competition, investment or innovation.
                                                  proposed rules may have an adverse                      reduced amount of origination activity                     We request comment on the potential
                                                  impact on capital formation and                         necessitated by the need to hold the                    impact of the proposal on the U.S.
                                                  efficiency if they make some types of                   $2.8 billion retention amount on the                    economy on an annual basis, any
                                                  resecuritization transactions costlier or               bank’s balance sheet. Typical                           potential increase in costs or prices for
                                                  infeasible to conduct as a result of risk               origination fees are 1 percent and                      consumers or individual industries, and
                                                  retention costs.                                        typical servicing fees are another half of              any potential effect on competition,
                                                  D. Executive Order 12866 Determination                  a percentage point. To capture any                      investment or innovation. Commenters
                                                                                                          additional lost fees, the OCC                           are requested to provide empirical data
                                                    The Office of Management and Budget                   conservatively estimated that the total                 and other factual support for their views
                                                  (OMB) reviewed this proposed rule as it                 cost of lost fees to be two percent of the              if possible.
                                                  relates to programs and activities of the               retained amount, or approximately $56
                                                  Department of Housing and Urban                         million. The second component of the                    G. FHFA: Considerations of Differences
                                                  Development (HUD) under Executive                       retention cost is the opportunity cost of               Between the Federal Home Loan Banks
                                                  Order 12866 (entitled ‘‘Regulatory                      earning the return on these retained                    and the Enterprises
                                                  Planning and Review’’), and determined                  assets versus the return that the bank
                                                  the rule as it relates to HUD to be an                                                                             Section 1313 of the Federal Housing
                                                                                                          would earn if these funds were put to                   Enterprises Financial Safety and
                                                  economically significant regulatory                     other use. Because of the variety of
                                                  action, as provided in section 3(f)(1) of                                                                       Soundness Act of 1992 requires the
                                                                                                          assets and returns on the securitized                   Director of FHFA, when promulgating
                                                  the Order. The docket file is available                 assets, the OCC assumes that this
                                                  for public inspection in the Regulations                                                                        regulations relating to the Federal Home
                                                                                                          interest opportunity cost nets to zero. In              Loan Banks (Banks), to consider the
                                                  Division, Office of General Counsel,                    addition to the cost of retaining the
                                                  Department of Housing and Urban                                                                                 following differences between the Banks
                                                                                                          assets under the proposed rule, the                     and the Enterprises (Fannie Mae and
                                                  Development, 451 7th Street, SW.,                       overall cost of the proposed rule
                                                  Room 10276 Washington, DC 20410–                                                                                Freddie Mac): cooperative ownership
                                                                                                          includes the administrative costs                       structure; mission of providing liquidity
                                                  0500. Due to security measures at the
                                                                                                          associated with implementing the rule                   to members; affordable housing and
                                                  HUD Headquarters building, please
                                                                                                          and providing required disclosures. The                 community development mission;
                                                  schedule an appointment to review the
                                                                                                          OCC estimates that implementation and                   capital structure; and joint and several
                                                  docket file by calling the Regulations
                                                                                                          disclosure will require approximately                   liability.238 The Director also may
                                                  Division at 202–402–3055 (this is not a
                                                                                                          480 hours per institution, or at $100 per               consider any other differences that are
                                                  toll-free number). Individuals with
                                                                                                          hour, approximately $48,000 per                         deemed appropriate. In preparing the
                                                  speech or hearing impairments may
                                                                                                          institution. The OCC estimates that the                 portions of this proposed rule over
                                                  access this number via TTY by calling
                                                                                                          rule will apply to approximately 25                     which FHFA has joint rulemaking
                                                  the Federal Information Relay Service at
                                                                                                          national banking organizations. Thus,                   authority, the Director considered the
                                                  800–877–8339.
                                                                                                          the estimate of the total administrative                differences between the Banks and the
                                                  E. OCC Unfunded Mandates Reform Act                     cost of the proposed rule is                            Enterprises as they relate to the above
                                                  of 1995 Determination                                   approximately $1.2 million. Thus, the                   factors. FHFA requests comments from
                                                     Section 202 of the Unfunded                          estimated total cost of the proposed rule               the public about whether differences
                                                  Mandates Reform Act of 1995, Public                     applied to ABS is $57.2 million.                        related to these factors should result in
                                                  Law 104–4 (Unfunded Mandates Act)                          The OCC has determined that its                      any revisions to the proposal.
                                                  requires that an agency prepare a                       portion of the final rules will not result
                                                                                                          in expenditures by State, local, and                    Text of the Proposed Common Rules
                                                  budgetary impact statement before                                                                               (All Agencies)
                                                  promulgating a rule that includes a                     tribal governments, or by the private
                                                  Federal mandate that may result in                      sector, of $126.4 million or more.                        The text of the proposed common
                                                  expenditure by State, local, and tribal                 Accordingly, the OCC has not prepared                   rules appears below:
                                                  governments, in the aggregate, or by the                a budgetary impact statement or
                                                                                                          specifically addressed the regulatory                   Part ll—Credit Risk Retention
                                                  private sector, of $100 million (adjusted
                                                  for inflation) or more in any one year.                 alternatives considered.                                Subpart A—Authority, Purpose, Scope and
                                                  The current inflation-adjusted                                                                                  Definitions
                                                                                                          F. Commission: Small Business
                                                  expenditure threshold is $126.4 million.                Regulatory Enforcement Fairness Act                     Sec.
                                                  If a budgetary impact statement is                                                                              ll.1 [Reserved]
                                                  required, section 205 of the UMRA also                     For purposes of the Small Business                   ll.2 Definitions.
                                                  requires an agency to identify and                      Regulatory Enforcement Fairness Act of
                                                                                                          1996, or ‘‘SBREFA,’’ 237 the Commission                 Subpart B—Credit Risk Retention
                                                  consider a reasonable number of
                                                  regulatory alternatives before                          solicits data to determine whether the                  ll.3 Base risk retention requirement.
                                                                                                          proposal constitutes a ‘‘major’’ rule.                  ll.4 Vertical risk retention.
                                                  promulgating a rule.
srobinson on DSKHWCL6B1PROD with PROPOSALS




                                                                                                          Under SBREFA, a rule is considered                      ll.5 Horizontal risk retention.
                                                     Based on current and historical                                                                              ll.6 L-Shaped risk retention.
                                                  supervisory data on national bank                       ‘‘major’’ where, if adopted, it results or
                                                                                                                                                                  ll.7 Revolving asset master trusts.
                                                  securitization activity, the OCC                        is likely to result in:                                 ll.8 Representative sample.
                                                  estimates that, pursuant to the proposed                   • An annual effect on the economy of                 ll.9 Eligible ABCP conduits.
                                                  rule, national banks would be required                  $100 million or more (either in the form                ll.10 Commercial mortgage-backed
                                                  to retain approximately $2.8 billion of                 of an increase or a decrease);                             securities.
                                                  credit risk, after taking into
                                                  consideration the proposed exemptions                     237 5   U.S.C. 603.                                     238 See   12 U.S.C. 4513.



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                                                  24156                      Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules

                                                  ll.11 Federal National Mortgage                         a person that directly, or indirectly                  trustees or persons performing similar
                                                    Association and Federal Home Loan                     through one or more intermediaries,                    functions of the company.
                                                    Mortgage Corporation ABS.                             controls, or is controlled by, or is under                Credit risk means:
                                                  ll.12 Premium capture cash reserve
                                                                                                          common control with, the person                           (1) The risk of loss that could result
                                                    account.
                                                                                                          specified.                                             from the failure of the borrower in the
                                                  Subpart C—Transfer of Risk Retention                       Appropriate Federal banking agency                  case of a securitized asset, or the issuing
                                                  ll.13 Allocation of risk retention to an                has the same meaning as in section 3 of                entity in the case of an ABS interest in
                                                     originator.                                          the Federal Deposit Insurance Act (12                  the issuing entity, to make required
                                                  ll.14 Hedging, transfer and financing                   U.S.C. 1813).                                          payments of principal or interest on the
                                                     prohibitions.                                           Asset means a self-liquidating                      asset or ABS interest on a timely basis;
                                                  Subpart D—Exceptions and Exemptions                     financial asset (including but not                        (2) The risk of loss that could result
                                                  ll.15 Exemption for qualified residential               limited to a loan, lease, mortgage, or                 from bankruptcy, insolvency, or a
                                                     mortgages.                                           receivable).                                           similar proceeding with respect to the
                                                  ll.16 Definitions applicable to qualifying                 Asset-backed security has the same                  borrower or issuing entity, as
                                                     commercial loans, commercial                         meaning as in section 3(a)(77) of the                  appropriate; or
                                                     mortgages, and auto loans.                           Securities Exchange Act of 1934 (15                       (3) The effect that significant changes
                                                  ll.17 Exceptions for qualifying                         U.S.C. 78c(a)(77)).                                    in the underlying credit quality of the
                                                     commercial loans, commercial                            Collateral with respect to any                      asset or ABS interest may have on the
                                                     mortgages, and auto loans.
                                                                                                          issuance of ABS interests means the                    market value of the asset or ABS
                                                  ll.18 Underwriting standards for
                                                     qualifying commercial loans.                         assets or other property that provide the              interest.
                                                  ll.19 Underwriting standards for                        cash flow (including cash flow from the                   Depositor means:
                                                     qualifying CRE loans.                                foreclosure or sale of the assets or                      (1) The person that receives or
                                                  ll.20 Underwriting standards for                        property) for the ABS interests                        purchases and transfers or sells the
                                                     qualifying auto loans.                               irrespective of the legal structure of                 securitized assets to the issuing entity;
                                                  ll.21 General exemptions.                               issuance, including security interests in                 (2) The sponsor, in the case of a
                                                  ll.22 Safe harbor for certain foreign-                  assets or other property of the issuing                securitization transaction where there is
                                                     related transactions.                                entity, fractional undivided property                  not an intermediate transfer of the assets
                                                  ll.23 Additional exemptions.
                                                                                                          interests in the assets or other property              from the sponsor to the issuing entity;
                                                  Appendix A to Part ___— Additional QRM
                                                     Standards; Standards for Determining                 of the issuing entity, or any other                    or
                                                     Acceptable Sources of Borrower Funds,                property interest in such assets or other                 (3) The person that receives or
                                                     Borrower’s Monthly Gross Income,                     property.                                              purchases and transfers or sells the
                                                     Monthly Housing Debt, and Total                         Collateralize. Assets or other property             securitized assets to the issuing entity in
                                                     Monthly Debt                                         collateralize an issuance of ABS                       the case of a securitization transaction
                                                  Subpart A—Authority, Purpose, Scope                     interests if the assets or property serve              where the person transferring or selling
                                                  and Definitions                                         as collateral for such issuance.                       the securitized assets directly to the
                                                                                                             Commercial real estate loan has the                 issuing entity is itself a trust.
                                                  § ll.1      [Reserved]                                  same meaning as in § _.16 of this part.                   Eligible ABCP conduit means an
                                                  § ll.2 Definitions.                                        Commission means the Securities and                 issuing entity that issues ABCP
                                                                                                          Exchange Commission.                                   provided that:
                                                     For purposes of this part, the                          Consolidated affiliate means, with                     (1) The issuing entity is bankruptcy
                                                  following definitions apply:                            respect to a sponsor, an entity (other                 remote or otherwise isolated for
                                                     ABCP means asset-backed commercial                   than the issuing entity) the financial                 insolvency purposes from the sponsor of
                                                  paper that has a maturity at the time of                statements of which are consolidated                   the issuing entity and from any
                                                  issuance not exceeding nine months,                     with those of:                                         intermediate SPV;
                                                  exclusive of days of grace, or any
                                                                                                             (1) The sponsor under applicable                       (2) The interests issued by an
                                                  renewal thereof the maturity of which is
                                                                                                          accounting standards; or                               intermediate SPV to the issuing entity
                                                  likewise limited.
                                                                                                             (2) Another entity the financial                    are collateralized solely by the assets
                                                     ABS interest: