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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 43
Docket No. OCC-2013-0010
RIN 1557-AD40
FEDERAL RESERVE SYSTEM
12 CFR Part 244
Docket No. R-1411
RIN 7100-AD70
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 373
RIN 3064-AD74
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1234
RIN 2590-AA43
U.S. SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 246
Release Nos. 34-70277
RIN 3235-AK96
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 267
RIN 2501-AD53
Credit Risk Retention
AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC); Board of
Governors of the Federal Reserve System (Board); Federal Deposit Insurance
Corporation (FDIC); U.S. Securities and Exchange Commission (Commission); Federal
Housing Finance Agency (FHFA); and Department of Housing and Urban Development
(HUD).
ACTION: Proposed rule.
SUMMARY: The OCC, Board, FDIC, Commission, FHFA, and HUD (the agencies) are
seeking comment on a joint proposed rule (the proposed rule, or the proposal) to revise
the proposed rule the agencies published in the Federal Register on April 29, 2011, and to
implement the credit risk retention requirements of section 15G of the Securities
Exchange Act of 1934 (15. U.S.C. 78o-11), as added by section 941 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 15G
generally requires the securitizer of asset-backed securities to retain not less than 5
percent of the credit risk of the assets collateralizing the asset-backed securities. Section
15G includes a variety of exemptions from these requirements, including an exemption
for asset-backed securities that are collateralized exclusively by residential mortgages
that qualify as “qualified residential mortgages,” as such term is defined by the agencies
by rule.
DATES: Comments must be received by October 30, 2013.
ADDRESSES: Interested parties are encouraged to submit written comments jointly to
all of the agencies. Commenters are encouraged to use the title “Credit Risk Retention”
to facilitate the organization and distribution of comments among the agencies.
2
Commenters are also encouraged to identify the number of the specific request for
comment to which they are responding.
Office of the Comptroller of the Currency: Because paper mail in the Washington, DC
area and at the OCC is subject to delay, commenters are encouraged to submit comments
by the Federal eRulemaking Portal or e-mail, if possible. Please use the title “Credit Risk
Retention” to facilitate the organization and distribution of the comments. You may
submit comments by any of the following methods:
•
Federal eRulemaking Portal – “Regulations.gov”: Go to
http://www.regulations.gov. Enter “Docket ID OCC-2013-0010” in the Search
Box and click “Search”. Results can be filtered using the filtering tools on the left
side of the screen. Click on “Comment Now” to submit public comments. Click
on the “Help” tab on the Regulations.gov home page to get information on using
Regulations.gov.
•
E-mail: regs.comments@occ.treas.gov.
•
Mail: Legislative and Regulatory Activities Division, Office of the Comptroller of
the Currency, 400 7th Street, SW, Suite 3E-218, Mail Stop 9W-11, Washington,
DC 20219.
•
Fax: (571) 465-4326.
•
Hand Delivery/Courier: 400 7th Street, SW, Suite 3E-218, Mail Stop 9W-11,
Washington, DC 20219.
Instructions: You must include “OCC” as the agency name and “Docket Number OCC2013-0010” in your comment. In general, OCC will enter all comments received into the
docket and publish them on the Regulations.gov Web site without change, including any
3
business or personal information that you provide such as name and address information,
e-mail addresses, or phone numbers. Comments received, including attachments and
other supporting materials, are part of the public record and subject to public disclosure.
Do not enclose any information in your comment or supporting materials that you
consider confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to this proposed
rulemaking by any of the following methods:
•
Viewing Comments Electronically: Go to http://www.regulations.gov. Enter
“Docket ID OCC-2013-0010” in the Search box and click “Search”. Comments
can be filtered by agency using the filtering tools on the left side of the screen.
Click on the “Help” tab on the Regulations.gov home page to get information on
using Regulations.gov, including instructions for viewing public comments,
viewing other supporting and related materials, and viewing the docket after the
close of the comment period.
•
Viewing Comments Personally: You may personally inspect and photocopy
comments at the OCC, 400 7th Street, SW, Washington, DC. For security
reasons, the OCC requires that visitors make an appointment to inspect
comments. You may do so by calling (202) 649-6700. Upon arrival, visitors will
be required to present valid government-issued photo identification and submit to
security screening in order to inspect and photocopy comments.
•
Docket: You may also view or request available background documents and
project summaries using the methods described above.
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Board of Governors of the Federal Reserve System:
You may submit comments, identified by Docket No. R-1411, by any of the following
methods:
•
Agency Web Site: http://www.federalreserve.gov. Follow the instructions for
submitting comments at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
•
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
•
E-mail: regs.comments@federalreserve.gov. Include the docket number in the
subject line of the message.
•
Fax: (202) 452-3819 or (202) 452-3102.
•
Mail: Address to Robert deV. Frierson, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW, Washington,
DC 20551.
All public comments will be made available on the Board’s web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless
modified for technical reasons. Accordingly, comments will not be edited to remove any
identifying or contact information. Public comments may also be viewed electronically
or in paper in Room MP-500 of the Board’s Martin Building (20th and C Streets, NW)
between 9:00 a.m. and 5:00 p.m. on weekdays.
Federal Deposit Insurance Corporation: You may submit comments, identified by RIN
number, by any of the following methods:
5
•
Agency Web Site: http://www.FDIC.gov/regulations/laws/federal. Follow
instructions for submitting comments on the agency web site.
•
E-mail: Comments@FDIC.gov. Include RIN 3064-AD74 in the subject line of
the message.
•
Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th Street, NW, Washington, DC 20429.
•
Hand Delivery/Courier: Guard station at the rear of the 550 17th Street Building
(located on F Street) on business days between 7:00 a.m. and 5:00 p.m.
•
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
Instructions: All comments will be posted without change to
http://www.fdic.gov/regulations/laws/federal/, including any personal information
provided. Paper copies of public comments may be ordered from the Public
Information Center by telephone at (877) 275-3342 or (703) 562-2200.
Securities and Exchange Commission: You may submit comments by the following
method:
Electronic Comments
•
Use the Commission’s Internet comment form
(http://www.sec.gov/rules/proposed.shtml); or
•
Send an e-mail to rule-comments@sec.gov. Please include File Number S7-14-11
on the subject line; or
•
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the
instructions for submitting comments.
6
Paper Comments:
•
Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090
•
All submissions should refer to File Number S7-14-11. This file number should
be included on the subject line if e-mail is used. To help us process and review
your comments more efficiently, please use only one method. The Commission
will post all comments on the Commission’s Internet website
(http://www.sec.gov/rules/proposed.shtml). Comments are also available for
website viewing and printing in the Commission’s Public Reference Room, 100 F
Street, NE, Washington, DC 20549, on official business days between the hours
of 10:00 am and 3:00 pm. All comments received will be posted without change;
we do not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
Federal Housing Finance Agency: You may submit your written comments on the
proposed rulemaking, identified by RIN number 2590-AA43, by any of the following
methods:
•
E-mail: Comments to Alfred M. Pollard, General Counsel, may be sent by email at RegComments@fhfa.gov. Please include “RIN 2590-AA43” in the
subject line of the message.
•
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments. If you submit your comment to the
Federal eRulemaking Portal, please also send it by e-mail to FHFA at
7
RegComments@fhfa.gov to ensure timely receipt by the agency. Please
include ‘‘RIN 2590–AA43’’ in the subject line of the message.
•
U.S. Mail, United Parcel Service, Federal Express, or Other Mail Service:
The mailing address for comments is: Alfred M. Pollard, General Counsel,
Attention: Comments/RIN 2590-AA43, Federal Housing Finance Agency,
Constitution Center, (OGC) Eighth Floor, 400 7th Street SW, Washington, DC
20024.
•
Hand Delivery/Courier: The hand delivery address is: Alfred M. Pollard,
General Counsel, Attention: Comments/RIN 2590-AA43, Federal Housing
Finance Agency, Constitution Center, (OGC) Eighth Floor, 400 7th Street SW,
Washington, DC 20024. A hand-delivered package should be logged in at the
Seventh Street entrance Guard Desk, First Floor, on business days between
9:00 a.m. and 5:00 p.m.
All comments received by the deadline will be posted for public inspection without
change, including any personal information you provide, such as your name and address,
on the FHFA website at http://www.fhfa.gov. Copies of all comments timely received
will be available for public inspection and copying at the address above on governmentbusiness days between the hours of 10 a.m. and 3 p.m. at the Federal Housing Finance
Agency, Constitution Center, 400 7th Street SW, Washington, DC 20024. To make an
appointment to inspect comments please call the Office of General Counsel at (202) 6493804.
Department of Housing and Urban Development: Interested persons are invited to
submit comments regarding this rule to the Regulations Division, Office of General
8
Counsel, Department of Housing and Urban Development, 451 7th Street, SW, Room
10276, Washington, DC 20410-0500. Communications must refer to the above docket
number and title. There are two methods for submitting public comments. All
submissions must refer to the above docket number and title.
•
Submission of Comments by Mail. Comments may be submitted by mail to
the Regulations Division, Office of General Counsel, Department of Housing
and Urban Development, 451 7th Street, SW, Room 10276, Washington, DC
20410-0500.
•
Electronic Submission of Comments. Interested persons may submit
comments electronically through the Federal eRulemaking Portal at
www.regulations.gov. HUD strongly encourages commenters to submit
comments electronically. Electronic submission of comments allows the
commenter maximum time to prepare and submit a comment, ensures timely
receipt by HUD, and enables HUD to make them immediately available to the
public. Comments submitted electronically through the www.regulations.gov
website can be viewed by other commenters and interested members of the
public. Commenters should follow the instructions provided on that site to
submit comments electronically.
•
Note: To receive consideration as public comments, comments must be
submitted through one of the two methods specified above. Again, all
submissions must refer to the docket number and title of the rule.
•
No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
9
•
Public Inspection of Public Comments. All properly submitted comments
and communications submitted to HUD will be available for public inspection
and copying between 8 a.m. and 5 p.m. weekdays at the above address. Due
to security measures at the HUD Headquarters building, an appointment to
review the public comments must be scheduled in advance by calling the
Regulations Division at 202-708-3055 (this is not a toll-free number).
Individuals with speech or hearing impairments may access this number via
TTY by calling the Federal Information Relay Service at 800-877-8339.
Copies of all comments submitted are available for inspection and
downloading at www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
OCC: Kevin Korzeniewski, Attorney, Legislative and Regulatory Activities Division,
(202) 649-5490, Office of the Comptroller of the Currency, 400 7th Street, SW,
Washington, DC 20219.
Board: Benjamin W. McDonough, Senior Counsel, (202) 452-2036; April C. Snyder,
Senior Counsel, (202) 452-3099; Brian P. Knestout, Counsel, (202) 452-2249; David W.
Alexander, Senior Attorney, (202) 452-2877; or Flora H. Ahn, Senior Attorney, (202)
452-2317, Legal Division; Thomas R. Boemio, Manager, (202) 452-2982; Donald N.
Gabbai, Senior Supervisory Financial Analyst, (202) 452-3358; Ann P. McKeehan,
Senior Supervisory Financial Analyst, (202) 973-6903; or Sean M. Healey, Senior
Financial Analyst, (202) 912-4611, Division of Banking Supervision and Regulation;
Karen Pence, Assistant Director, Division of Research & Statistics, (202) 452-2342; or
Nikita Pastor, Counsel, (202) 452-3667, Division of Consumer and Community Affairs,
10
Board of Governors of the Federal Reserve System, 20th and C Streets, NW,
Washington, DC 20551.
FDIC: Rae-Ann Miller, Associate Director, (202) 898-3898; George Alexander,
Assistant Director, (202) 898-3718; Kathleen M. Russo, Supervisory Counsel, (703) 5622071; or Phillip E. Sloan, Counsel, (703) 562-6137, Federal Deposit Insurance
Corporation, 550 17th Street, NW, Washington, DC 20429.
Commission: Steven Gendron, Analyst Fellow; Arthur Sandel, Special Counsel; David
Beaning, Special Counsel; or Katherine Hsu, Chief, (202) 551-3850, in the Office of
Structured Finance, Division of Corporation Finance, U.S. Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-3628.
FHFA: Patrick J. Lawler, Associate Director and Chief Economist,
Patrick.Lawler@fhfa.gov, (202) 649-3190; Ronald P. Sugarman, Principal Legislative
Analyst, Ron.Sugarman@fhfa.gov, (202) 649-3208; Phillip Millman, Principal Capital
Markets Specialist, Phillip.Millman@fhfa.gov, (202) 649-3080; or Thomas E. Joseph,
Associate General Counsel, Thomas.Joseph@fhfa.gov, (202) 649-3076; Federal Housing
Finance Agency, Constitution Center, 400 7th Street SW, Washington, DC 20024. The
telephone number for the Telecommunications Device for the Hearing Impaired is (800)
877-8339.
HUD: Michael P. Nixon, Office of Housing, Department of Housing and Urban
Development, 451 7th Street, SW, Room 10226, Washington, DC 20410; telephone
number 202-402-3094 (this is not a toll-free number). Persons with hearing or speech
impairments may access this number through TTY by calling the toll-free Federal
Information Relay Service at 800-877-8339.
11
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Background
B. Overview of the Original Proposal and Public Comment
C. Overview of the Proposed Rule
II. General Definitions and Scope
A. Overview of Significant Definitions in the Original Proposal and Comments
1. Asset-Backed Securities, Securitization Transactions, and ABS
Interests
2. Securitizer, Sponsor, and Depositor
3. Originator
4. Servicing Assets, Collateral
B. Proposed General Definitions
III. General Risk Retention Requirement
A. Minimum Risk Retention Requirement
B. Permissible Forms of Risk Retention – Menu of Options
1. Standard Risk Retention
2. Revolving Master Trusts
3. Representative Sample
4. Asset-Backed Commercial Paper Conduits
5. Commercial Mortgage-Backed Securities
6. Government-Sponsored Enterprises
12
7. Open Market Collateralized Loan Obligations
8. Municipal Bond “Repackaging” Securitizations
9. Premium Capture Cash Reserve Account
C. Allocation to the Originator
D. Hedging, Transfer, and Financing Restrictions
IV.
General Exemptions
A. Exemption for Federally Insured or Guaranteed Residential, Multifamily, and
Health Care Mortgage Loan Assets
B. Exemption for Securitizations of Assets Issued, Insured, or Guaranteed by the
United States or any Agency of the United States and Other Exemptions
C. Exemption for Certain Resecuritization Transactions
D. Other Exemptions from Risk Retention Requirements
1. Utility Legislative Securitizations
2. Seasoned Loans
3. Legacy Loan Securitizations
4. Corporate Debt Repackagings
5. “Non-conduit” CMBS Transactions
6. Tax Lien-Backed Securities Sponsored by a Municipal Entity
7. Rental Car Securitizations
E. Safe Harbor for Foreign Securitization Transactions
F. Sunset on Hedging and Transfer Restrictions
G. Federal Deposit Insurance Corporation Securitizations
13
V. Reduced Risk Retention Requirements and Underwriting Standards for ABS Backed
by Qualifying Commercial, Commercial Real Estate, or Automobile Loans
A. Qualifying Commercial Loans
B. Qualifying Commercial Real Estate Loans
1. Ability to Repay
2. Loan-to-Value Requirement
3. Collateral Valuation
4. Risk Management and Monitoring
C. Qualifying Automobile Loans
1. Ability to Repay
2. Loan Terms
3. Reviewing Credit History
4. Loan-to-Value
D. Qualifying Asset Exemption
E. Buyback Requirement
VI. Qualified Residential Mortgages
A. Overview of Original Proposal and Public Comments
B. Approach to Defining QRM
1. Limiting Credit Risk
2. Preserving Credit Access
C. Proposed Definition of QRM
D. Exemption for QRMs
14
E. Repurchase of Loans Subsequently Determined to be Non-Qualified After
Closing
F. Alternative Approach to Exemptions for QRMs
VII. Solicitation of Comments on Use of Plain Language
VIII. Administrative Law Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Commission Economic Analysis
D. OCC Unfunded Mandates Reform Act of 1995 Determination
E. Commission: Small Business Regulatory Enforcement Fairness Act
F. FHFA: Considerations of Differences between the Federal Home Loan Banks
and the Enterprises
I. Introduction
The agencies are requesting comment on a proposed rule that re-proposes with
modifications a previously proposed rule to implement the requirements of section 941 of
the Dodd–Frank Wall Street Reform and Consumer Protection Act (the Act, or Dodd–
Frank Act). 1 Section 15G of the Exchange Act, as added by section 941(b) of the DoddFrank Act, generally requires the Board, the FDIC, the OCC (collectively, referred to as
the Federal banking agencies), the Commission, and, in the case of the securitization of
any “residential mortgage asset,” together with HUD and FHFA, to jointly prescribe
1
Pub. L. No. 111-203, 124 Stat. 1376 (2010). Section 941 of the Dodd-Frank Act
amends the Securities Exchange Act of 1934 (the Exchange Act) and adds a new section
15G of the Exchange Act. 15 U.S.C. 78o-11.
15
regulations that (i) require a securitizer to retain not less than 5 percent of the credit risk
of any asset that the securitizer, through the issuance of an asset-backed security (ABS),
transfers, sells, or conveys to a third party, and (ii) prohibit a securitizer from directly or
indirectly hedging or otherwise transferring the credit risk that the securitizer is required
to retain under section 15G and the agencies’ implementing rules. 2
Section 15G of the Exchange Act exempts certain types of securitization
transactions from these risk retention requirements and authorizes the agencies to exempt
or establish a lower risk retention requirement for other types of securitization
transactions. For example, section 15G specifically provides that a securitizer shall not
be required to retain any part of the credit risk for an asset that is transferred, sold, or
conveyed through the issuance of ABS by the securitizer, if all of the assets that
collateralize the ABS are qualified residential mortgages (QRMs), as that term is jointly
defined by the agencies. 3 In addition, section 15G provides that a securitizer may retain
less than 5 percent of the credit risk of commercial mortgages, commercial loans, and
automobile loans that are transferred, sold, or conveyed through the issuance of ABS by
the securitizer if the loans meet underwriting standards established by the Federal
banking agencies. 4
In April 2011, the agencies published a joint notice of proposed rulemaking that
2
See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B)(ii).
3
See 15 U.S.C. 78o-11(c)(1)(C)(iii), (e)(4)(A) and (B).
4
See id. at § 78o-11(c)(1)(B)(ii) and (2).
16
proposed to implement section 15G of the Exchange Act (original proposal). 5 The
proposed rule revises the original proposal, as described in more detail below.
Section 15G allocates the authority for writing rules to implement its provisions
among the agencies in various ways. As a general matter, the agencies collectively are
responsible for adopting joint rules to implement the risk retention requirements of
section 15G for securitizations that are backed by residential mortgage assets and for
defining what constitutes a QRM for purposes of the exemption for QRM-backed ABS. 6
The Federal banking agencies and the Commission, however, are responsible for
adopting joint rules that implement section 15G for securitizations backed by all other
types of assets, 7 and are authorized to adopt rules in several specific areas under section
15G. 8 In addition, the Federal banking agencies are jointly responsible for establishing,
by rule, the underwriting standards for non-QRM residential mortgages, commercial
mortgages, commercial loans, and automobile loans that would qualify ABS backed by
these types of loans for a risk retention requirement of less than 5 percent. 9 Accordingly,
when used in this Notice of Proposed Rulemaking, the term “agencies” shall be deemed
5
Credit Risk Retention; Proposed Rule, 76 FR 24090 (April 29, 2011) (Original
Proposal).
6
See id. at § 78o-11(b)(2), (e)(4)(A) and (B).
7
See id. at § 78o-11(b)(1).
8
See, e.g. id. at §§ 78o-11(b)(1)(E) (relating to the risk retention requirements for ABS
collateralized by commercial mortgages); (b)(1)(G)(ii) (relating to additional exemptions
for assets issued or guaranteed by the United States or an agency of the United States);
(d) (relating to the allocation of risk retention obligations between a securitizer and an
originator); and (e)(1) (relating to additional exemptions, exceptions or adjustments for
classes of institutions or assets).
9
See id. at § 78o-11(b)(2)(B).
17
to refer to the appropriate agencies that have rulewriting authority with respect to the
asset class, securitization transaction, or other matter discussed.
For ease of reference, the re-proposed rules of the agencies are referenced using a
common designation of §__.1 to §__.21 (excluding the title and part designations for
each agency). With the exception of HUD, each agency will codify the rules, when
adopted in final form, within each of their respective titles of the Code of Federal
Regulations. 10 Section __.1 of each agency’s rule identifies the entities or transactions
subject to such agency’s rule.
The preamble to the original proposal described the agencies’ intention to jointly
approve any written interpretations, written responses to requests for no-action letters and
general counsel opinions, or other written interpretive guidance (written interpretations)
concerning the scope or terms of section 15G of the Exchange Act and the final rules
issued thereunder that are intended to be relied on by the public generally. The agencies
also intended for the appropriate agencies to jointly approve any exemptions, exceptions,
or adjustments to the final rules. For these purposes, the phrase “appropriate agencies”
refers to the agencies with rulewriting authority for the asset class, securitization
transaction, or other matter addressed by the interpretation, guidance, exemption,
exception, or adjustment.
10
Specifically, the agencies propose to codify the rules as follows: 12 CFR part 43
(OCC); 12 CFR part 244 (Regulation RR) (Board); 12 CFR part 373 (FDIC); 12 CFR
part 246 (Commission); 12 CFR part 1234 (FHFA). As required by section 15G, HUD
has jointly prescribed the proposed rules for a securitization that is backed by any
residential mortgage asset and for purposes of defining a qualified residential mortgage.
Because the proposed rules would exempt the programs and entities under HUD’s
jurisdiction from the requirements of the proposed rules, HUD does not propose to codify
the rules into its title of the CFR at the time the rules are adopted in final form.
18
Consistent with section 15G of the Exchange Act, the risk retention requirements
would become effective, for securitization transactions collateralized by residential
mortgages, one year after the date on which final rules are published in the Federal
Register, and two years after that date for any other securitization transaction.
A. Background
As the agencies observed in the preamble to the original proposal, the
securitization markets are an important link in the chain of entities providing credit to
U.S. households and businesses, and state and local governments. 11 When properly
structured, securitization provides economic benefits that can lower the cost of credit to
households and businesses. 12 However, when incentives are not properly aligned and
there is a lack of discipline in the credit origination process, securitization can result in
harmful consequences to investors, consumers, financial institutions, and the financial
system.
11
Securitization may reduce the cost of funding, which is accomplished through several
different mechanisms. For example, firms that specialize in originating new loans and
that have difficulty funding existing loans may use securitization to access more-liquid
capital markets for funding. In addition, securitization can create opportunities for more
efficient management of the asset–liability duration mismatch generally associated with
the funding of long-term loans, for example, with short-term bank deposits.
Securitization also allows the structuring of securities with differing maturity and credit
risk profiles from a single pool of assets that appeal to a broad range of investors.
Moreover, securitization that involves the transfer of credit risk allows financial
institutions that primarily originate loans to particular classes of borrowers, or in
particular geographic areas, to limit concentrated exposure to these idiosyncratic risks on
their balance sheets.
12
Report to the Congress on Risk Retention, Board of Governors of the Federal Reserve
System, at 8 (October 2010), available at
http://federalreserve.gov/boarddocs/rptcongress/securitization/riskretention.pdf (Board
Report).
19
During the financial crisis, securitization transactions displayed significant
vulnerabilities to informational and incentive problems among various parties involved in
the process. 13 Investors did not have access to the same information about the assets
collateralizing ABS as other parties in the securitization chain (such as the sponsor of the
securitization transaction or an originator of the securitized loans). 14 In addition, assets
were resecuritized into complex instruments, such as collateralized debt obligations
(CDOs) and CDOs-squared, which made it difficult for investors to discern the true value
of, and risks associated with, an investment in the securitization. 15 Moreover, some
lenders using an “originate-to-distribute” business model loosened their underwriting
standards knowing that the loans could be sold through a securitization and retained little
or no continuing exposure to the loans. 16
Congress intended the risk retention requirements added by section 15G to help
address problems in the securitization markets by requiring that securitizers, as a general
matter, retain an economic interest in the credit risk of the assets they securitize. By
requiring that the securitizer retain a portion of the credit risk of the assets being
securitized, the requirements of section 15G provide securitizers an incentive to monitor
and ensure the quality of the assets underlying a securitization transaction, and, thus, help
align the interests of the securitizer with the interests of investors. Additionally, in
circumstances where the assets collateralizing the ABS meet underwriting and other
13
See Board Report at 8-9.
14
See S. Rep. No. 111-176, at 128 (2010).
15
See id.
16
See id.
20
standards that help to ensure the assets pose low credit risk, the statute provides or
permits an exemption. 17
Accordingly, the credit risk retention requirements of section 15G are an
important part of the legislative and regulatory efforts to address weaknesses and failures
in the securitization process and the securitization markets. Section 15G complements
other parts of the Dodd-Frank Act intended to improve the securitization markets. Such
other parts include provisions that strengthen the regulation and supervision of national
recognized statistical rating organizations (NRSROs) and improve the transparency of
credit ratings; 18 provide for issuers of registered ABS offerings to perform a review of the
assets underlying the ABS and disclose the nature of the review; 19 and require issuers of
ABS to disclose the history of the requests they received and repurchases they made
related to their outstanding ABS. 20
B. Overview of the Original Proposal and Public Comment
In developing the original proposal, the agencies took into account the diversity of
assets that are securitized, the structures historically used in securitizations, and the
manner in which securitizers 21 have retained exposure to the credit risk of the assets they
17
See 15 U.S.C. 78o-11(c)(1)(B)(ii), (e)(1)-(2).
18
See, e.g. sections 932, 935, 936, 938, and 943 of the Dodd-Frank Act (15 U.S.C. 78o7, 78o-8).
19
See section 945 of the Dodd-Frank Act (15 U.S.C. 77g).
20
See section 943 of the Dodd-Frank Act (15 U.S.C. 78o-7).
21
As discussed in the original proposal and further below, the agencies propose that a
“sponsor,” as defined in a manner consistent with the definition of that term in the
Commission’s Regulation AB, would be a “securitizer” for the purposes of section 15G.
21
securitize. 22 The original proposal provided several options from which sponsors could
choose to meet section 15G’s risk retention requirements, including, for example,
retention of a 5 percent “vertical” interest in each class of ABS interests issued in the
securitization, retention of a 5 percent “horizontal” first-loss interest in the securitization,
and other options designed to reflect the way in which market participants have
historically structured credit card receivable and asset-backed commercial paper conduit
securitizations. The original proposal also included a special “premium capture”
mechanism designed to prevent a sponsor from structuring a securitization transaction in
a manner that would allow the sponsor to offset or minimize its retained economic
exposure to the securitized assets by monetizing the excess spread created by the
securitization transaction.
The original proposal also included disclosure requirements that were specifically
tailored to each of the permissible forms of risk retention. The disclosure requirements
were an integral part of the original proposal because they would have provided investors
with pertinent information concerning the sponsor’s retained interests in a securitization
transaction, such as the amount and form of interest retained by sponsors.
As required by section 15G, the original proposal provided a complete exemption
from the risk retention requirements for ABS that are collateralized solely by QRMs and
established the terms and conditions under which a residential mortgage would qualify as
22
Both the language and legislative history of section 15G indicate that Congress
expected the agencies to be mindful of the heterogeneity of securitization markets. See,
e.g., 15 U.S.C. 78o-11(c)(1)(E),(c)(2),(e); S. Rep. No. 111-76, at 130 (2010) (“The
Committee believes that implementation of risk retention obligations should recognize
the differences in securitization practices for various asset classes.”).
22
a QRM. In developing the proposed definition of a QRM, the agencies considered the
terms and purposes of section 15G, public input, and the potential impact of a broad or
narrow definition of QRM on the housing and housing finance markets. In addition, the
agencies developed the QRM proposal to be consistent with the requirement of section
15G that the definition of a QRM be “no broader than” the definition of a “qualified
mortgage” (QM), as the term is defined under section 129C(b)(2) of the Truth in Lending
Act (TILA) (15 U.S.C. 1639C(b)(2)), as amended by the Dodd-Frank Act, 23and
regulations adopted thereunder. 24
The original proposal would generally have prohibited QRMs from having
product features that were observed to contribute significantly to the high levels of
delinquencies and foreclosures since 2007. These included features permitting negative
amortization, interest-only payments, or significant interest rate increases. The QRM
definition in the original proposal also included other underwriting standards associated
23
See 15 U.S.C. 78o-11(e)(4)(C). As adopted, the text of section 15G(e)(4)(C) crossreferences section 129C(c)(2) of TILA for the definition of a QM. However, section
129C(b)(2), and not section 129C(c)(2), of TILA contains the definition of a “qualified
mortgage.” The legislative history clearly indicates that the reference in the statute to
section 129C(c)(2) of TILA (rather than section 129C(b)(2) of TILA) was an inadvertent
technical error. See 156 Cong. Rec. S5929 (daily ed. July 15, 2010) (statement of Sen.
Christopher Dodd) (“The [conference] report contains the following technical errors: the
reference to ‘section 129C(c)(2)’ in subsection (e)(4)(C) of the new section 15G of the
Securities and Exchange Act, created by section 941 of the [Dodd-Frank Act] should read
‘section 129C(b)(2).’ In addition, the references to ‘subsection’ in paragraphs (e)(4)(A)
and (e)(5) of the newly created section 15G should read ‘section.’ We intend to correct
these in future legislation.”).
24
See 78 FR 6408 (January 30, 2013), as amended by 78 FR 35430 (June 12, 2013).
These two final rules were preceded by a proposed rule defining QM, issued by the Board
and published in the Federal Register. See 76 FR 27390 (May 11, 2011). The Board had
initial responsibility for administration and oversight of TILA prior to transfer to the
Consumer Financial Protection Bureau.
23
with lower risk of default, including a down payment requirement of 20 percent in the
case of a purchase transaction, maximum loan-to-value ratios of 75 percent on rate and
term refinance loans and 70 percent for cash-out refinance loans, as well as credit history
criteria (or requirements). The QRM standard in the original proposal also included
maximum front-end and back-end debt-to-income ratios. As explained in the original
proposal, the agencies intended for the QRM proposal to reflect very high quality
underwriting standards, and the agencies expected that a large market for non-QRM loans
would continue to exist, providing ample liquidity to mortgage lenders.
Consistent with the statute, the original proposal also provided that sponsors
would not have to hold risk retention for securitized commercial, commercial real estate,
and automobile loans that met proposed underwriting standards that incorporated features
and requirements historically associated with very low credit risk in those asset classes.
With respect to securitization transactions sponsored by the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac) (jointly, the Enterprises), the agencies proposed to recognize the
100 percent guarantee of principal and interest payments by the Enterprises on issued
securities as meeting the risk retention requirement. However, this recognition would
only remain in effect for as long as the Enterprises operated under the conservatorship or
receivership of FHFA with capital support from the United States.
In response to the original proposal, the agencies received comments from over
10,500 persons, institutions, or groups, including nearly 300 unique comment letters.
The agencies received a significant number of comments regarding the appropriate
amount and measurement of risk retention. Many commenters generally supported the
24
proposed menu-based approach of providing sponsors flexibility to choose from a
number of permissible forms of risk retention, although several argued for more
flexibility in selecting risk retention options, including using multiple options
simultaneously. Comments on the disclosure requirements in the original proposal were
limited.
Many commenters expressed significant concerns with the proposed standards for
horizontal risk retention and the premium capture cash reserve account (PCCRA), which
were intended to ensure meaningful risk retention. Many commenters asserted that these
proposals would lead to significantly higher costs for sponsors, possibly discouraging
them from engaging in new securitization transactions. However, some commenters
supported the PCCRA concept, arguing that the more restrictive nature of the account
would be offset by the requirement’s contribution to more conservative underwriting
practices.
Other commenters expressed concerns with respect to standards in the original
proposal for specific asset classes, such as the proposed option for third-party purchasers
to hold risk retention in commercial mortgage-backed securitizations instead of sponsors
(as contemplated by section 15G). Many commenters also expressed concern about the
underwriting standards for non-residential asset classes, generally criticizing them as too
conservative to be utilized effectively by sponsors. Several commenters criticized
application of the original proposal to managers of certain collateralized loan obligation
(CLO) transactions and argued that the original proposal would lead to more
concentration in the industry and reduce access to credit for many businesses.
25
An overwhelming majority of commenters criticized the agencies’ proposed
QRM standard. Many of these commenters asserted that the proposed definition of
QRM, particularly the 20 percent down payment requirement, would significantly
increase the costs of credit for most home buyers and restrict access to credit. Some of
these commenters asserted that the proposed QRM standard would become a new
“government-approved” standard, and that lenders would be reluctant to originate
mortgages that did not meet the standard. Commenters also argued that this proposed
standard would make it more difficult to reduce the participation of the Enterprises in the
mortgage market. Commenters argued that the proposal was inconsistent with legislative
intent and strongly urged the agencies to eliminate the down payment requirement, make
it substantially smaller, or allow private mortgage insurance to substitute for the
requirement within the QRM standard. Commenters also argued that the agencies should
align the QRM definition with the definition of QM, as implemented by the Consumer
Financial Protection Bureau (CFPB). 25
Various commenters also criticized the agencies’ proposed treatment of the
Enterprises. A commenter asserted that the agencies’ recognition of the Enterprises’
guarantee as retained risk (while in conservatorship or receivership with capital support
from the United States) would impede the policy goal of reducing the role of the
Enterprises and the government in the mortgage securitization market and encouraging
investment in private residential mortgage securitizations. A number of other
commenters, however, supported the proposed approach for the Enterprises.
25
See 78 FR 6407 (January 30, 2013), as amended by 78 FR 35429 (June 12, 2013) and
78 FR 44686 (July 24, 2013).
26
The preamble to the original proposal described the agencies’ intention to jointly
approve certain types of written interpretations concerning the scope of section 15G and
the final rules issued thereunder. Several commenters on the original proposal expressed
concern about the agencies’ processes for issuing written interpretations jointly and the
possible uncertainty about the rules that may arise due to this process.
The agencies have endeavored to provide specificity and clarity in the proposed
rule to avoid conflicting interpretations or uncertainty. In the future, if the heads of the
agencies determine that further guidance would be beneficial for market participants, they
may jointly publish interpretive guidance documents, as the federal banking agencies
have done in the past. In addition, the agencies note that market participants can, as
always, seek guidance concerning the rules from their primary federal banking regulator
or, if such market participant is not a depository institution or a government-sponsored
enterprise, the Commission. In light of the joint nature of the agencies’ rule writing
authority, the agencies continue to view the consistent application of the final rule as a
benefit and intend to consult with each other when adopting staff interpretations or
guidance on the final rule that would be shared with the public generally. The agencies
are considering whether to require that such staff interpretations and guidance be jointly
issued by the agencies with rule writing authority and invite comment. 26
26
These items would not include interpretation and guidance in staff comment letters
and other staff guidance directed to specific institutions that is not intended to be relied
upon by the public generally. Nor would it include interpretations and guidance
contained in administrative or judicial enforcement proceedings by the agencies, or in an
agency report of examination or inspection or similar confidential supervisory
correspondence.
27
The specific provisions of the original proposal and public comments received
thereon are discussed in further detail below.
C. Overview of the Proposed Rule
The agencies have carefully considered the many comments received on the
original proposal as well as engaged in further analysis of the securitization and lending
markets in light of the comments. As a result, the agencies believe it would be
appropriate to modify several important aspects of the original proposal and are issuing a
new proposal incorporating these modifications. The agencies have concluded that a new
proposal would give the public the opportunity to review and provide comment on the
agencies’ revised design of the risk retention regulatory framework and assist the
agencies in determining whether the revised framework is appropriately structured.
The proposed rule takes account of the comments received on the original
proposal. In developing the proposed rule, the agencies consistently have sought to
ensure that the amount of credit risk required of a sponsor would be meaningful,
consistent with the purposes of section 15G. The agencies have also sought to minimize
the potential for the proposed rule to negatively affect the availability and costs of credit
to consumers and businesses.
As described in detail below, the proposed rule would significantly increase the
degree of flexibility that sponsors would have in meeting the risk retention requirements
of section 15G. For example, the proposed rule would permit a sponsor to satisfy its
obligation by retaining any combination of an “eligible vertical interest” and an “eligible
horizontal residual interest” to meet the 5 percent minimum requirement. The agencies
are also proposing that horizontal risk retention be measured by fair value, reflecting
28
market practice, and are proposing a more flexible treatment for payments to a horizontal
risk retention interest than that provided in the original proposal. In combination with
these changes, the agencies propose to remove the PCCRA requirement. 27 The agencies
have incorporated proposed standards for the expiration of the hedging and transfer
restrictions and proposed new exemptions from risk retention for certain
resecuritizations, seasoned loans, and certain types of securitization transactions with low
credit risk. In addition, the agencies propose a new risk retention option for CLOs that is
similar to the allocation to originator concept proposed for sponsors generally.
Furthermore, the agencies are proposing revised standards with respect to risk
retention by a third-party purchaser in commercial mortgage-backed securities (CMBS)
transactions and an exemption that would permit transfer (by a third-party purchaser or
sponsor) of a horizontal interest in a CMBS transaction after five years, subject to
standards described below.
The agencies have carefully considered the comments received on the QRM
standard in the original proposal as well as various ongoing developments in the
mortgage markets, including mortgage regulations. For the reasons discussed more fully
below, the agencies are proposing to revise the QRM definition in the original proposal to
equate the definition of a QRM with the definition of QM adopted by the CFPB. 28
The agencies invite comment on all aspects of the proposed rule, including
comment on whether any aspects of the original proposal should be adopted in the final
27
The proposal would also eliminate the “representative sample” option, which
commenters had argued would be impractical.
28
See 78 FR 6407 (January 30, 2013), as amended by 78 FR 35429 (June 12, 2013) and
78 FR 44686 (July 24, 2013).
29
rule. Please provide data and explanations supporting any positions offered or changes
suggested.
II. General Definitions and Scope
A. Overview of Significant Definitions in the Original Proposal and Comments
1. Asset-Backed Securities, Securitization Transactions, and ABS Interests
The original proposal provided that the proposed risk retention requirements
would have applied to sponsors in securitizations that involve the issuance of “assetbacked securities” and defined the terms “asset-backed security” and “asset” consistent
with the definitions of those terms in the Exchange Act. The original proposal noted that
section 15G does not appear to distinguish between transactions that are registered with
the Commission under the Securities Act of 1933 (the Securities Act) and those that are
exempt from registration under the Securities Act. It further noted that the proposed
definition of ABS, which would have been broader than that of the Commission’s
Regulation AB, 29 included securities that are typically sold in transactions that are
exempt from registration under the Securities Act, such as CDOs and securities issued or
guaranteed by an Enterprise. As a result, the proposed risk retention requirements would
have applied to securitizers of ABS offerings regardless of whether the offering was
registered with the Commission under the Securities Act.
Under the original proposal, risk retention requirements would have applied to the
securitizer in each “securitization transaction,” defined as a transaction involving the
offer and sale of ABS by an issuing entity. The original proposal also explained that the
29
See 17 CFR 229.1100 through 17 CFR 229.1123.
30
term “ABS interest” would refer to all types of interests or obligations issued by an
issuing entity, whether or not in certificated form, including a security, obligation,
beneficial interest, or residual interest, but would not include interests, such as common
or preferred stock, in an issuing entity that are issued primarily to evidence ownership of
the issuing entity, and the payments, if any, which are not primarily dependent on the
cash flows of the collateral held by the issuing entity.
With regard to these three definitions, some commenters were critical of what
they perceived to be the overly broad scope of the terms and advocated for express
exemptions or exclusions from their application. Some commenters expressed concern
that the definition of “asset-backed securities” could be read to be broader than intended
and requested clarification as to the precise contours of the definition. For example,
certain commenters were concerned that the proposed ABS definition could
unintentionally include securities that do not serve the same purpose or present the same
set of risks as “asset-backed securities,” such as securities which are, either directly or
through a guarantee, full-recourse corporate obligations of a creditworthy entity that is
not a special-purpose vehicle (SPV), but are also secured by a pledge of financial assets.
Other commenters suggested that the agencies provide a bright-line safe harbor that
defines conditions under which risk retention is not required even if a security is
collateralized by self-liquidating assets and advocated that certain securities be expressly
excluded from the proposed rule’s definition of ABS.
Similarly, a number of commenters requested clarification with regard to the
scope of the definition of “ABS interest,” stating that its broad definition could
potentially capture a number of items not traditionally considered “interests” in a
31
securitization, such as non-economic residual interests, servicing and special servicing
fees, and amounts payable by the issuing entity under a derivatives contract. With regard
to the definition of “securitization transaction,” a commenter recommended that
transactions undertaken solely to manage financial guarantee insurance related to the
underlying obligations not be considered “securitizations.”
2. Securitizer, Sponsor, and Depositor
Section 15G stipulates that its risk retention requirements be applied to a
“securitizer” of an ABS and, in turn, that a securitizer is both an issuer of an ABS or a
person who organizes and initiates a securitization transaction by selling or transferring
assets, either directly or indirectly, including through an affiliate or issuer. The original
proposal noted that the second prong of this definition is substantially identical to the
definition of a “sponsor” of a securitization transaction in the Commission’s Regulation
AB. 30 Accordingly, the original proposal would have defined the term “sponsor” in a
manner consistent with the definition of that term in the Commission’s Regulation AB. 31
Other than issues concerning CLOs, which are discussed in Part III.B.7 of this
Supplementary Information, comments with regard to these terms were generally limited
to requests that the final rules provide that certain specified persons – such as
30
See Item 1101 of the Commission’s Regulation AB (17 CFR 229.1101) (defining a
sponsor as “a person who organizes and initiates an asset-backed securities transaction by
selling or transferring assets, either directly or indirectly, including through an affiliate, to
the issuing entity.”).
31
As discussed in the original proposal, when used in the federal securities laws, the
term “issuer” may have different meanings depending on the context in which it is used.
For the purposes of section 15G, the original proposal provided that the agencies would
have interpreted an “issuer” of an asset-back security to refer to the “depositor” of an
ABS, consistent with how that term has been defined and used under the federal
securities laws in connection with an ABS.
32
underwriting sales agents – be expressly excluded from the definition of securitizer or
sponsor for the purposes of the risk retention requirements.
3. Originator
The original proposal would have defined the term “originator” in the same
manner as section 15G, namely, as a person who, through the extension of credit or
otherwise, creates a financial asset that collateralizes an ABS, and sells the asset directly
or indirectly to a securitizer (i.e., a sponsor or depositor). The original proposal went on
to note that because this definition refers to the person that “creates” a loan or other
receivable, only the original creditor under a loan or receivable – and not a subsequent
purchaser or transferee – would have been an originator of the loan or receivable for
purposes of section 15G.
4. Securitized Assets, Collateral
The original proposal referred to the assets underlying a securitization transaction
as the “securitized assets,” meaning assets that are transferred to the SPV that issues the
ABS interests and that stand as collateral for those ABS interests. “Collateral” would be
defined as the property that provides the cash flow for payment of the ABS interests
issued by the issuing entity. Taken together, these definitions were meant to suggest
coverage of the loans, leases, or similar assets that the depositor places into the issuing
SPV at the inception of the transaction, though it would have also included other assets
such as pre-funded cash reserve accounts. Commenters pointed out that, in addition to
this property, the issuing entity may hold other assets. For example, the issuing entity
may acquire interest rate derivatives to convert floating rate interest income to fixed rate,
or the issuing entity may accrete cash or other liquid assets in reserve funds that
33
accumulate cash generated by the securitized assets. As another example, commenters
noted that an asset-backed commercial paper conduit may hold a liquidity guarantee from
a bank on some or all of its securitized assets.
B. Proposed General Definitions
The agencies have carefully considered all of the comments raised with respect to
the general definitions of the original proposal. The agencies do not believe that
significant changes to these definitions are necessary and, accordingly, are proposing to
maintain the general definitions in substantially the same form as they were presented in
the original proposal, with one exception. 32
To describe the additional types of property that could be held by an issuing
entity, the agencies are proposing a definition of “servicing assets,” which would be any
rights or other assets designed to assure the servicing, timely payment, or timely
distribution of proceeds to security holders, or assets related or incidental to purchasing
or otherwise acquiring and holding the issuing entity’s securitized assets. These may
include cash and cash equivalents, contract rights, derivative agreements of the issuing
entity used to hedge interest rate and foreign currency risks, or the collateral underlying
the securitized assets. As noted in the rule text, it also includes proceeds of assets
collateralizing the securitization transactions, whether in the form of voluntary payments
from obligors on the assets or otherwise (such as liquidation proceeds). The agencies are
proposing this definition in order to ensure that the provisions of the proposal
32
Regarding comments about what securities constitutes an ABS interest under the
proposed definition, the agencies preliminarily believe that non-economic residual
interests would constitute ABS interests. However, as the proposal makes clear, fees for
services such as servicing fees would not fall under the definition of an ABS interest.
34
appropriately accommodate the need, in administering a securitization transaction on an
ongoing basis, to hold various assets other than the loans or similar assets that are
transferred into the asset pool by the securitization depositor. The proposed definition is
similar to elements of the definition of “eligible assets” in Rule 3a-7 under the Investment
Company Act of 1940, which specifies conditions under which the issuer of nonredeemable fixed-income securities backed by self-liquidating financial assets will not be
deemed to be an investment company.
To facilitate the agencies revised proposal for the QRM definition, the agencies
are proposing to define the term “residential mortgage” by reference to the definition of
“covered transaction” to be found in the CFPB’s Regulation Z. 33 Accordingly, for
purposes of the proposed rule, a residential mortgage would mean a consumer credit
transaction that is secured by a dwelling, as such term is also defined in Regulation
Z 34 (including any real property attached to a dwelling) and any transaction that is
exempt from the definition of “covered transaction” under the CFPB’s Regulation Z. 35
Therefore, the term “residential mortgage” would include home equity lines of credit,
reverse mortgages, mortgages secured by interests in timeshare plans, and temporary
loans. By defining residential mortgage in this way, the agencies seek to ensure that
relevant definitions in the proposed rule and in the CFPB’s rules on and related to QM
are harmonized to reduce compliance burden and complexity, and the potential for
conflicting definitions and interpretations where the proposed rule and the QM standard
33
See 78 FR 6584 (January 30, 2013), to be codified at 12 CFR 1026.43.
34
12 CFR 1026.2(a)(19).
35
Id.
35
intersect. Additionally, the agencies are proposing to include those loans excluded from
the definition of “covered transaction” in the definition of “residential mortgage” for
purposes of risk retention so that those categories of loans would be subject to risk
retention requirements that are applied to residential mortgage securitizations under the
proposed rule.
III. General Risk Retention Requirement
A. Minimum Risk Retention Requirement
Section 15G of the Exchange Act generally requires that the agencies jointly
prescribe regulations that require a securitizer to retain not less than 5 percent of the
credit risk for any asset that the securitizer, through the issuance of an ABS, transfers,
sells, or conveys to a third party, unless an exemption from the risk retention
requirements for the securities or transaction is otherwise available (e.g., if the ABS is
collateralized exclusively by QRMs). Consistent with the statute, the original proposal
generally required that a sponsor retain an economic interest equal to at least 5 percent of
the aggregate credit risk of the assets collateralizing an issuance of ABS (the base risk
retention requirement). Under the original proposal, the base risk retention requirement
would have applied to all securitization transactions that are within the scope of section
15G, regardless of whether the sponsor were an insured depository institution, a bank
holding company or subsidiary thereof, a registered broker-dealer, or other type of
entity. 36
36
Synthetic securitizations and securitizations that meet the requirements of the foreign
safe harbor are examples of securitization transactions that are not within the scope of
section 15G.
36
The agencies requested comment on whether the minimum 5 percent risk
retention requirement was appropriate or whether a higher risk retention requirement
should be established. Several commenters expressed support for the minimum 5 percent
risk retention requirement, with some commenters supporting a higher risk retention
requirement. However, other commenters suggested tailoring the risk retention
requirement to the specific risks of distinct asset classes.
Consistent with the original proposal, the proposed rule would apply a minimum
5 percent base risk retention requirement to all securitization transactions that are within
the scope of section 15G, regardless of whether the sponsor is an insured depository
institution, a bank holding company or subsidiary thereof, a registered broker-dealer, or
other type of entity, and regardless of whether the sponsor is a supervised entity. 37 The
agencies continue to believe that this exposure should provide a sponsor with an
incentive to monitor and control the underwriting of assets being securitized and help
align the interests of the sponsor with those of investors in the ABS. In addition, the
sponsor also would be prohibited from hedging or otherwise transferring its retained
interest prior to the applicable sunset date, as discussed in Part III.D of this
Supplementary Information.
37
See proposed rule at §§ __.3 through __.10. Similar to the original proposal, the
proposed rule, in some instances, would permit a sponsor to allow another person to
retain the required amount of credit risk (e.g., originators, third-party purchasers in
commercial mortgage-backed securities transactions, and originator-sellers in assetbacked commercial paper conduit securitizations). However, in such circumstances, the
proposal includes limitations and conditions designed to ensure that the purposes of
section 15G continue to be fulfilled. Further, even when a sponsor would be permitted to
allow another person to retain risk, the sponsor would still remain responsible under the
rule for compliance with the risk retention requirements.
37
The agencies note that the base risk retention requirement under the proposed rule
would be a regulatory minimum. The sponsor, originator, or other party to a
securitization may retain additional exposure to the credit risk of assets that the sponsor,
originator, or other party helps securitize beyond that required by the proposed rule,
either on its own initiative or in response to the demands or requirements of private
market participants.
B. Permissible Forms of Risk Retention -- Menu of Options
Section 15G expressly provides the agencies the authority to determine the
permissible forms through which the required amount of risk retention must be held. 38
Accordingly, the original proposal provided sponsors with multiple options to satisfy the
risk retention requirements of section 15G. The flexibility provided in the original
proposal’s menu of options for complying with the risk retention requirement was
designed to take into account the heterogeneity of securitization markets and practices
and to reduce the potential for the proposed rules to negatively affect the availability and
costs of credit to consumers and businesses. The menu of options approach was designed
to be consistent with the various ways in which a sponsor or other entity, in historical
market practices, may have retained exposure to the credit risk of securitized assets. 39
Historically, whether or how a sponsor retained exposure to the credit risk of the assets it
38
See 15 U.S.C. 78o-11(c)(1)(C)(i); see also S. Rep. No. 111-176, at 130 (2010) (“The
Committee [on Banking, Housing, and Urban Affairs] believes that implementation of
risk retention obligations should recognize the differences in securitization practices for
various asset classes.”).
39
See Board Report; see also Macroeconomic Effects of Risk Retention Requirements,
Chairman of the Financial Stability Oversight Counsel (January 2011), available at
http://www.treasury.gov/initiatives/wsr/Documents/Section 946 Risk Retention Study
(FINAL).pdf.
38
securitized was determined by a variety of factors including the rating requirements of
the NRSROs, investor preferences or demands, accounting and regulatory capital
considerations, and whether there was a market for the type of interest that might
ordinarily be retained (at least initially by the sponsor).
The agencies requested comment on the appropriateness of the menu of options in
the original proposal and the permissible forms of risk retention that were proposed.
Commenters generally supported the menu-based approach of providing sponsors with
the flexibility to choose from a number of permissible forms of risk retention. Many
commenters requested that sponsors be permitted to use multiple risk retention options in
any percentage combination, as long as the aggregate percentage of risk retention would
be at least 5 percent.
The agencies continue to believe that providing options for risk retention is
appropriate in order to accommodate the variety of securitization structures that would be
subject to the proposed rule. Accordingly, subpart B of the proposed rule would maintain
a menu of options approach to risk retention. Additionally, the agencies have considered
commenters’ concerns about flexibility in combining forms of risk retention and are
proposing modifications to the various forms of risk retention, and how they may be
used, to increase flexibility and facilitate different circumstances that may accompany
various securitization transactions. Additionally, the permitted forms of risk retention in
the proposal would be subject to terms and conditions that are intended to help ensure
that the sponsor (or other eligible entity) retains an economic exposure equivalent to at
least 5 percent of the credit risk of the securitized assets. Each of the forms of risk
retention being proposed by the agencies is described below.
39
1. Standard Risk Retention
a. Overview of Original Proposal and Public Comments
In the original proposal, to fulfill risk retention for any transactions (standard risk
retention), the agencies proposed to allow sponsors to use one of three methods: (i)
vertical risk retention; (ii) horizontal risk retention; and (iii) L-shaped risk retention.
Under the vertical risk retention option in the original proposal, a sponsor could
satisfy its risk retention requirement by retaining at least 5 percent of each class of ABS
interests issued as part of the securitization transaction. As discussed in the original
proposal, this would provide the sponsor with an interest in the entire securitization
transaction. The agencies received numerous comments supporting the vertical risk
retention option as an appropriate way to align the interests of the sponsor with those of
the investors in the ABS in a manner that would be easy to calculate. However, some
commenters expressed concern that the vertical risk retention option would expose the
sponsor to substantially less risk of loss than if the sponsor had retained risk under the
horizontal risk retention option, thereby making risk retention less effective.
Under the horizontal risk retention option in the original proposal, a sponsor could
satisfy its risk retention obligations by retaining a first-loss “eligible horizontal residual
interest” in the issuing entity in an amount equal to at least 5 percent of the par value of
all ABS interests in the issuing entity that were issued as part of the securitization
transaction. In lieu of holding an eligible horizontal residual interest, the original
proposal allowed a sponsor to cause to be established and funded, in cash, a reserve
account at closing (horizontal cash reserve account) in an amount equal to at least 5
percent of the par value of all the ABS interests issued as part of the transaction (i.e., the
40
same dollar amount (or corresponding amount in the foreign currency in which the ABS
are issued, as applicable) as would be required if the sponsor held an eligible horizontal
residual interest).
Under the original proposal, an interest qualified as an eligible horizontal residual
interest only if it was an ABS interest that was allocated all losses on the securitized
assets until the par value of the class was reduced to zero and had the most subordinated
claim to payments of both principal and interest by the issuing entity. While the original
proposal would have permitted the eligible horizontal residual interest to receive its pro
rata share of scheduled principal payments on the underlying assets in accordance with
the relevant transaction documents, the eligible horizontal residual interest generally
could not receive any other payments of principal made on a securitized asset (including
prepayments) until all other ABS interests in the issuing entity were paid in full.
The agencies solicited comment on the structure of the eligible horizontal residual
interest, including the proposed approach to measuring the size of the eligible horizontal
residual interest and the proposal to restrict unscheduled payments of principal to the
sponsor holding horizontal risk retention. Several commenters expressed support for the
horizontal risk retention option and believed that it would effectively align the interests of
the sponsor with those of the investors in the ABS. However, many commenters raised
concerns about the agencies’ proposed requirements for the eligible horizontal residual
interest. Many commenters requested clarification as to the definition of “par value” and
how sponsors should calculate the eligible horizontal residual interest when measuring it
against 5 percent of the par value of the ABS interests. Moreover, several commenters
recommended that the agencies use different approaches to the measurement of the
41
eligible horizontal residual interest. A few of these commenters recommended the
agencies take into account the “fair value” of the ABS interests as a more appropriate
economic measure of risk retention.
Several commenters pointed out that the restrictions in the original proposal on
principal payments to the eligible horizontal residual interest would be impractical to
implement. For example, some commenters expressed concern that the restriction would
prevent the normal operation of a variety of ABS structures, where servicers do not
distinguish which part of a monthly payment is interest or principal and which parts of
principal payments are scheduled or unscheduled.
The original proposal also contained an “L-shaped” risk retention option, whereby
a sponsor, subject to certain conditions, could use an equal combination of vertical risk
retention and horizontal risk retention to meet its 5 percent risk retention requirement. 40
The agencies requested comment on whether a higher proportion of the risk
retention held by a sponsor under this option should be composed of a vertical component
or a horizontal component. Many commenters expressed general support for the Lshaped option, but recommended that the agencies allow sponsors to utilize multiple risk
retention options in different combinations or in any percentage combination as long as
the aggregate percentage of risk retained is at least 5 percent. Commenters suggested that
40
Specifically, the original proposal would have allowed a sponsor to meet its risk
retention obligations under the rules by retaining: (1) not less than 2.5 percent of each
class of ABS interests in the issuing entity issued as part of the securitization transaction
(the vertical component); and (2) an eligible horizontal residual interest in the issuing
entity in an amount equal to at least 2.564 percent of the par value of all ABS interests in
the issuing entity issued as part of the securitization transaction, other than those interests
required to be retained as part of the vertical component (the horizontal component).
42
the flexibility would permit sponsors to fulfill the risk retention requirements by selecting
a method that would minimize the costs of risk retention to sponsors and any resulting
increase in costs to borrowers.
b. Proposed Combined Risk Retention Option
The agencies carefully considered all of the comments on the horizontal, vertical,
and L-shaped risk retention with respect to the original proposal.
In the proposed rule, to provide more flexibility to accommodate various sponsors
and securitization transactions and in response to comments, the agencies are proposing
to combine the horizontal, vertical, and L-shaped risk retention options into a single risk
retention option with a flexible structure. 41 Additionally, to provide greater clarity for the
measurement of risk retention and to help prevent sponsors from structuring around their
risk retention requirement by negating or reducing the economic exposure they are
required to maintain, the proposal would require sponsors to measure their risk retention
requirement using fair value, determined in accordance with U.S. generally accepted
accounting principles (GAAP). 42
The proposed rule would provide for a combined standard risk retention option
that would permit a sponsor to satisfy its risk retention obligation by retaining an
“eligible vertical interest,” an “eligible horizontal residual interest,” or any combination
thereof, in a total amount equal to no less than 5 percent of the fair value of all ABS
interests in the issuing entity that are issued as part of the securitization transaction. The
41
See proposed rule at §__.4.
42
Cf. Financial Accounting Standards Board Accounting Standards Codification Topic
820.
43
eligible horizontal residual interest may consist of either a single class or multiple classes
in the issuing entity, provided that each interest qualifies, individually or in the aggregate,
as an eligible horizontal residual interest. 43 In the case of multiple classes, this
requirement would mean that the classes must be in consecutive order based on
subordination level. For example, if there were three levels of subordinated classes and
the two most subordinated classes had a combined fair value equal to 5 percent of all
ABS interests, the sponsor would be required to retain these two most subordinated
classes if it were going to discharge its risk retention obligations by holding only eligible
horizontal residual interests. As discussed below, the agencies are proposing to refine the
definitions of the eligible vertical interest and the eligible horizontal residual interest as
well.
This standard risk retention option would provide sponsors with greater flexibility
in choosing how to structure their retention of credit risk in a manner compatible with the
practices of the securitization markets. For example, in securitization transactions where
the sponsor would typically retain less than 5 percent of an eligible horizontal residual
interest, the standard risk retention option would permit the sponsor to hold the balance
of the risk retention as a vertical interest. In addition, the flexible standard risk retention
option should not in and of itself result in a sponsor having to consolidate the assets and
liabilities of a securitization vehicle onto its own balance sheet because the standard risk
retention option does not mandate a particular proportion of horizontal to vertical interest
or require retention of a minimum eligible horizontal residual interest. Under the
43
See proposed rule at §__.2 (definition of “eligible horizontal residual interest”).
44
proposed rule, a sponsor would be free to hold more of an eligible vertical interest in lieu
of an eligible horizontal residual interest. The inclusion of more of a vertical interest
could reduce the significance of the risk profile of the sponsor’s economic exposure to
the securitization vehicle. The significance of the sponsor’s exposure is one of the
characteristics the sponsor evaluates when determining whether to consolidate the
securitization vehicle for accounting purposes.
As proposed, a sponsor may satisfy its risk retention requirements with respect
to a securitization transaction by retaining at least 5 percent of the fair value of each
class of ABS interests issued as part of the securitization transaction. A sponsor using
this approach must retain at least 5 percent of the fair value of each class of ABS
interests issued in the securitization transaction regardless of the nature of the class of
ABS interests (e.g., senior or subordinated) and regardless of whether the class of
interests has a par value, was issued in certificated form, or was sold to unaffiliated
investors. For example, if four classes of ABS interests were issued by an issuing
entity as part of a securitization—a senior AAA-rated class, a subordinated class, an
interest-only class, and a residual interest—a sponsor using this approach with respect
to the transaction would have to retain at least 5 percent of the fair value of each such
class or interest.
A sponsor may also satisfy its risk retention requirements under the vertical
option by retaining a “single vertical security.” A single vertical security would be an
ABS interest entitling the holder to a specified percentage (e.g., 5 percent) of the
principal and interest paid on each class of ABS interests in the issuing entity (other than
such single vertical security) that result in the security representing the same percentage
45
of fair value of each class of ABS interests. By permitting the sponsor to hold the
vertical form of risk retention as a single security, the agencies intend to provide sponsors
an option that is simpler than carrying multiple securities representing a percentage share
of every series, tranche, and class issued by the issuing entity, each of which might need
to be valued by the sponsor on its financial statements every financial reporting period.
The single vertical security option provides the sponsor with the same principal and
interest payments (and losses) as the vertical stack, in the form of one security to be held
on the sponsor’s books.
The agencies considered the comments on the measurement of the eligible
horizontal residual interest in the original proposal and are proposing a fair value
framework for calculating the standard risk retention because it uses methods more
consistent with market practices. The agencies’ use of par value in the original proposal
sought to establish a simple and transparent measure, but the PCCRA requirement, which
the agencies proposed to ensure that the eligible horizontal residual interest had true
economic value, tended to introduce other complexities. In addition, the use of fair value
as defined in GAAP provides a consistent framework for calculating standard risk
retention across very different securitization transactions and different classes of interests
within the same type of securitization structure.
However, fair value is a methodology susceptible to yielding a range of results
depending on the key variables selected by the sponsor in determining fair value.
Accordingly, as part of the agencies’ proposal to rely on fair value as a measure that will
adequately reflect the amount of a sponsor’s economic “skin in the game,” the agencies
propose to require disclosure of the sponsor’s fair value methodology and all significant
46
inputs used to measure its eligible horizontal residual interest, as discussed below in this
section. Sponsors that elect to utilize the horizontal risk retention option must disclose
the reference data set or other historical information which would meaningfully inform
third parties of the reasonableness of the key cash flow assumptions underlying the
measure of fair value. For the purposes of this requirement, key assumptions may
include default, prepayment, and recovery. The agencies believe these key metrics will
help investors assess whether the fair value measure used by the sponsor to determine the
amount of its risk retention are comparable to market expectations.
The agencies are also proposing limits on payments to holders of the eligible
horizontal residual interest, but the limits differ from those in the original proposal, based
on the fair value measurement. The agencies continue to believe that limits are necessary
to establish economically meaningful horizontal risk retention that better aligns the
sponsor’s incentives with those of investors. However, the agencies also intend for
sponsors to be able to satisfy their risk retention requirements with the retention of an
eligible horizontal residual interest in a variety of ABS structures, including those
structures that, in contrast to mortgage-backed securities transactions, do not distinguish
between principal and interest payments and between principal losses and other losses.
The proposed restriction on projected cash flows to be paid to the eligible
horizontal residual interest would limit how quickly the sponsor can recover the fair
value amount of the eligible horizontal residual interest in the form of cash payments
from the securitization (or, if a horizontal cash reserve account is established, released to
the sponsor or other holder of such account). The proposed rule would prohibit the
sponsor from structuring a deal where it receives such amounts at a faster rate than the
47
rate at which principal is paid to investors in all ABS interests in the securitization,
measured for each future payment date. Since the cash flows projected to be paid to
sponsors (or released to the sponsor or other holder of the horizontal cash reserve
account) and all ABS interests would already be calculated at the closing of the
transactions as part of the fair value calculation, it should not be unduly complex or
burdensome for sponsors to project the cash flows to be paid to the eligible horizontal
residual interest (or released to the sponsor or other holder of the horizontal cash reserve
account) and the principal to be paid to all ABS interests on each payment date. To
compute the fair value of projected cash flows to be paid to the eligible horizontal
residual interest (or released to the sponsor or other holder of the horizontal cash reserve
account) on each payment date, the sponsor would discount the projected cash flows to
the eligible horizontal residual interest on each payment date (or released to the sponsor
or other holder of the horizontal cash reserve account) using the same discount rate that
was used in the fair value calculation (or the amount that must be placed in an eligible
horizontal cash reserve account, equal to the fair value of an eligible horizontal residual
interest). To compute the cumulative fair value of cash flows projected to be paid to the
eligible horizontal residual interest through each payment date, the sponsor would add the
fair value of cash flows to the eligible horizontal residual interest (or released to the
sponsor or other holder of the horizontal cash reserve account) from issuance through
each payment date (or the termination of the horizontal cash reserve account). The ratio
of the cumulative fair value of cash flows projected to be paid to the eligible horizontal
residual interest (or released to the sponsor or other holder of the horizontal cash reserve
account) at each payment date divided by the fair value of the eligible horizontal residual
48
interest (or the amount that must be placed in an eligible horizontal cash reserve account,
equal to the fair value of an eligible horizontal residual interest) at issuance (the EHRI
recovery percentage) measures how quickly the sponsor can be projected to recover the
fair value of the eligible horizontal residual interest. To measure how quickly investors
as a whole are projected to be repaid principal through each payment date, the sponsor
would divide the cumulative amount of principal projected to be paid to all ABS interests
through each payment date by the total principal of ABS interests at issuance (ABS
recovery percentage).
In order to comply with the proposed rule, the sponsor, prior to the issuance of the
eligible horizontal residual interest (or funding a horizontal cash reserve account), or at
the time of any subsequent issuance of ABS interests, as applicable, would have to certify
to investors that it has performed the calculations required by section 4(b)(2)(i) of the
proposed rule and that the EHRI recovery percentages are not expected to be larger than
the ABS recovery percentages for any future payment date. 44 In addition, the sponsor
would have to maintain record of such calculations and certifications in written form in
its records and must provide disclosure upon request to the Commission and its
appropriate Federal banking agency, if any, until three years after all ABS interests are no
longer outstanding. If this test fails for any payment date, meaning that the eligible
horizontal residual interest is projected to recover a greater percentage of its fair value
than the percentage of principal projected to be repaid to all ABS interests with respect to
such future payment date, the sponsor, absent provisions in the cash flow waterfall that
44
See proposed rule at §__.4(b).
49
prohibit such excess projected payments from being made on such payment date, would
not be in compliance with the requirements of section 4(b)(2) of the proposed rule. For
example, the schedule of target overcollateralization in an automobile loan securitization
might need to be adjusted so that the sponsor’s retained interest satisfies the eligible
horizontal residual interest repayment restriction.
The cash flow projection would be a one-time calculation performed at issuance
on projected cash flows. This is in part to limit operational burdens and to allow for
sponsors to receive the upside from a transaction performing above expectations in a
timely fashion. It should also minimize increases in the cost of credit to borrowers as a
result of the risk retention requirement. At the same time, the restriction that a sponsor
cannot structure a transaction in which the sponsor is projected to recover the fair value
of the eligible horizontal residual interest any faster than all investors are repaid principal
should help to maintain the alignment of interests of the sponsor with those of investors
in the ABS, while providing flexibility for various types of securitization structures.
Moreover, the restriction would permit a transaction to be structured so that the sponsor
could receive a large, one-time payment, which is a feature common in deals where
certain cash flows that would otherwise be paid to the eligible horizontal residual interest
are directed to pay other classes, such as a money market tranche in an automobile loan
securitization, provided that such payment did not cause a failure to satisfy the projected
payment test.
On the other hand, the restriction would prevent the sponsor from structuring a
transaction in which the sponsor is projected to be paid an amount large enough to
increase the leverage of the transaction by more than the amount which existed at the
50
issuance of the asset-backed securities. In other words, the purpose of the restriction is to
prevent sponsors from structuring a transaction in which the eligible horizontal residual
interest is projected to receive such a disproportionate amount of money that the
sponsor’s interests are no longer aligned with investors’ interests. For example, if the
sponsor has recovered all of the fair value of an eligible horizontal residual interest, the
sponsor effectively has no retained risk if losses on the securitized assets occur later in
the life of the transaction.
In addition, in light of the fact that the EHRI recovery percentage calculation is
determined one time, before closing of the transaction, based on the sponsor’s
projections, the agencies are proposing to include an additional disclosure requirement
about the sponsor’s past performance in respect to the EHRI recovery percentage
calculation. For each transaction that includes an EHRI, the sponsor will be required to
make a disclosure that looks back to all other EHRI transactions the sponsor has brought
out under the requirements of the risk retention rules for the previous five years, and
disclose the number of times the actual payments made to the sponsor under the EHRI
exceeded the amounts projected to be paid to the sponsor in determining the Closing Date
Projected Cash Flow Rate (as defined in section 4(a) of the proposed rule).
Similar to the original proposal, the proposed rule would allow a sponsor, in lieu
of holding all or part of its risk retention in the form of an eligible horizontal residual
interest, to cause to be established and funded, in cash, a reserve account at closing
(horizontal cash reserve account) in an amount equal to the same dollar amount (or
51
corresponding amount in the foreign currency in which the ABS are issued, as applicable)
as would be required if the sponsor held an eligible horizontal residual interest. 45
This horizontal cash reserve account would have to be held by the trustee (or
person performing functions similar to a trustee) for the benefit of the issuing entity.
Some commenters on the original proposal recommended relaxing the investment
restrictions on the horizontal cash reserve account to accommodate foreign transactions.
The proposed rule includes several important restrictions and limitations on such a
horizontal cash reserve account to ensure that a sponsor that establishes a horizontal cash
reserve account would be exposed to the same amount and type of credit risk on the
underlying assets as would be the case if the sponsor held an eligible horizontal residual
interest. For securitization transactions where the underlying loans or the ABS interests
issued are denominated in a foreign currency, the amounts in the account may be invested
in sovereign bonds issued in that foreign currency or in fully insured deposit accounts
denominated in the foreign currency in a foreign bank (or a subsidiary thereof) whose
home country supervisor (as defined in section 211.21 of the Board’s Regulation K) 46 has
adopted capital standards consistent with the Capital Accord of the Basel Committee on
Banking Supervision, as amended, provided the foreign bank is subject to such
standards. 47 In addition, amounts that could be withdrawn from the account to be
45
See proposed rule at §__.4(c).
46
12 CFR 211.21.
47
Otherwise, as in the original proposal, amounts in a horizontal cash reserve account
may only be invested in: (1) United States Treasury securities with remaining maturities
of one year or less; and (2) deposits in one or more insured depository institutions (as
defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813)) that are fully
insured by federal deposit insurance. See proposed rule at §__.4(c)(2).
52
distributed to a holder of the account would be restricted to the same degree as payments
to the holder of an eligible horizontal residual interest (such amounts to be determined as
though the account was an eligible horizontal residual interest), and the sponsor would be
required to comply with all calculation requirements that it would have to perform with
respect to an eligible horizontal residual interest in order to determine permissible
distributions from the cash account.
Disclosure requirements would also be required with respect to a horizontal cash
reserve account, including the fair value and calculation disclosures required with respect
to an eligible horizontal residual interest, as discussed below.
The original proposal included tailored disclosure requirements for the vertical,
horizontal, and L-shaped risk retention options. A few commenters recommended
deleting the proposed requirement that the sponsor disclose the material assumptions and
methodology used in determining the aggregate dollar amount of ABS interests issued by
the issuing entity in the securitization. In the proposed rule, the agencies are proposing
disclosure requirements similar to those in the original proposal, with some
modifications, and are proposing to add new requirements for the fair value measurement
and to reflect the structure of the proposed standard risk retention option.
The proposed rule would require sponsors to provide or cause to be provided to
potential investors a reasonable time prior to the sale of ABS interests in the issuing
entity and, upon request, to the Commission and its appropriate Federal banking agency
(if any) disclosure of:
•
The fair value (expressed as a percentage of the fair value of all ABS
interests issued in the securitization transaction and dollar amount (or
53
corresponding amount in the foreign currency in which the ABS are
issued, as applicable)) of the eligible horizontal residual interest that will
be retained (or was retained) by the sponsor at closing, and the fair value
(expressed as a percentage of the fair value of all ABS interests issued in
the securitization transaction and dollar amount (or corresponding amount
in the foreign currency in which the ABS are issued, as applicable)) of the
eligible horizontal residual interest required to be retained by the sponsor
in connection with the securitization transaction;
•
A description of the material terms of the eligible horizontal residual
interest to be retained by the sponsor;
•
A description of the methodology used to calculate the fair value of all
classes of ABS interests;
•
The key inputs and assumptions used in measuring the total fair value of
all classes of ABS interests and the fair value of the eligible horizontal
residual interest retained by the sponsor (including the range of
information considered in arriving at such key inputs and assumptions and
an indication of the weight ascribed thereto) and the sponsor’s
technique(s) to derive the key inputs;
•
For sponsors that elect to utilize the horizontal risk retention option, the
reference data set or other historical information that would enable
investors and other stakeholders to assess the reasonableness of the key
cash flow assumptions underlying the fair value of the eligible horizontal
54
residual interest. Examples of key cash flow assumptions may include
default, prepayment, and recovery;
•
Whether any retained vertical interest is retained as a single vertical
security or as separate proportional interests;
•
Each class of ABS interests in the issuing entity underlying the single
vertical security at the closing of the securitization transaction and the
percentage of each class of ABS interests in the issuing entity that the
sponsor would have been required to retain if the sponsor held the eligible
vertical interest as a separate proportional interest in each class of ABS
interest in the issuing entity; and
•
The fair value (expressed as a percentage of the fair value of all ABS
interests issued in the securitization transaction and dollar amount (or
corresponding amount in the foreign currency in which the ABS are
issued, as applicable)) of any single vertical security or separate
proportional interests that will be retained (or was retained) by the sponsor
at closing, and the fair value (expressed as a percentage of the fair value of
all ABS interests issued in the securitization transaction and dollar amount
(or corresponding amount in the foreign currency in which the ABS are
issued, as applicable)) of the single vertical security or separate
proportional interests required to be retained by the sponsor in connection
with the securitization transaction.
Consistent with the original proposal, a sponsor electing to establish and fund a
horizontal cash reserve account would be required to provide disclosures similar to those
55
required with respect to an eligible horizontal residual interest, except that these
disclosures have been modified to reflect the different nature of the account.
Request for Comment
1(a). Should the agencies require a minimum proportion of risk retention held by
a sponsor under the standard risk retention option to be composed of a vertical
component or a horizontal component? 1(b). Why or why not?
2(a). The agencies observe that horizontal risk retention, as first-loss residual
position, generally would impose the most economic risk on a sponsor. Should a sponsor
be required to hold a higher percentage of risk retention if the sponsor retains only an
eligible vertical interest under this option or very little horizontal risk retention? 2(b).
Why or why not?
3. Are the disclosures proposed sufficient to provide investors with all material
information concerning the sponsor’s retained interest in a securitization transaction and
the methodology used to calculate fair value, as well as enable investors and the agencies
to monitor whether the sponsor has complied with the rule?
4(a). Is the requirement for sponsors that elect to utilize the horizontal risk
retention option to disclose the reference data set or other historical information that
would enable investors and other stakeholders to assess the reasonableness of the key
cash flow assumptions underlying the fair value of the eligible horizontal residual interest
useful? 4(b). Would the requirement to disclose this information impose a significant
cost or undue burden to sponsors? 4(c). Why or why not? 4(d). If not, how should
proposed disclosures be modified to better achieve those objectives?
56
5(a). Does the proposal require disclosure of any information that should not be
made publicly available? 5(b). If so, should such information be made available to the
Commission and Federal banking agencies upon request?
6. Are there any additional factors that the agencies should consider with respect
to the standard risk retention?
7. To what extent would the flexible standard risk retention option address
concerns about a sponsor having to consolidate a securitization vehicle for accounting
purposes due to the risk retention requirement itself, given that the standard risk retention
option does not require a particular proportion of horizontal to vertical interest?
8(a). Is the proposed approach to measuring risk retention appropriate? 8(b).
Why or why not?
9(a). Would a different measurement of risk retention be more appropriate? 9(b).
Please provide details and data supporting any alternative measurement methodologies.
10(a). Is the restriction on certain projected payments to the sponsor with respect
to the eligible horizontal residual interest appropriate and sufficient? 10(b). Why or why
not?
11(a). The proposed restriction on certain projected payments to the sponsor with
respect to the eligible horizontal residual interest compares the rate at which the sponsor
is projected to recover the fair value of the eligible horizontal residual interest with the
rate which all other investors are projected to be repaid their principal. Is this comparison
of two different cash flows an appropriate means of providing incentives for sound
underwriting of ABS? 11(b). Could it increase the cost to the sponsor of retaining an
eligible horizontal residual interest? 11(c). Could sponsors or issuers manipulate this
57
comparison to reduce the cost to the sponsor of retaining an eligible horizontal residual
interest? How? 11(d). If so, are there adjustments that could be made to this
requirement that would reduce or eliminate such possible manipulation? 11(e). Would
some other cash flow comparison be more appropriate? 11(f). If so, which cash flows
should be compared? 11(g). Does the proposed requirement for the sponsor to disclose,
for previous ABS transactions, the number of times the sponsor was paid more than the
issuer predicted for such transactions reach the right balance of incremental burden to the
sponsor while providing meaningful information to investors? 11(h). If not, how should
it be modified to better achieve those objectives?
12(a). Does the proposed form of the single vertical security accomplish the
agencies’ objective of providing a way for sponsors to hold vertical risk retention without
the need to perform valuation of multiple securities for accounting purposes each
financial reporting period? 12(b). Is there a different approach that would be more
efficient?
13(a). Is three years after all ABS interests are no longer outstanding an
appropriate time period for the sponsors’ record maintenance requirement with respect to
the calculations and other requirements in section 4? 13(b). Why or why not? 13(c). If
not, what would be a more appropriate time period?
14(a). Would the calculation requirements in section 4 of the proposed rule likely
be included in agreed upon procedures with respect to an interest retained pursuant to the
proposed rule? 14(b). Why or why not? 14(c). If so, what costs may be associated with
such a practice?
c. Alternative Eligible Horizontal Residual Interest Proposal
58
The agencies have also considered, and request comment on, an alternative
provision relating to the amount of principal payments received by the eligible horizontal
residual interest. Under this alternative, on any payment date, in accordance with the
transaction’s governing documents, the cumulative amount paid to an eligible horizontal
residual interest may not exceed a proportionate share of the cumulative amount paid to
all holders of ABS interests in the transaction. The proportionate share would equal the
percentage, as measured on the date of issuance, of the fair value of all of the ABS
interests issued in the transaction that is represented by the fair value of the eligible
horizontal residual interest.
For purposes of this calculation, fees and expenses paid to service providers
would not be included in the cumulative amounts paid to holders of ABS interests. All
other amounts paid to holders of ABS would be included in the calculations, including
principal repayment, interest payments, excess spread and residual payments. The
transaction documents would not allow distribution to the eligible horizontal residual
interest any amounts payable to the eligible horizontal residual interest that would exceed
the eligible horizontal residual interest’s permitted proportionate share. Such excess
amounts could be paid to more senior classes, placed into a reserve account, or allocated
in any manner that does not otherwise result in payments to the holder of the eligible
horizontal residual interest that would exceed the allowed amount.
By way of illustration, assume the fair value of the eligible horizontal residual
interest for a particular transaction was equal to 10 percent of the fair value of all ABS
interests issued in that transaction. In order to meet the requirements of the proposal, the
cumulative amount paid to the sponsor in its capacity as holder of the eligible horizontal
59
residual interest on any given payment date could not exceed 10 percent of the
cumulative amount paid to all holders of ABS interests, excluding payment of expenses
and fees to service providers. This would allow large payments to the eligible horizontal
residual interest so long as such payments do not otherwise result in payments to the
holder of the eligible horizontal residual interest that would exceed the allowed amount.
The agencies request comment on this alternative mechanism for allowing the
eligible horizontal residual interest to receive unscheduled principal payments, including
whether the agencies should adopt the alternative proposal instead of the proposed
mechanism for these payments described above.
Request for Comment
15(a). Other than a cap in the priority of payments on amounts to be paid to the
eligible horizontal residual interest and related calculations on distribution dates and
related provisions to allocate any amounts above the cap, would there be any additional
steps necessary to comply with the alternative proposal? 15(b). If so, please describe
those additional steps and any associated costs.
16. Would the cost and difficulty of compliance with the alternative proposal,
including monitoring compliance, be higher or lower, than with the proposal?
17(a). Does the alternative proposal accommodate more or less of the current
market practice than the proposal? 17(b). If there is a difference, please provide data
with respect to the scale of that difference.
18. With respect to the alternative proposal, should amounts other than payment
of expenses and fees to service providers be excluded from the calculations?
60
19(a). Does the alternative proposal adequately accommodate structures with
unscheduled payments of principal, such as scheduled step downs? 19(b). Does the
alternative adequately address structures which do not distinguish between interest and
principal received from underlying assets for purposes of distributions?
20(a). Are there asset classes or transaction structures for which the alternative
proposal would not be economically viable? 20(b). Are there asset classes or transaction
structures for which the alternative proposal would be more economically feasible than
the proposal?
21. Should both the proposal and the alternative proposal be made available to
sponsors?
22(a). The proposal includes a restriction on how payments on an eligible
horizontal residual interest must be structured but does not restrict actual payments to the
eligible horizontal residual interest, which could be different than the projected payments
if losses are higher or lower than expected. The alternative proposal for payments on
eligible horizontal residual interests does not place restrictions on structure but does
restrict actual payments to the eligible horizontal residual interest. Does the proposal or
the alternative proposal better align the sponsor’s interests with investors’ interests?
22(b). Why or why not?
2. Revolving Master Trusts
a. Overview
Securitization sponsors frequently use a revolving master trust when they seek to
issue more than one series of ABS collectively backed by a common pool of assets that
61
change over time. 48 Pursuant to the original proposal, the seller’s interest form of risk
retention would only be available to revolving master trusts.
The seller’s interest is an undivided interest held by the master trust securitization
sponsor in the pool of receivables or loans held in the trust. It entitles the sponsor to a
percentage of all payments of principal, interest, and fees, as well as recoveries from
defaulted assets that the trust periodically receives on receivables and loans held in the
trust, as well as the same percentage of all payment defaults on those assets. Investors in
the various series of ABS issued by the trust have claims on the remaining principal and
interest, as a source of repayment for the ABS interests they hold. 49 Typically, the
seller’s interest is pari passu to the investors’ interest with respect to collections and
losses on the securitized assets, though in some revolving master trusts, it is subordinated
to the investors’ interest in this regard. If the seller’s interest is pari passu, it generally
becomes subordinated to investors’ interests in the event of an early amortization of the
ABS interests held by investors, as discussed more below. Commenters representing the
48
In a revolving master trust securitization, assets (e.g., credit card receivables or dealer
floorplan financings) are periodically added to the pool to collateralize current and future
issuances of the securities backed by the pool. Often, but not always, the assets are
receivables generated by revolving lines of credit originated by the sponsor. A major
exception would be the master trusts used in the United Kingdom to finance residential
mortgages.
49
Generally, the trust sponsor retains the right to any excess cash flow from payments of
interest and fees received by the trust that exceeds the amount owed to ABS investors.
Excess cash flow from payments of principal is paid to the sponsor in exchange for newly
generated receivables in the trust’s existing revolving accounts. However, the specific
treatment of excess interest, fees, and principal payments with respect to any ABS series
within the trust is a separate issue, discussed in connection with the agencies’ proposal to
give sponsors credit for some forms of eligible horizontal risk retention at the series level,
as explained in further detail below.
62
interests of securitization sponsors generally favored the seller’s interest approach but
requested certain modifications.
The agencies are proposing to maintain the seller’s interest as the specific risk
retention option for master trusts, with changes from the original proposal that reflect
many of the comments received, as discussed in further detail below. The modifications
to this option are intended to refine this method of risk retention to better reflect the way
revolving master trust securitizations operate in the current market.
As discussed in greater detail below, among other things, the agencies are
proposing to modify the original proposal with respect to master trusts by:
•
Allowing sponsors that hold a first-loss exposure in every series of ABS
issued by a master trust to count the percent of such interest that is held
consistently across all ABS series toward the minimum 5 percent seller’s
interest requirement;
•
Removing the restriction in the original proposal that prohibited the use of
the seller’s interest risk retention option for master trust securitizations
backed by non-revolving assets;
•
Clarifying how the seller’s interest can be used in connection with multilevel legacy trusts and master trusts in which some of the seller’s interest
corresponds to loans or receivables held in a legacy master trust;
•
Revising the calculation of the 5 percent seller’s interest amount so it is
based on the trust’s amount of outstanding ABS rather than the amount of
trust assets;
63
•
Clarifying the rules regarding the use of certain structural features,
including delinked credit enhancement structures, where series-specific
credit enhancements that do not support the seller’s interest-linked
structures, and the limited use of assets that are not part of the seller’s
interest to administer the features of the ABS issued to investors; and
•
Clarify how the rule would apply to a revolving master trust in early
amortization.
b. Definitions of Revolving Master Trust and Seller’s Interest
The seller’s interest form of retention would only be available to revolving master
trusts. These are trusts established to issue ABS interests on multiple issuance dates out
of the same trust. In some instances the trust will issue to investors a series with multiple
classes of tranched ABS periodically. In others, referred to as “delinked credit
enhancement structures,” the master trust maintains one or more series, but issues
tranches of ABS of classes in the series periodically, doing so in amounts that maintain
levels of subordination between classes as required in the transaction documents. The
revolving master trust risk retention option is designed to accommodate both of these
structures.
The agencies’ original proposal would require that all securitized assets in the
master trust must be loans or other extensions of credit that arise under revolving
accounts. The agencies received comments indicating that a small number of securitizers
in the United States, such as insurance premium funding trusts, use revolving trusts to
securitize short-term loans, replacing loans as they mature with new loans, in order to
sustain cash flow and collateral support to longer-term securities. In response to
64
commenters, the agencies are proposing to expand the securitized asset requirement to
include non-revolving loans. 50 Nevertheless, as with the original proposal, all ABS
interests issued by the master trust must be collateralized by the master trust’s common
pool of receivables or loans. Furthermore, the common pool’s principal balance must
revolve so that cash representing principal remaining after payment of principal due, if
any, to outstanding ABS on any payment date, as well as cash flow from principal
payments allocated to seller’s interest is reinvested in new extensions of credit at a price
that is predetermined at the transaction and new receivables or loans are added to the pool
from time to time to collateralize existing series of ABS issued by the trust. The seller’s
interest option would not be available to a trust that issues series of ABS at different
times backed by segregated independent pools of securitized assets within the trust as a
series trust, or a trust that issues shorter-term ABS interests backed by a static pool of
long-term loans, or a trust with a re-investment period that precedes an ultimate
amortization period.
In general, the seller’s interest represents the seller/sponsor’s interest in the
portion of the receivables or loans that does not collateralize outstanding investors’
interests in ABS issued under series. Investor interests include any sponsor/seller’s
retained ABS issued under a series. As discussed above, a seller’s interest is a typical
form of risk retention in master trusts, whereby the sponsor of a master trust holds an
undivided interest in the securitized assets. The original proposal defined “seller’s
50
Revolving master trusts are also used in the United Kingdom to securitize mortgages,
and U.S. investors may invest in RMBS issued by these trusts. This proposed change
would make it easier for these issuers to structure their securitizations in compliance with
section 15G for such purpose.
65
interest” consistent with these features, as an ABS interest (i) in all of the assets that are
held by the issuing entity and that do not collateralize any other ABS interests issued by
the entity; (ii) that is pari passu with all other ABS interests issued by the issuing entity
with respect to the allocation of all payments and losses prior to an early amortization
event (as defined in the transaction documents); and (iii) that adjusts for fluctuations in
the outstanding principal balances of the securitized assets.
The proposal would define “seller’s interest” similarly to the original proposal.
However, in response to comments, the agencies have made changes to the definition
from the original proposal to reflect market practice. The first change would modify the
definition to reflect the fact that the seller’s interest is pari passu with investors’ interests
at the series level, not at the level of all investors’ interests collectively. The agencies are
proposing this change because each series in a revolving master trust typically uses
senior-subordinate structures under which investors are entitled to different payments out
of that series’ percentage share of the collections on the trust’s asset pool, so some
investors in subordinated classes are subordinate to the seller’s interest. The second
change would modify the definition to reflect the fact that, in addition to the receivables
and loans that collateralize the trust’s ABS interests, a master trust typically includes
servicing assets. 51 To the extent these assets are allocated as collateral only for a specific
series, these assets are not part of the seller’s interest. 52 Furthermore, the proposal
51
The definition of “servicing assets” is discussed in Part II.B of this Supplementary
Information.
52
Although this language allows certain assets held by the trust to be allocated as
collateral only for a specific series and excluded from the seller’s interest, it does not
allow a trust to claim eligibility for the seller’s interest form of risk retention unless the
66
clarifies that the seller’s interest amount is the unpaid principal balance of the seller’s
interest in the common pool of receivables or loans. The seller’s interest amount must at
least equal the required minimum seller’s interest.
In addition, the agencies are considering whether they should make additional
provisions for subordinated seller’s interests. In some revolving master trusts, there is an
interest similar to a seller’s interest, except that instead of the interest being pari passu
with the investors’ interest with respect to principal collections and interest and fee
collections, the sponsor’s (or depositor’s) share of the collections in the interest are
subordinated, to enhance the ABS interests issued to investors at the series level. The
agencies are considering whether to permit these subordinated interests to count towards
the 5 percent seller’s interest treatment, since they perform a loss-absorbing function that
is analogous to a horizontal interest (whereas a typical seller’s interest is analogous to a
vertical interest, and typically is only subordinated in the event of early amortization).
Because they are subordinated, however, the agencies are considering requiring them be
counted toward the 5 percent requirement on a fair value basis, instead of the face value
basis applied for regular, unsubordinated seller’s interests. 53 The sponsor would be
seller’s interest is, consistent with the revolving master trust definition, generally
collateralized by a common pool of assets, the composition of which changes over time,
and that securitizes all ABS interests in the trust. Absent broad exposure to the
securitized assets, the seller’s interest ceases to be a vertical form of risk retention. The
proposed language is designed to accommodate limited forms of exclusion from the
seller’s interest in connection with administering the trust, dealing with the revolving
versus amortizing periods for investor ABS series, implementation of interest rate
features, and similar aspects of these securitization transactions.
53
The fair value determination would be for purposes of the amount of subordinated
seller’s interest included in the numerator of the 5 percent ratio. The denominator would
be the unpaid principal balance of all outstanding investors’ ABS interests, as is proposed
for regular, unsubordinated seller’s interests.
67
required to apply the same fair value standards as the rule imposes under the general risk
retention requirement.
In addition to these definitional changes, the agencies are proposing modifications
to the overall structure of the master trust risk retention option as it was proposed in the
original proposal, in light of comments concerning the manner in which the seller’s
interest is held. In some cases, the seller’s interest may be held by the sponsor, as was
specified in the original proposal, but in other instances, it may be held by another entity,
such as the depositor, or two or more originators may sponsor a single master trust to
securitize receivables generated by both firms, with each firm holding a portion of the
seller’s interest. Accordingly, the agencies are proposing to allow the seller’s interest to
be held by any wholly-owned affiliate of the sponsor. 54
In response to comments, the agencies are also proposing to allow the seller’s
interest to be retained in multiple interests, rather than a single interest. This approach is
intended to address legacy trust structures and would impose requirements on the division
of the seller’s interest in such structures. In these structures, a sponsor that controls an
older revolving master trust that no longer issues ABS to investors keeps the trust in
place, with the credit lines that were designated to the trust over the years still in
operation and generating new receivables for the legacy trust. The legacy trust issues
certificates collateralized by these receivables to a newer issuing trust, which typically
also has credit lines designated to the trust, providing the issuing trust with its own pool
54
The requirement for the holder to be a wholly-owned affiliate of the sponsor is
consistent with the restrictions on permissible transferees of risk retention generally
required to be held by the sponsor under the rule. See Part III.D.2 of this Supplementary
Information.
68
of receivables. The issuing trust issues investors’ ABS interests backed by receivables
held directly by the issuing trust and also indirectly in the legacy trust (as evidenced by
the collateral certificates held by the issuing trust).
The proposal would permit the seller’s interest for the legacy trust’s receivables to
be held separately, but still be considered eligible risk retention, by the sponsor at the
issuing trust level because it functions as though it were part of the seller’s interest
associated with all the securitized assets held by the issuing trust (i.e., its own receivables
and the collateral certificates). However, the portion of the seller’s interest held through
the legacy trust must be proportional to the percentage of assets the collateral certificates
comprise of the issuing trust’s assets. If the sponsor held more, and the credit quality of
the receivables feeding the issuing trust turned out to be inferior to the credit lines
feeding the legacy trust, the sponsor would be able to avoid the full effect of those
payment defaults at the issuing trust level.
The proposal would require the sponsor to retain a minimum seller’s interest in
the receivables or loans held by the trust representing at least 5 percent of the total unpaid
principal balance of the investors’ ABS interests issued by the trust and outstanding. 55
The sponsor would be required to meet this 5 percent test at the closing of each issuance
of securities by the master trust, and at every seller’s interest measurement date specified
under the securitization transaction documents, but no less than monthly. The sponsor
55
The agencies originally proposed 5 percent of the total receivables and loans in the
trust, but are persuaded by commenters that this is disproportionate to the base risk
retention requirement in some cases. Revolving master trusts may hold receivables far in
excess of the amount of investors’ ABS interests outstanding, for example, when the
sponsor has other funding sources at more favorable costs than those available from
investors in the master trust’s ABS.
69
would remain subject to its obligation to meet the seller’s interest requirement on these
measurement dates until the trust no longer has ABS interests outstanding to any third
party.
The agencies are proposing to include the principal balance instead of the fair
value of outstanding ABS interests as the basis for the calculation of the minimum
seller’s interest requirement. The agencies currently consider this approach to be
sufficiently conservative, because sponsors of revolving master trusts do not include
senior interest-only bonds or premium bonds in their ABS structures. If this were not the
case, it would be more appropriate to require the minimum seller’s interest requirement to
be included based on the fair value basis of outstanding ABS interests. However, the fair
value determination would create additional complexity and costs, especially given the
frequency of the measurements required. In consideration of this, the agencies would
expect to include in any final rule a prohibition against the seller’s interest approach for
any revolving trust that includes senior interest-only bonds or premium bonds in the ABS
interest it issues to investors.
Request for Comment
23(a). Is such prohibition appropriate? 23(b). If not, what is a better approach,
and why? Commenters proposing an alternative approach should provide specific
information about which revolving trusts in the marketplace currently include such
interests in their capital structures, and the manner in which they could comply with a fair
value approach.
24. In revising the definition of “seller’s interest” the agencies have modified the
rule text to exclude “assets that collateralize other specified ABS interests issued by the
70
issuing entity” as well as rule text excluding “servicing assets,” which is a defined term
under the proposal. Are such exclusions redundant, or would they exclude rights to
assets or cash flow that are commonly included as seller’s interest?
c. Combining Seller’s Interest with Horizontal Risk Retention at the Series Level
The original proposal for revolving asset master trusts focused primarily on the
seller’s interest form of risk retention. Commenters requested that the agencies modify
the original proposal to recognize as risk retention the various forms of subordinated
exposures sponsors hold in master trust securitization transactions. The proposal would
permit sponsors to combine the seller’s interest with either of two horizontal types of risk
retention held at the series level, one of which meets the same criteria as the standard risk
retention requirement, and the other of which is eligible under the special conditions
discussed below.
To be eligible to combine the seller’s interest with horizontal risk retained at the
series level, the sponsor would be required to maintain a specified amount of horizontal
risk retention in every series issued by the trust. If the sponsor retained these horizontal
interests in every series across the trust, the sponsor would be permitted to reduce its
seller’s interest by a corresponding percentage. For example, if the sponsor held 2
percent, on a fair value basis, of all the securities issued in each series in either of the two
forms of permitted horizontal interests, the sponsor’s seller’s interest requirement would
be reduced to 3 percent of the unpaid principal balance of all investor interests
outstanding, instead of 5 percent. However, if the sponsor ever subsequently issued a
series (or additional classes or tranches out of an existing series of a delinked structure)
that did not meet this 2 percent minimum horizontal interest requirement, the sponsor
71
would be required to increase its minimum seller’s interest up to 5 percent for the entire
trust (i.e., 5 percent of the total unpaid principal balance of all the investors’ ABS interest
outstanding in every series, not just the series for which the sponsor decided not to hold
the minimum 2 percent horizontal interest).
The agencies propose to permit the sponsor to hold horizontal interests at the
series level in the form of a certificated or uncertificated ABS interest. The interest in the
series would need to be issued in a form meeting the definition of an eligible horizontal
residual interest or a specialized horizontal form, available only to revolving master
trusts. The residual interest held by sponsors of revolving trusts at the series level
typically does not meet the requirement of the proposed definition of eligible horizontal
residual interest which would limit the rate of payments to the sponsor to the rate of
payments made to the holders of senior ABS interests.
Many revolving asset master trusts are collateralized with receivables that pay
relatively high rates of interest, such as credit and charge card receivables or floor plan
financings. The ABS interests sold to investors are structured so there is an initial
revolving period, under which the series’ share of borrower repayments of principal on
the receivables are used by the trust to purchase new, replacement receivables.
Subsequently, during the “controlled amortization” phase, principal payments are
accumulated for the purpose of amortizing and paying off the securities on an expected
maturity date. Under the terms of the transaction, principal payments are handled in a
separate waterfall from interest payments. The series’ share of interest payments
received by the trust each period (typically a month) is used to pay trust expenses and the
72
interest due to holders of ABS interests. 56 Because the series’ share of cash flow from
interest payments is generally in excess of amounts needed to pay principal and interest,
it is used to cover the series’ share of losses on receivables that were charged-off during
the period and a surplus typically still remains. This residual interest is returned to the
sponsor (though it may, under the terms of the transaction, first be made available to
other series in the trust to cover shortfalls in interest due and receivable losses during the
period that were not covered by other series’ shares of the trust’s proceeds).
This subordinated claim to residual interest by the sponsor is a form of horizontal
risk retention; the residual interest is payable to the sponsor only to the extent it exceeds
the amount needed to cover principal losses on more senior securities in the series. The
agencies therefore believe it would be appropriate to recognize this form of risk retention
as an acceptable method of meeting a sponsor’s risk retention requirement for revolving
master trusts. Accordingly, the agencies are proposing to recognize the fair value of the
sponsor’s claim to this residual interest as a permissible form of horizontal risk retention
for revolving master trust structures, for which the sponsor could take credit against the
seller’s interest requirement in the manner described above. Under the proposal, the
sponsor would receive credit for the residual interest whether it is certificated or
uncertificated, subject to the following requirements:
•
Each series distinguishes between the series’ share of collection of interest, fees,
and principal from the securitized assets (separate waterfalls);
56
In some trusts the expenses are senior in priority, but this varies.
73
•
The sponsor’s claim to any of the series’ share of interest and fee proceeds each
period pursuant to the horizontal residual interest is subordinated to all interest
due to all ABS interests in the series for that period, and further reduced by the
series’ share of defaults on principal of the trust’s securitized assets for that period
(that is, charged-off receivables);
•
The horizontal residual interest, to the extent it has claims to any part of the
series’ share of principal proceeds, has the most subordinated claim; and
•
The horizontal residual interest is only eligible for recognition as risk retention so
long as the trust is a revolving trust.
Some commenters on the original proposal also requested that the sponsor be
permitted to combine the seller’s interest with other vertical forms of risk retention at the
series level. The agencies are not aware of any current practice of vertical holding at the
series level. The agencies would consider including, as part of the seller’s interest form
of risk retention, vertical forms of risk retention (subject to an approach similar to the one
described in this proposal for horizontal interests) if it was, in fact, market practice to
hold vertical interests in every series of ABS issued by revolving master trusts. The
agencies have considered this possibility but, especially in light of the lack of market
practice, are not proposing to allow sponsors to meet their risk retention requirement in
this manner.
In addition, the sponsor would need to make the calculations and disclosures on
every measurement date required under the rule for the seller’s interest and horizontal
interest, as applicable, under the proposed rule. Furthermore, the sponsor would be
required to retain the disclosures in its records and make them available to the
74
Commission or supervising Federal banking agency (as applicable) until three years after
all ABS interests issued in a series are no longer outstanding.
Request for Comment
25(a). Is there a market practice of retaining vertical forms of risk retention at the
series level? 25(b). What advantages and disadvantages would there be in allowing
sponsors to meet their risk retention requirement through a combination of seller’s
interest and vertical holdings at the series level?
26(a). Are the disclosure and recordkeeping requirements in the proposal
appropriate? 26(b). Why or why not? 26(c). Is there a different time frame that would
be more appropriate and if so, what would it be?
d. Early Amortization
The original proposal did not address the impact of early amortization on the
seller’s interest risk retention option. As noted above, revolving master trusts issue ABS
interests with a revolving period, during which each series’ share of principal collections
on the trust’s receivables are used to purchase replacement receivables from the sponsor.
The terms of the revolving trust securitization describe various circumstances under
which all series will stop revolving and principal collections will be used to amortize
investors’ ABS interests as quickly as possible. These terms are designed to protect
investors from declines in the credit quality of the trust’s asset pool. Early amortization
is exceedingly rare, but when it occurs, the seller’s interest may fall below its minimum
maintenance level, especially if the terms of the securitization subordinate the seller’s
interest to investor interests either through express subordination or through a more
beneficial reallocation to other investors of collections that would otherwise have been
75
allocated to the seller’s interest. Accordingly, the agencies are revising the proposed rule
to address the circumstances under which a sponsor would fall out of compliance with
risk retention requirements after such a reduction in the seller’s interest in the early
amortization context.
Under the proposed rule, a sponsor that suffers a decline in its seller’s interest
during an early amortization period caused by an unsecured adverse event would not
violate the rule’s risk retention requirements as a result of such decline, provided that
each of the following four requirements were met:
•
The sponsor was in full compliance with the risk retention requirements on all
measurement dates before the early amortization trigger occurred;
•
The terms of the seller’s interest continue to make it pari passu or subordinate
to each series of investor ABS with respect to allocation of losses;
•
The master trust issues no additional ABS interests after early amortization is
initiated to any person not wholly-owned by the sponsor; 57 and
•
To the extent that the sponsor is relying on any horizontal interests of the type
described in the preceding subsection to reduce the percentage of its required
seller’s interest, those interests continue to absorb losses as described above.
The ability of a sponsor to avoid a violation of the risk retention in this way is
only available to sponsors of master trusts comprised of revolving assets. If securitizers
of ordinary non-revolving assets were permitted to avail themselves of the seller’s
57
In other words, the sponsor is not prohibited from repaying all outstanding investors’
ABS interests and maintaining the trust as a legacy trust, which could be used at a later
date to issue collateral certificates to a new issuing trust.
76
interest and this early amortization treatment, they could create master trust transactions
that revolved only briefly, with “easy” early amortization triggers, and thereby
circumvent the cash distribution restrictions otherwise applicable to risk retention
interests under section 4 of the proposed rule.
As an ancillary provision to this proposed early amortization treatment, the
agencies are proposing to recognize so-called excess funding accounts as a supplement to
the seller’s interest. An excess funding account is a segregated account in the revolving
master trust, to which certain collections on the securitized assets that would otherwise be
payable to the holder of the seller’s interest are diverted if the amount of the seller’s
interest falls below the minimum specified in the deal documentation. 58 If an early
amortization event for the trust is triggered, the cash in the excess funding account is
distributed to investors’ ABS interests in the same manner as collections on the
securitized assets. Accordingly, funding of an excess funding account would typically be
temporary, eventually resolved either by the sponsor adding new securitized assets to
restore the trust to its minimum seller’s interest amount (and the funds trapped in the
excess funding account subsequently would be paid to the sponsor), or by the subsequent
early amortization of the trust for failure to attain the minimum seller’s interest over
multiple measurement dates.
58
Ordinarily, if the seller’s interest would not meet the minimum amount required under
a formula contained in the deal documentation, the sponsor is required to designate
additional eligible credit plans to the transaction and transfer the receivables from those
credit plans into the trust to restore the securitized assets in the trust to the specified ratio.
If the sponsor cannot do this for some reason, the excess funding account activates to trap
certain funds that would otherwise be paid to the sponsor out of the trust.
77
As a general matter, the agencies would not propose to confer eligible risk
retention status on an account that is funded by cash flow from securitized assets.
However, for the other forms of risk retention proposed by the agencies, the amount of
retention is measured and set at the inception of the transaction. Due to the revolving
nature of the master trusts, periodic measurement of risk retention at the trust level is
necessary for an effective seller’s interest option.
The agencies are therefore proposing the above-described early amortization
treatment for trusts that enter early amortization, analogous to the measurement at
inception under the other approaches. If a revolving trust breaches its minimum seller’s
interest, the excess funding account (under the conditions described in the proposed rule)
functions as an interim equivalent to the seller’s interest for a brief period and gives the
sponsor an opportunity to restore securitized asset levels to normal levels. 59 Under the
proposed rule, the amount of the seller’s interest may be reduced on a dollar-for-dollar
basis by the amount of cash retained in an excess funding account triggered by the trust’s
failure to meet the minimum seller’s interest, if the account is pari passu with (or
subordinate to) each series of the investors’ ABS interests and funds in the account are
payable to investors in the same manner as collections on the securitized assets.
59
In addition, the only excess funding account that is eligible for consideration under the
proposed rule is one that is triggered from the trust’s failure to meet its collateral tests in
a given period; this is materially different than a violation of, for example, a base rate
trigger, which signals unexpected problems with the credit quality of the securitized
assets in the pool.
78
Request for Comment
27(a). Are there changes the agencies should consider making to the proposed
early amortization and excess funding account provisions in order to align them better
with market practice while still serving the agencies’ stated purpose of these sections?
27(b). If so, what changes should the agencies consider?
e. Compliance by the Effective Date
Commenters requested that they only be required to maintain a 5 percent seller’s
interest for the amount of the investors’ ABS interests issued after the effective date of
the regulations. As a general principle, the agencies also do not seek to apply risk
retention to ABS issued before the effective date of the regulations. On the other hand,
the agencies believe that the treatment requested by commenters is not appropriate,
because the essence of the seller’s interest form of risk retention is that it is a pro rata,
pari passu exposure to the entire asset pool. Accordingly, at present, the agencies
propose to require sponsors relying on the seller’s interest approach to comply with the
rule with respect to the entirety of the unpaid principal balance of the trust’s outstanding
investors’ ABS interests after the effective date of the rule, without regard to whether the
investors’ ABS interests were issued before or after the rule’s effective date.
If the terms of the agreements under which an existing master trust securitization
operates do not require the sponsor to hold a minimum seller’s interest to the exact terms
of the proposed rule, then the sponsor could find revising the terms of outstanding series
to conform to the rule’s exact requirements to be difficult or impracticable. Therefore,
the agencies propose to recognize a sponsor’s compliance with the risk retention
requirements based on the sponsor’s actual conduct. If a sponsor has the ability under the
79
terms of the master trust’s documentation to retain a level of seller’s interest (adjusted by
qualifying horizontal interests at the series level, if any), and does not retain a level of
seller’s interest as required, the agencies would consider this to be failure of compliance
with the proposed rule’s requirements.
Request for Comment
28(a). The agencies request comment as to how long existing revolving master
trusts would need to come into compliance with the proposed risk retention rule under the
conditions described above. Do existing master trust agreements effectively prohibit
compliance? 28(b). Why or why not? 28(c). From an investor standpoint, what are the
implications of the treatment requested by sponsor commenters, under which sponsors
would only hold a seller’s interest with respect to post-effective date issuances of ABS
interests out of the trust?
29(a). Should the agencies approve exceptions on a case by case basis during
the post-adoption implementation period, subject to case-specific conditions appropriate
to each trust? 29(b). How many trusts would need relief and under what circumstances
should such relief be granted?
30. The agencies seek to formulate the seller’s interest form of risk retention in a
fashion that provides meaningful risk retention on par with the base forms of risk
retention under the rule, and at the same time accommodates prudent features of existing
market structures. The agencies request comment whether the proposal accomplishes
both these goals and, if not, what additional changes the agencies should consider to that
end.
3. Representative Sample
80
a. Overview of Original Proposal and Public Comment
The original proposal would have provided that a sponsor could satisfy its risk
retention requirement for a securitization transaction by retaining ownership of a
randomly selected representative sample of assets, equal to at least 5 percent of the
unpaid principal balance of all pool assets initially identified for securitizing that is
equivalent in all material respects to the securitized assets. To ensure that the sponsor
retained exposure to substantially the same type of credit risk as investors in the
securitized transaction, the sponsor electing to use the representatives sample option
would have been required to construct a “designated pool” of assets consisting of at least
1,000 separate assets from which the securitized assets and the assets comprising the
representative sample would be drawn and containing no assets other than securitized
assets or assets comprising the representative sample. The proposed rule would have
required a sponsor to select a sample of assets from the designated pool using a random
selection process that would not take into account any characteristics other than unpaid
principal balance and to then assess that representative sample to ensure that, for each
material characteristic of the assets in the pool, the mean of any quantitative characteristic
and the proportion of any categorical characteristic is within a 95 percent two-tailed
confidence interval of the mean or proportion of the same characteristics of the assets in
the designated pool. If the representative sample did not satisfy this requirement, the
proposal stipulated that a sponsor repeat the random selection process until it selected a
qualifying sample or opt to use another risk retention form.
The original proposal set forth a variety of safeguards meant to ensure that a
sponsor using the representative sample option created the representative pool in
81
conformance with the requirements described above. These included a requirement to
obtain a report regarding agreed-upon procedures from an independent public accounting
firm describing whether the sponsor has the required procedures in place for selecting the
assets to be retained, maintains documentation that clearly identifies the assets in the
representative sample, and ensures that the retained assets are not included in the
designated pool of any other securitizations. The proposed rule also would have
required, until all of the securities issued in the related securitization had been paid in full
or the related issuing entity had been dissolved, that servicing of the assets in the
representative sample and in the securitization pool be performed by the same entity
under the same contractual standards and that the individuals responsible for this
servicing must not be able to identify an asset as being part of the representative sample
or the securitization pool. In addition, the sponsor would have been required to make
certain specified disclosures.
While some commenters were supportive of the proposal’s inclusion of the
representative sample option, many commenters were critical of the option. A number of
commenters stated that it would be impractical to implement this option for a variety of
reasons, including that it would be unworkable with respect to various asset classes,
would be subject to manipulation, and was too burdensome with respect to its disclosure
requirements. Other commenters recommended that the option be limited for use with
automobile loans and other loans that are not identified at origination for sale through
securitization. A number of commenters expressed concerns regarding the required size
of the designated pool, including that the pool size was too large to be practical, that it
82
would favor larger lenders, and that it would not work well with larger loans, such as
jumbo residential mortgage-backed securities and commercial mortgages.
Commenters were generally critical of the proposed requirement for a procedures
report, contending that the report would impose costs upon a sponsor without a
commensurate benefit. Additionally, commenters representing accounting firms and
professionals questioned the value of the procedures report and stated that if not provided
to investors in the securitized transaction, the report could run afoul of certain rules
governing the professional standards of accountants. Commenters also recommended
that the blind servicing requirement of the option be modified to allow for certain
activities, such as loss mitigation, assignment of loans to special servicers, disclosure of
loan level data, and remittance of funds to appropriate parties.
b. Proposed Treatment
The agencies have considered the comments on the representative sample option
in the original proposal and are concerned that, based on observations by commenters,
the representative sample option would be difficult to implement and may result in the
costs of its utilization outweighing its benefits. Therefore, the agencies are not proposing
to include a representative sample option in the re-proposed rule. The agencies believe
that the other proposed risk retention options would be better able to achieve the purposes
of section 15G, including the standard risk retention option, while reducing the potential
to negatively affect the availability and costs of credit to consumers and businesses.
Request for Comment
31(a). Should the agencies include a representative sample option as a form of
risk retention? 31(b). If so, how should such an option be constructed, consistent with
83
establishing a statistically representative sample? 31(c). What benefits would including
such an option provide to the securitization market, investors, borrowers, or others?
4. Asset-Backed Commercial Paper Conduits
a. Overview of the Original Proposal and Public Comments
The original proposal included a risk retention option specifically designed for
asset-backed commercial paper (ABCP) structures. As explained in the original
proposal, ABCP is a type of liability that is typically issued by a special purpose vehicle
(commonly referred to as a “conduit”) sponsored by a financial institution or other
sponsor. The commercial paper issued by the conduit is collateralized by a pool of
assets, which may change over the life of the entity. Depending on the type of ABCP
program being conducted, the securitized assets collateralizing the ABS interests that
support the ABCP may consist of a wide range of assets including automobile loans,
commercial loans, trade receivables, credit card receivables, student loans, and other
loans. Like other types of commercial paper, the term of ABCP typically is short, and the
liabilities are ‘‘rolled,’’ or refinanced, at regular intervals. Thus, ABCP conduits
generally fund longer-term assets with shorter-term liabilities.60 The original proposal
was designed to take into account the special structures through which some conduits
typically issue ABCP, as well as the manner in which participants in the securitization
chain of these conduits typically retain exposure to the credit risk of the underlying
assets.
60
See Original Proposal at §__.9.
84
Under the original proposal, this risk retention option would have been available
only for short-term ABCP collateralized by asset-backed securities that were issued or
initially sold exclusively to ABCP conduits and supported by a liquidity facility that
provides 100 percent liquidity coverage from a banking institution. The option would not
have been available to ABCP conduits that lack 100 percent liquidity coverage or ABCP
conduits that operate purchased securities or arbitrage programs 61 in the secondary
market.
In a typical ABCP conduit, the sponsor of the ABCP conduit approves the
originators whose loans or receivables will collateralize the ABS interests that support the
ABCP issued by the conduit. Banks can use ABCP conduits that they sponsor to meet
the borrowing needs of a bank customer and offer that customer a more attractive cost of
funds than a commercial loan or a traditional debt or equity financing. In such a
transaction, the customer (an “originator-seller”) may sell loans or receivables to an
intermediate, bankruptcy remote SPV established by the originator-seller. The credit risk
of the receivables transferred to the intermediate SPV then typically is separated into two
classes – a senior ABS interest that is purchased by the ABCP conduit and a residual
ABS interest that absorbs first losses on the receivables and that is retained by the
originator-seller. The residual ABS interest retained by the originator-seller typically is
61
Structured investment vehicles (SIVs) and securities arbitrage ABCP programs both
purchase securities (rather than receivables and loans) from originators. SIVs typically
lack liquidity facilities covering all of these liabilities issued by the SIV, while securities
arbitrage ABCP programs typically have such liquidity coverage, though terms are more
limited than those of the ABCP conduits eligible for special treatment pursuant to the
proposed rule.
85
sized with the intention that it be sufficiently large to absorb all losses on the underlying
receivables.
The ABCP conduit, in turn, issues short-term ABCP that is collateralized by the
senior ABS interests purchased from one or more intermediate SPVs (which are
supported by the subordination provided by the residual ABS interests retained by the
originator-sellers). The sponsor of this type of ABCP conduit, which is usually a bank or
other regulated financial institution or an affiliate or subsidiary of a bank or other
regulated financial institution, also typically provides (or arranges for another regulated
financial institution or group of financial institution to provide) 100 percent liquidity
coverage on the ABCP issued by the conduit. This liquidity coverage typically requires
the support provider to provide funding to, or purchase assets or ABCP from, the ABCP
conduit in the event that the conduit lacks the funds necessary to repay maturing ABCP
issued by the conduit.
The original proposal included several conditions designed to ensure that this
option would be available only to the type of ABCP conduits that do not purchase
securities in the secondary market, as described above. For example, this option would
have been available only with respect to ABCP issued by an “eligible ABCP conduit,” as
defined by the original proposal. The original proposal defined an eligible ABCP conduit
as an issuing entity that issues ABCP and that meets each of the following criteria. 62
First, the issuing entity would have been required to have been bankruptcy remote or
otherwise isolated for insolvency purposes from the sponsor and any intermediate SPV.
62
See Original Proposal at §__.2 (definition of “eligible ABCP conduit”).
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Second, the ABS issued by an intermediate SPV to the issuing entity would have been
required to be collateralized solely by assets originated by a single originator-seller. 63
Third, all the interests issued by an intermediate SPV would have been required to be
transferred to one or more ABCP conduits or retained by the originator-seller. Fourth, a
regulated liquidity provider would have been required to enter into a legally binding
commitment to provide 100 percent liquidity coverage (in the form of a lending facility,
an asset purchase agreement, a repurchase agreement, or similar arrangement) to all of
the ABCP issued by the issuing entity by lending to, or purchasing assets or ABCP from,
the issuing entity in the event that funds were required to repay maturing ABCP issued by
the issuing entity. 64
Under the original proposal, the sponsor of an eligible ABCP conduit would have
been permitted to satisfy its base risk retention obligations if each originator-seller that
63
Under the original proposal, an originator-seller would mean an entity that creates
financial assets through one or more extensions of credit or otherwise and sells those
financial assets (and no other assets) to an intermediate SPV, which in turn sells interests
collateralized by those assets to one or more ABCP conduits. The original proposal
defined an intermediate SPV as a special purpose vehicle that is bankruptcy remote or
otherwise isolated for insolvency purposes that purchases assets from an originator-seller
and that issues interests collateralized by such assets to one or more ABCP conduits. See
Original Proposal at §__.2 (definitions of “originator-seller” and “intermediate SPV”).
64
The original proposal defined a regulated liquidity provider as a depository institution
(as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813)); a bank
holding company (as defined in 12 U.S.C. 1841) or a subsidiary thereof; a savings and
loan holding company (as defined in 12 U.S.C. 1467a) provided all or substantially all of
the holding company’s activities are permissible for a financial holding company under
12 U.S.C. 1843(k) or a subsidiary thereof; or a foreign bank (or a subsidiary thereof)
whose home country supervisor (as defined in § 211.21 of the Federal Reserve Board’s
Regulation K (12 CFR 211.21)) has adopted capital standards consistent with the Capital
Accord of the Basel Committee on Banking Supervision, as amended, provided the
foreign bank is subject to such standards. See http://www.bis.org/bcbs/index.htm for
more information about the Basel Capital Accord.
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transferred assets to collateralize the ABS interests that supported the ABCP issued by
the conduit retained the same amount and type of credit risk as would be required under
the horizontal risk retention option under the original proposal as if the originator-seller
was the sponsor of the intermediate SPV. Specifically, the original proposal provided
that a sponsor of an ABCP securitization transaction could satisfy its base risk retention
requirement with respect to the issuance of ABCP by an eligible ABCP conduit if each
originator-seller retained an eligible horizontal residual interest in each intermediate SPV
established by or on behalf of that originator-seller for purposes of issuing interests to the
eligible ABCP conduit. The eligible horizontal residual interest retained by the
originator-seller would have been required to equal at least 5 percent of the par value of
all interests issued by the intermediate SPV.
Accordingly, each originator-seller would have been required to retain credit
exposure to the receivables sold by that originator-seller to support issuance of the
ABCP. The originator-seller also would have been prohibited from selling, transferring,
or hedging the eligible horizontal residual interest that it is required to retain. This option
was designed to accommodate the special structure and features of these types of ABCP
programs.
The original proposal also would have imposed certain obligations directly on the
sponsor in recognition of the key role the sponsor plays in organizing and operating an
eligible ABCP conduit. First, the original proposal provided that the sponsor of an
eligible ABCP conduit that issues ABCP in reliance on the option would have been
responsible for compliance with the requirements of this risk retention option. Second,
88
the sponsor would have been required to maintain policies and procedures to monitor the
originator-sellers’ compliance with the requirements of the proposal.
The sponsor also would have been required to provide, or cause to be provided, to
potential purchasers a reasonable period of time prior to the sale of any ABCP from the
conduit, and to the Commission and its appropriate Federal banking agency, if any, upon
request, the name and form of organization of each originator-seller that retained an
interest in the securitization transaction pursuant to section 9 of the original proposal
(including a description of the form, amount, and nature of such interest), and of the
regulated liquidity provider that provided liquidity coverage to the eligible ABCP conduit
(including a description of the form, amount, and nature of such liquidity coverage).
Section 15G permits the agencies to allow an originator (rather than a sponsor) to
retain the required amount and form of credit risk and to reduce the amount of risk
retention required of the sponsor by the amount retained by the originator. 65 In
developing the risk retention option for eligible ABCP conduits in the original proposal,
the agencies considered the factors set forth in section 15G(d)(2) of the Exchange Act. 66
The original proposal included conditions designed to ensure that the interests in the
intermediate SPVs sold to an eligible ABCP conduit would have low credit risk, and to
65
See 15 U.S.C. 78o-11(c)(1)(G)(iv) and (d) (permitting the Commission and the
Federal banking agencies to allow the allocation of risk retention from a sponsor to an
originator).
66
See id. at § 78o-11(d)(2). These factors are whether the assets sold to the securitizer
have terms, conditions, and characteristics that reflect low credit risk; whether the form
or volume of transactions in securitization markets creates incentives for imprudent
origination of the type of loan or asset to be sold to the securitizer; and the potential
impact of the risk retention obligations on the access of consumers and businesses to
credit on reasonable terms, which may not include the transfer of credit risk to a third
party.
89
ensure that originator-sellers had incentives to monitor the quality of the assets that are
sold to an intermediate SPV and collateralize the ABCP issued by the conduit. In
addition, the original proposal was designed to effectuate the risk retention requirements
of section 15G of the Exchange Act in a manner that facilitated reasonable access to
credit by consumers and businesses through the issuance of ABCP backed by consumer
and business receivables. Finally, as noted above, an originator-seller would have been
subject to the same restrictions on transferring or hedging the retained eligible horizontal
residual interest to a third party as applied to sponsors under the original proposal.
b. Comments on the Original Proposal
Commenters generally supported including an option specifically for ABCP
structures. Commenters expressed concern, however, about several aspects of the option.
Many commenters recommended allowing the credit enhancements usually found in
ABCP conduit programs (i.e., 100 percent liquidity facilities or program-wide credit
enhancement) to qualify as a form of risk retention, in addition to the proposed option,
because sponsors that provide this level of protection to their conduit programs are
already exposed to as much (or more) risk of loss as a sponsor that holds an eligible
horizontal residual interest. Several commenters also requested that the agencies permit
originator-sellers to also use the other permitted menu options, such as master trusts.
Commenters generally did not support the restrictions in the definition of “eligible
ABCP conduit” in the original proposal because these restrictions would prevent ABCP
multi-seller conduits from financing ABS that was collateralized by securitized assets
originated by more than one originator. In particular, the restriction that assets held by an
intermediate SPV must have been “originated by a single originator-seller” would, as
90
these commenters asserted, preclude funding assets that an originator-seller acquires from
a third party or from multiple affiliated originators under a corporate group, which
commenters asserted was a common market practice. Many commenters noted that the
requirement that all of the interests issued by the intermediate SPV be transferred to one
or more ABCP conduits or retained by the originator-seller did not take into account that,
in many cases, an intermediate SPV may also sell interests to investors other than ABCP
conduits.
Some commenters also observed that the original proposal did not appear to
accommodate ABCP conduit transactions where originator-sellers sell their entire interest
in the securitized receivables to an intermediate SPV in exchange for cash consideration
and an equity interest in the SPV. The SPV, in turn, would hold the retained interest.
Therefore, these commenters recommended that the rule permit an originator-seller to
retain its interest through its or its affiliate’s ownership of the equity in the intermediate
SPV, rather than directly. In addition, a commenter requested that the agencies revise the
ABCP option to accommodate structures where the intermediate SPV is the originator. A
few commenters requested that the agencies expand the definition of eligible liquidity
provider to include government entities, and to allow multiple liquidity providers for one
sponsor. Some commenters also criticized the monitoring and disclosure requirements
for the ABCP option in the original proposal. A few commenters recommended that the
ABCP option be revised so that ABCP with maturities of up to 397 days could use the
ABCP option.
c. Proposed ABCP Option
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The agencies are proposing an option for ABCP securitization transactions that
retains the basic structure of the original proposal with modifications to a number of
requirements intended to address issues raised by commenters. 67 As with the original
proposal, the proposal permits the sponsor to satisfy its base risk retention requirement if
each originator-seller that transfers assets to collateralize the ABCP issued by the conduit
retains the same amount and type of credit risk as would be required as if the originatorseller was the sponsor of the intermediate SPV. The agencies continue to believe that
such an approach, as modified by the proposal, is appropriate in light of the
considerations set forth in section 15G(d)(2) of the Exchange Act. 68 These modifications
are intended to allow the ABCP option to accommodate certain of the wider variety of
market practices observed in the comments on the original proposal while establishing a
meaningful risk retention requirement. In summary, these modifications are designed to
67
As with the original proposal, the proposal permits the sponsor to satisfy its base risk
retention requirement if each originator-seller that transfers assets to collateralize the
ABCP issued by the conduit retains the same amount and type of credit risk as would be
required as if the originator-seller was the sponsor of the intermediate SPV, provided that
all other conditions to this option are satisfied. The agencies continue to believe that such
an approach, as modified by the proposal, is appropriate in light of the considerations set
forth in section 15G(d)(2) of the Exchange Act. See note 66, supra. In developing the
risk retention option for eligible ABCP conduits in the original proposal, the agencies
considered the factors set forth in section 15G(d)(2) of the Exchange Act. The proposal
include conditions designed to ensure that the interests in the intermediate SPVs sold to
an eligible ABCP conduit would have low credit risk, and to ensure that originator-sellers
had incentives to monitor the quality of the assets that are sold to an intermediate SPV
and collateralize the ABCP issued by the conduit. In addition, the proposal is designed to
effectuate the risk retention requirements of section 15G of the Exchange Act in a manner
that facilitates reasonable access to credit by consumers and businesses through the
issuance of ABCP backed by consumer and business receivables. Finally, as noted
above, an originator-seller would be subject to the same restrictions on transferring or
hedging the retained interest to a third party as applied to sponsors of securitization
transactions.
68
See note 66, supra.
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permit somewhat more flexibility on behalf of originator-sellers that finance through
ABCP conduits extensions of credit they create in connection with their business
operations. The additional flexibility granted under the revised proposal permits
affiliated groups of originator-sellers to finance credits through a combined intermediate
SPV. It also permits additional flexibility where an originator seller uses an intermediate
SPV not only to finance credits through an ABCP conduit, but also other ABS channels,
such as direct private placements in the investor market. The proposal also permits
additional flexibility to accommodate the structures of intermediate SPVs, such as
revolving master trusts and pass-through intermediate special purpose vehicles (ISPVs).
Nevertheless, the revised proposal retains the original proposal’s core requirements,
including the 100 percent liquidity coverage requirement. The revised proposal also does
not accommodate “aggregators” who use ABCP to finance assets acquired in the market;
the assets underlying each intermediate SPV must be created by the respective originatorseller.
First, the proposal would introduce the concept of a “majority-owned originatorseller affiliate” (OS affiliate), which would be defined under the proposal as an entity
that, directly or indirectly, majority controls, is majority controlled by, or is under
common majority control with, an originator-seller participating in an eligible ABCP
conduit. For purposes of this definition, majority control would mean ownership of more
than 50 percent of the equity of an entity or ownership of any other controlling financial
interest in the entity (as determined under GAAP). Under the proposal, both an
originator-seller and a majority-owned OS affiliate could sell or transfer assets that these
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entities have originated to an intermediate SPV. 69 However, intermediate SPVs could not
acquire assets directly from non-affiliates. This modification addresses the agencies’
concern about asset aggregators that acquire loans and receivables from multiple sources
in the market, place them in an intermediate SPV, and issue interests to ABCP conduits.
Where, as in the case of an eligible ABCP conduit, a banking institution provides 100
percent liquidity coverage to the conduit, the Federal banking agencies are concerned that
the aggregation model could interfere with the liquidity provider’s policies and practices
for monitoring and managing the risk exposure of the guarantee. In light of the purposes
of section 15G, the Federal banking agencies do not believe that extending the ABCP
option to ABCP conduits that are used to finance the purchase and securitization of
receivables purchased in the secondary market would consistently help ensure high
quality underwriting of ABS.
Second, the proposal would allow for multiple intermediate SPVs between an
originator-seller and a majority-owned OS affiliate. As indicated in the comments on the
original proposal, there are instances where, for legal or other purposes, there is a need
for multiple intermediate SPVs. Under the proposal, an intermediate SPV would be
69
With the majority ownership standard, the agencies are proposing to require a high
level of economic identity of interest between firms that are permitted to use a common
intermediate SPV as a vehicle to finance their assets. The agencies are concerned that a
lower standard of affiliation in this regard could make it more difficult for the conduit
sponsor and liquidity provider to understand the credit quality of assets backing the
conduit. Moreover, a lower standard of affiliation creates opportunities for an originatorseller to act as an aggregator by securitizing purchased assets through special-purpose
vehicles the originator-seller creates and controls for such purposes, and putting the ABS
issued by those special-purpose vehicles into the intermediate SPV.
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defined to be a direct or indirect wholly-owned affiliate 70 of the originator-seller that is
bankruptcy remote or otherwise isolated for insolvency purposes from the eligible ABCP
conduit, the originator-seller, and any majority-controlled OS affiliate that, directly or
indirectly, sells or transfers assets to such intermediate SPV. The intermediate SPV
would be permitted to acquire assets originated by the originator-seller or its majoritycontrolled OS affiliate from the originator-seller or majority-controlled OS affiliate, or it
could also acquire assets or asset-backed securities from another controlled intermediate
SPV collateralized solely by securitized assets originated by the originator-seller or its
majority-controlled OS affiliate and servicing assets. Finally, intermediate SPVs in
structures with multiple intermediate SPVs that do not issue asset-backed securities
collateralized solely by ABS interests must be pass-through entities that either transfer
assets to other SPVs in anticipation of securitization (e.g., a depositor) or transfer ABS
interests to the ABCP conduit or another intermediate SPV. Finally, under the proposal,
all ABS interests held by an eligible ABCP conduit must be issued in a securitization
transaction sponsored by an originator-seller and supported by securitized assets
originated or created by an originator-seller or one or more majority-owned OS affiliates
of the originator-seller.
Third, the proposed rule, in contrast to the original proposal, would allow an
intermediate SPV to sell asset-backed securities that it issues to third parties other than
ABCP conduits. For example, the agencies believe that some originator-sellers operate a
revolving master trust to finance extensions of credit the originator-seller creates in
70
See proposed rule at §__.2 (definition of “affiliate”).
95
connection with its business operations. The master trust sometimes issues a series of
ABS backed by an interest in those credits directly to investors through a private
placement transaction or registered offering, and other times issues an interest to an
eligible ABCP conduit. The proposed rule would accommodate this practice.
Fourth, the proposal would clarify and expand (as compared to the original
proposal) the types of collateral that an eligible ABCP conduit could acquire from an
originator-seller. Under the proposed definition of “eligible ABCP conduit”, a conduit
could acquire any of the following types of assets: (1) ABS interests supported by
securitized assets originated by an originator-seller or one or more majority-controlled
OS affiliates of the originator seller, and by servicing assets; 71 (2) special units of
beneficial interest or similar interests in a trust or special purpose vehicle that retains
legal title to leased property underlying leases that were transferred to an intermediate
SPV in connection with a securitization collateralized solely by such leases originated by
an originator-seller or majority-controlled OS affiliate and by servicing assets; and (3)
interests in a revolving master trust collateralized solely by assets originated by an
originator-seller or majority-controlled OS affiliate; and by servicing assets. 72
Consistent with this principle, the agencies seek to clarify that the ABS interests
acquired by the conduit could not be collateralized by securitized assets otherwise
71
The purpose of this clarification is to allow originator-sellers certain additional
flexibility in structuring their participation in eligible ABCP conduits, while retaining the
core principle that the assets being financed have been originated by the originator-seller
or a majority-controlled OS affiliate, not purchased and aggregated.
72
The definition of “servicing assets” is discussed in Part II.B of this Supplementary
Information. The agencies are allowing an ABCP conduit to hold servicing assets, and
thus acknowledge the kinds of rights and assets that a typical ABCP conduit needs to
have in order to conduct the activities required in a securitization.
96
purchased or acquired by the intermediate SPV’s originator-seller, majority-controlled
OS affiliate, or by the intermediate SPV from unaffiliated originators or sellers. The
ABS interests also would have to be acquired by the ABCP conduit in an initial issuance
by or on behalf of an intermediate SPV, (1) directly from the intermediate SPV, (2) from
an underwriter of the securities issued by the intermediate SPV, or (3) from another
person who acquired the securities directly from the intermediate SPV. In addition, the
ABCP conduit would have to be collateralized solely by asset-backed securities acquired
by the ABCP conduit in an initial issuance by or on behalf of an intermediate SPV
directly from the intermediate SPVs, from an underwriter of the securities issued by the
intermediate SPV, or from another person who acquired the securities directly from the
intermediate SPV and servicing assets. Because eligible ABCP conduits can only
purchase ABS interests in an initial issuance, eligible ABCP conduits may not aggregate
ABS interests by purchasing them in the secondary market.
Fifth, in response to comments on the original proposal that an originator-seller
should be able to use a wider variety of risk retention options, the proposal would expand
the retention options available to the originator-seller. Under the proposed rule, an
eligible ABCP conduit would satisfy its risk retention requirements if, with respect to
each asset-backed security the ABCP conduit acquires from an intermediate SPV, the
originator-seller or majority-controlled OS affiliate held risk retention in the same form,
amount, and manner as would be required using the standard risk retention or revolving
asset master trust options. Thus, in the example above of an originator-seller that
finances credits through a revolving master trust, the originator-seller could retain risk in
97
the form of a seller’s interest meeting the requirements of the revolving master trust
provisions of the proposed rule.
Sixth, consistent with the original proposal, the proposal requires that a regulated
liquidity provider must have entered into a legally binding commitment to provide 100
percent liquidity coverage (in the form of a lending facility, an asset purchase agreement,
a repurchase agreement, or similar arrangement) of all the ABCP issued by the issuing
entity by lending to, or purchasing assets from, the issuing entity in the event that funds
are required to repay maturing ABCP issued by the issuing entity. The proposal clarifies
that 100 percent liquidity coverage means that, in the event that the ABCP conduit is
unable for any reason to repay maturing ABCP issued by the issuing entity, the total
amount for which the liquidity provider may be obligated is equal to 100 percent of the
amount of ABCP outstanding plus accrued and unpaid interest. Amounts due pursuant to
the required liquidity coverage may not be subject to credit performance of the ABS held
by the ABCP conduit or reduced by the amount of credit support provided to the ABCP
conduit. Liquidity coverage that only funds performing receivables or performing ABS
interests will not meet the requirements of the ABCP option.
d. Duty to Monitor and Disclosure Requirements
Consistent with the original proposal, the agencies are proposing that the sponsor
of an eligible ABCP conduit would continue to be responsible for compliance. Some
commenters on the original proposal requested that the agencies replace the monitoring
obligation with a contractual obligation of an originator-seller to maintain compliance.
However, the agencies believe that the sponsor of an ABCP conduit is in the best position
98
to monitor compliance by originator-sellers. Accordingly, the proposal would continue
to require the sponsor of an ABCP conduit to monitor compliance by an originator-seller.
e. Disclosure requirements
The agencies also are proposing disclosure requirements that are similar to those
in the original proposal, with two changes. First, the agencies are proposing to remove
the requirement that the sponsor of the ABCP conduit disclose the names of the
originator-sellers. The proposal would continue to require the sponsor of an ABCP
conduit to provide to each purchaser of ABCP the name and form of organization of the
regulated liquidity provider that provides liquidity coverage to the eligible ABCP
conduit, including a description of the form, amount, and nature of such liquidity
coverage, and notice of any failure to fund. In addition, with respect to each ABS interest
held by the ABCP conduit, the sponsor of the ABCP conduit would be required to
provide the asset class or brief description of the underlying receivables for each ABS
interest, the standard industrial category code (SIC Code) for the originator-seller or
majority-controlled OS affiliate that will retain (or has retained) pursuant to this section
an interest in the securitization transaction, and a description of the form, amount
(expressed as a percentage and as a dollar amount (or corresponding amount in the
foreign currency in which the ABS are issued, as applicable) of the fair value of all ABS
interests issued in the securitization transaction. Finally, an ABCP conduit sponsor
relying on the ABCP option would be required to provide, or cause to be provided, upon
request, to the Commission and its appropriate Federal banking agency, if any, in writing,
all of the information required to be provided to investors and the name and form of
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organization of each originator-seller or majority-controlled OS affiliate that will retain
(or has retained) an interest in the underlying securitization transactions.
Second, a sponsor of an ABCP conduit would be required to promptly notify
investors, the Commission, and its appropriate Federal banking agency, if any, in writing
of (1) the name and form of organization of any originator-seller that fails to maintain its
risk retention as required by the proposed rule and the amount of asset-backed securities
issued by an intermediate SPV of such originator-seller and held by the ABCP conduit;
(2) the name and form of organization of any originator-seller that hedges, directly or
indirectly through an intermediate SPV, its risk retention in violation of its risk retention
requirements and the amount of asset-backed securities issued by an intermediate SPV of
such originator-seller and held by the ABCP conduit; and (3) and any remedial actions
taken by the ABCP conduit sponsor or other party with respect to such asset-backed
securities. In addition, the sponsor of an ABCP conduit would be required to take other
appropriate steps upon learning of a violation by an originator-seller of its risk retention
obligations including, as appropriate, curing any breach of the requirements, or removing
from the eligible ABCP conduit any asset-backed security that does not comply with the
applicable requirements. To cure the non-compliance of the non-conforming asset, the
sponsor could, among other things, purchase the non-conforming asset from the ABCP
conduit, purchase 5 percent of the outstanding ABCP and comply with the vertical risk
retention requirements, or declare an event of default under the underlying transaction
documents (assuming the sponsor negotiated such a term) and accelerate the repayment
of the underlying assets.
f. Other Items
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In most cases, the sponsor of the ABCP issued by the conduit will be the bank or
an affiliate of the bank that organizes the conduit. The agencies note that the use of the
ABCP option by the sponsor of an eligible ABCP conduit would not relieve the
originator-seller from its independent obligation to comply with its own risk retention
obligations under the revised proposal, if any. In most, if not all, cases, the originatorseller will be the sponsor of the asset-backed securities issued by an intermediate SPV
and will therefore be required to hold an economic interest in the credit risk of the assets
collateralizing the asset-backed securities issued by the intermediate SPV. The agencies
also note that a sponsor of an ABCP conduit would not be limited to using the ABCP
option to satisfy its risk retention requirements. An ABCP conduit sponsor could rely on
any of the risk retention options described in section 4 of the proposed rule.
The agencies are proposing definitions of “ABCP” and “eligible liquidity
provider” that are the same as the definitions in the original proposal. The agencies
believe it would be inappropriate to expand the ABCP option to commercial paper that
has a term of over nine months, because a duration of nine months accommodates almost
all outstanding issuances and the bulk of those issuances have a significantly shorter term
of 90 days or less. In addition, the agencies have not expanded the definition of eligible
liquidity provider to include sovereign entities. The agencies do not believe that
prudential requirements could be easily designed to accommodate a sovereign entity that
functions as a liquidity provider to an ABCP conduit.
Request for comments
32(a). To the extent that the proposed ABCP risk retention option does not reflect
market practice, how would modifying the proposal help ensure high quality
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underwriting of ABCP? 32(b). What structural or definitional changes to the proposal
would be appropriate, including but not limited to any changes to the proposed
definitions of 100 percent liquidity coverage, eligible ABCP conduit, intermediate SPV,
majority-owned OS affiliate, originator-seller, and regulated liquidity provider? 32(c).
Do ABCP conduits typically have 100 percent liquidity coverage as defined in the
proposal? 32(d). What percentage of ABCP conduits and what percentage of ABCP
currently outstanding was issued by such conduits?
33(a). Do ABCP conduits typically only purchase assets directly from
intermediate SPVs (i.e., that meet the requirements of the proposal? 33(b). What
percentage of ABCP currently outstanding was issued by such conduits?
34(a). Do ABCP conduits typically purchase receivables directly from customers,
rather than purchasing ABS interests from SPVs sponsored by customers? 34(b). What
percentage of ABCP currently outstanding was issued by such conduits? 34(c). Is the
requirement that an ABCP conduit relying on this option may not purchase receivables
directly from the originator appropriate? 34(d). Why or why not?
35(a). Is the requirement that an ABCP conduit relying on this option may not
purchase ABS interests in the secondary market appropriate? 35(b). Why or why not?
35(c). Does the proposed ABCP option appropriately capture assets that are acquired
through business combinations?
36(a). Do ABCP conduits typically purchase corporate debt securities on a
regular or occasional basis? 36(b). What percentage of ABCP currently outstanding was
issued by such conduits?
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37(a). Do ABCP conduits typically purchase ABS in the secondary market on a
regular or occasional basis? 37(b). What percentage of ABCP currently outstanding was
issued by such conduits?
38. With respect to ABCP conduits that purchase assets that do not meet the
requirements of the proposal, what percentage of those ABCP conduits’ assets do not
meet the requirements?
39(a). Should the agencies allow multiple eligible liquidity providers for
purposes of the ABCP risk retention options? 39(b). If so, should this be limited to
special circumstances? 39(c). Should the agencies allow a liquidity provider to provide
liquidity coverage with respect to a specific ABS interest?
40(a). Does the definition of majority-owned OS affiliate appropriately capture
companies that are affiliated with an originator-seller? 40(b). Why or why not?
41. Should the rule require disclosure of the originator seller in the case of
noncompliance by the originator seller?
42(a). Should the rule also require disclosure to investors in ABCP in all cases of
violation of this section? 42(b). Why or why not? 42(c). If so, should the rule prescribe
how such disclosure be made available to investors?
43. Are there other changes that should be made to disclosure provisions?
44. Should the rule provide further clarity as to who will be deemed a sponsor of
ABCP issued by an ABCP conduit?
45(a). Should there be a supplemental phase-in period (beyond the delayed
effective dates in 15 U.S.C. 78o-11(i)) for existing ABCP conduits that do not meet the
proposed definition of eligible ABCP conduit? 45(b). Why or why not? 45(c). If so,
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what would be the appropriate limit (e.g., up to 10 percent of the assets in the ABCP
conduit could be nonconforming), and what would be the appropriate time period(s) for
conformance (e.g., up to two years)?
5. Commercial Mortgage-Backed Securities
a. Overview of the Original Proposal and Public Comments
Section 15G(c)(1)(E) of the Exchange Act (15 U.S.C. 78o-11(c)(1)(E)) provides
that, with respect to CMBS, the regulations prescribed by the agencies may provide for
retention of the first-loss position by a third-party purchaser that specifically negotiates
for the purchase of such first-loss position, holds adequate financial resources to back
losses, provides due diligence on all individual assets in the pool before the issuance of
the asset-backed securities, and meets the same standards for risk retention as the Federal
banking agencies and the Commission require of the securitizer. In light of this provision
and the historical market practice of third-party purchasers acquiring first-loss positions
in CMBS transactions, the agencies originally proposed to permit a sponsor of ABS that
is collateralized by commercial real estate loans to meet its risk retention requirements if
a third-party purchaser acquired an eligible horizontal residual interest in the issuing
entity. 73 The acquired interest would have had to take the same form, amount, and
manner as the sponsor would have been required to retain under the horizontal risk
retention option. The CMBS risk retention option would have been available only for
securitization transactions where commercial real estate loans constituted at least 95
73
Such third-party purchasers are commonly referred to in the CMBS market as “Bpiece buyers” and the eligible horizontal residual interest is commonly referred to as the
“B-piece.”
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percent of the unpaid principal balance of the assets being securitized and where six
proposed requirements were met:
(1) The third-party purchaser retained an eligible horizontal residual interest in the
securitization in the same form, amount, and manner as would be required of the sponsor
under the horizontal risk retention option;
(2) The third-party purchaser paid for the first-loss subordinated interest in cash
at the closing of the securitization without financing being provided, directly or
indirectly, from any other person that is a party to the securitization transaction
(including, but not limited to, the sponsor, depositor, or an unaffiliated servicer), other
than a person that is a party solely by reason of being an investor;
(3) The third-party purchaser performed a review of the credit risk of each asset
in the pool prior to the sale of the asset-backed securities;
(4) The third-party purchaser could not be affiliated with any other party to the
securitization transaction (other than investors) or have control rights in the securitization
(including, but not limited to acting as servicer or special servicer) that were not
collectively shared by all other investors in the securitization;
(5) The sponsor provided, or caused to be provided, to potential purchasers
certain information concerning the third-party purchaser and other information
concerning the transaction; and
(6) Any third-party purchaser acquiring an eligible horizontal residual interest
under the CMBS option complied with the hedging, transfer and other restrictions
applicable to such interest under the proposed rules as if the third-party purchaser was a
sponsor who had acquired the interest under the horizontal risk retention option.
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As stated in the original proposal, these requirements were designed to help
ensure that the form, amount and manner of the third-party purchaser’s risk retention
would be consistent with the purposes of section 15G of the Exchange Act.
Generally, commenters supported the ability of sponsors to transfer credit risk to
third-party purchasers. One commenter stated that the CMBS option acknowledged the
mandate of section 941 of the Dodd-Frank Act and the recommendations of the Federal
Reserve Board by providing much need flexibility to the risk retention rules and
recognized the impact and importance of the third-party purchaser in the CMBS market.
Some commenters, however, believed the proposed criteria for the option would
discourage the use of the option or render the option unworkable. In particular, one
commenter raised concerns with the restrictions on financing and hedging of the B-piece,
the restrictions on the transfer of such interest for the life of the transaction, restrictions
on servicing and control rights including the introduction of an operating advisor, and
requirements related to the disclosure of the B-piece purchase price would likely
discourage the use of the CMBS option.
In response to the agencies’ question in the original proposal as to whether a
third-party risk retention option should be available to other asset classes, commenters’
views were mixed. Some commenters expressed support for allowing third parties to
retain the risk in other asset classes, with other commenters supporting a third-party
option for RMBS and another commenter suggesting the option be made available to any
transaction in which individual assets may be significant enough in size to merit the
individual review required of a third-party purchaser.
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The agencies believe that a third-party purchaser that specifically negotiates for
the purchase of a first-loss position is a common feature of commercial mortgage
securitizations that is generally not found in other asset classes. For this reason, section
15G(c)(1)(E)(ii) of the Exchange Act specifically permits the agencies to create thirdparty risk retention for commercial mortgage securitizations. However, the agencies
believe there is insufficient benefit to market liquidity to justify an expansion of thirdparty risk retention to other asset classes, and propose to maintain the more direct
alignment of incentives achieved by requiring the sponsor to retain risk for the other asset
classes not covered by section 15G(c)(1)(E)(ii).
The agencies also received many comments with respect to the specific conditions
of the CMBS option in the original proposal. In this proposed rule, the CMBS option is
similar to that of the original proposal, but incorporates a number of key changes the
agencies believe are appropriate in response to concerns raised by commenters. These
are discussed below.
b. Proposed CMBS Option
i. Number of Third-Party Purchasers and Retention of Eligible Interest
Under the original proposal, only one third-party purchaser could retain the
required risk retention interest. Additionally, the third-party purchaser would have been
required to retain an eligible horizontal residual interest in the securitization in the same
form, amount and manner as would be required of the sponsor under the horizontal
retention option. The proposed CMBS option was not designed to permit a third-party
purchaser to share the required risk retention with the sponsor.
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Many commenters on the original proposal requested flexibility in satisfying the
CMBS option through the sharing of risk retention between sponsors and third-party
purchasers, as well as among multiple third-party purchasers. In particular, some
commenters noted that allowing such flexibility would be consistent with how the
proposed rule would allow a sponsor to choose to retain a vertical and horizontal
retention piece to share the risk retention obligation with an originator.
The agencies considered the comments on the original proposal carefully and
believe that some additional flexibility for the CMBS risk retention option would be
appropriate. Accordingly, under the proposed rule, the agencies would allow two (but no
more than two) third-party purchasers to satisfy the risk retention requirement through the
purchase of an eligible horizontal residual interest (as defined under the proposed rule).
Each third-party purchaser’s interest would be required to be pari passu with the other
third-party purchaser’s interest, so that neither third-party purchaser’s losses are
subordinate to the other’s losses. The agencies do not believe it would be appropriate to
allow more than two third-party purchasers to satisfy the risk retention requirement for a
single transaction, because it could dilute too much the incentives generated by the risk
retention requirement to monitor the credit quality of the commercial mortgages in the
pool.
The agencies are also revising the CMBS option to clarify that, when read
together with the revisions that have been made to the standard risk retention
requirements, the eligible horizontal residual interest held by the third-party purchasers
can be used to satisfy the standard risk retention requirements, either by itself as the sole
credit risk retained or in combination with a vertical interest held by the sponsor. The
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agencies believe this flexibility increases the likelihood that third-party purchasers will
assume risk retention obligations. The agencies further believe that the interests of the
third-party purchaser and other investors are aligned through other provisions of the
proposed CMBS option, namely the Operating Advisor provisions and disclosure
provisions discussed below.
ii. Third-Party Purchaser Qualifying Criteria
In the original proposal, the agencies did not propose qualifying criteria for thirdparty purchasers related to the third-party purchaser’s experience or financial capabilities.
One commenter proposed that only “qualified” third-party purchasers be
permitted to retain the risk under the CMBS option, with such qualifications based on
certain pre-determined criteria of experience, financial analysis capability, capability to
direct the special servicer and certain financial capabilities to sustain losses. Another
commenter requested that the final rule require third-party purchasers to be independent
from special servicers.
Consistent with the original proposal, the agencies are not proposing to add
specific qualifying criteria for third-party purchasers. The agencies believe that investors
in the business of purchasing B-piece interests in CMBS transactions, who are typically
interested in acquiring special servicing rights in such transactions, likely have the
requisite experience and capabilities to make an informed decision regarding their
purchases. Furthermore, the agencies continue to propose disclosure requirements with
respect to the identity and experience of third-party purchasers in the transaction, which
will alert investors in a CMBS transaction as to the experience of third-party purchasers
and other material information necessary to make an informed investment decision.
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Additionally, based generally on comments the agencies have received, the agencies have
not added a requirement that third-party purchasers be independent from special servicers
since the acquisition of special servicing rights is a primary reason why third-party
purchasers are willing to purchase the B-piece in the CMBS transactions. Such an
independence requirement would adversely affect the willingness of third-party
purchasers to assume the risk retention obligations in CMBS transactions.
iii. Composition of Collateral
Consistent with the original proposal, the agencies are restricting the third-party
purchaser option to securitization transactions collateralized by commercial real estate
loans. However, the original proposal allowed up to 5 percent of the collateral to be other
types of assets, in order to accommodate assets other than loans that are typically needed
to administer a securitization. Since then, the agencies have added the servicing assets
definition to the proposed rule, to accommodate these kinds of assets. 74 Accordingly, the
agencies are eliminating the 95 percent test and revising the collateral restriction to cover
securitization transactions collateralized by commercial real estate loans and servicing
assets.
iv. Source of Funds
The original proposal would have required that the third-party purchaser pay for
its eligible horizontal residual interest in cash, and would have prohibited the third-party
purchaser from obtaining financing, directly or indirectly, for the purchase of such
interest from any party to the securitization transaction other than an investor.
74
The definition of “servicing assets” is discussed in Part II.B of this Supplementary
Information.
110
A few commenters supported the proposed limitation on financing, while another
commenter recommended that no distinction be made between the sponsor’s ability to
finance its risk retention interest compared to third-party purchasers. Several
commenters requested clarification on what “indirect” financing means under the
proposal and requested that the final rule not prohibit the third-party purchaser from
obtaining financing from a party for an unrelated transaction.
The agencies are re-proposing this condition consistent with the original proposal.
The limitation on obtaining financing would apply only to financings for the purchase of
the B-piece in a specific CMBS transaction and only where the financing provider is
another party to that same CMBS transaction. The agencies are clarifying that the
financing provider restriction would include affiliates of the other parties to the CMBS
transaction. This limitation would not restrict third-party purchasers from obtaining
financing from a transaction party for a purpose other than purchasing the B-piece in the
transaction; provided that none of such financing is later used to purchase the B-piece,
which would be an indirect financing of the B-piece. Nor would third-party purchasers
be restricted from obtaining financing from a person that is not a party to the specific
transaction, unless that person had some indirect relationship with a party to the
transaction, such as a parent-subsidiary relationship or a subsidiary-subsidiary
relationship under a parent company (subject to the required holding period and
applicable hedging restrictions). The use of the term indirect financing is meant to ensure
that these types of indirect relationships are prohibited under the financing limitations of
the rule.
v. Review of Assets by Third-Party Purchaser
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Under the original proposal, a third-party purchaser would have been required to
conduct a review of the credit risk of each securitized asset prior to the sale of the ABS
that includes, at a minimum, a review of the underwriting standards, collateral, and
expected cash flows of each loan in the pool. Most commenters addressing this issue
generally supported the proposed condition that a third-party purchaser must separately
examine each asset in the pool. Specifically, one commenter noted that this level of
review is currently the industry standard and is a clear indication of the strength of the
credit review process for CMBS transactions.
The agencies are proposing this condition again with only minor changes to
indicate, in the event there is more than one third-party purchaser in a transaction, that
each third-party purchaser would be required to conduct an independent review of the
credit risk of each CMBS asset.
vi. Operating Advisor
(1) Affiliation and control rights
The original proposal included a condition of the CMBS option intended to
address the potential conflicts of interest that can arise when a third-party purchaser
serves as the “controlling class” of a CMBS transaction. This condition would have
prohibited a third-party purchaser from (1) being affiliated with any other party to the
securitization transaction (other than investors); or (2) having control rights in the
securitization (including, but not limited to acting as servicer or special servicer) that are
not collectively shared by all other investors in the securitization. The proposed
prohibition of control rights related to servicing would have been subject to an exception
from this condition, however, only if the underlying securitization transaction documents
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provided for the appointment of an independent operating advisor (“Operating Advisor”)
with certain powers and responsibilities that met certain criteria. The proposed criteria
were: (1) the Operating Advisor is not affiliated with any other party to the securitization,
(2) the Operating Advisor does not directly or indirectly have any financial interest in the
securitization other than in fees from its role as Operating Advisor, and (3) the Operating
Advisor is required to act in the best interest of, and for the benefit of, investors as a
collective whole. The original proposal would have required that an independent
Operating Advisor be appointed if the third-party purchaser was acting as, or was
affiliated with, a servicer for any of the securitized assets and had control rights related to
such servicing.
(2) Operating Advisor Criteria and Responsibilities
The agencies received many comments with respect to the criteria in the original
proposal for the Operating Advisor, as well as with respect to the Operating Advisor’s
required responsibilities.
Commenters had mixed views concerning when the rule should require an
Operating Advisor and whether the Operating Advisor should play an active role while
the third-party purchaser is the “controlling class.” There was a comment supporting the
proposed requirement that an Operating Advisor be included when the third-party
purchaser is affiliated with and controls the special servicing function of the transaction.
Some commenters supported the inclusion of an Operating Advisor in all CMBS
transactions. Other commenters supported a dormant role for the Operating Advisor
while the third-party purchaser was the “controlling class,” and the Operating Advisor’s
power would be triggered when such purchaser was no longer the controlling class
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(typically when the third-party purchaser’s interest is reduced to less than 25 percent of
its original principal balance after taking into account appraisal reductions). Some of
these commenters asserted that the introduction of an Operating Advisor may support the
interests of the senior investors at the expense of the third-party purchaser, thereby
adversely affecting the willingness of third-party purchasers to assume the risk retention
obligations. Further, commenters stated that the Operating Advisor would add layers of
administrative burden on an already highly structured CMBS framework and make
servicing and workouts for the underlying loans more difficult and expensive, thereby
reducing returns. Finally, some commenters stated that oversight is unnecessary while
the third-party purchaser continues to have an economic stake in the transaction because
third-party purchasers are highly incentivized to discharge their servicing duties in a
manner that maximizes recoveries. One of these commenters noted that this is its current
approach and is working to the satisfaction of both investment grade investors and thirdparty purchasers. Some commenters recommended a framework whereby the Operating
Advisor would be involved immediately but its role would depend on whether the thirdparty purchaser was the controlling class.
Additionally, some commenters specifically requested that the Operating
Advisor’s authority apply only to the special servicer (instead of all servicers as
originally proposed) for three reasons. First, the special servicer has authority or consent
rights with respect to all material servicing actions and defaulted loans, whereas the
master servicer has very little discretion because its servicing duties are typically set forth
in detail in the pooling and servicing agreement and its authority to modify loans is
limited. Moreover, any control right held by a third-party purchaser with respect to
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servicing is typically exercised through the special servicer and the third-party purchaser
does not generally provide any direct input into master servicer decisions.
Second, the B-piece termination right is another structural feature of CMBS
transactions that applies to special servicers but not to master servicers. The third-party
purchaser’s right to terminate and replace the special servicer without cause is one
method of control by the third-party purchaser over special servicing. The master
servicer, however, is not subject to this termination without cause. The master servicer
typically can be terminated by the trustee only upon the occurrence of one of the
negotiated events of default with respect to the master servicer. In the event of such a
default, holders of ABS evidencing a specified percentage of voting rights (25 percent in
many deals) of all certificates can direct the trustee to take such termination action.
Third, an Operating Advisor’s right to remove the master servicer may be
problematic for the master servicer’s servicing rights assets. Master servicers usually
purchase their servicing rights from the sponsors in the securitization and these rights
retain an ongoing value. Therefore, any termination rights beyond those based on
negotiated events of default jeopardize the value of the master servicer’s servicing asset.
Based on comments received, the agencies acknowledge that third-party
purchasers often are, or are affiliated with, the special servicers in CMBS transactions.
Because of this strong connection between third-party purchasers and the special
servicing rights in CMBS transactions, the agencies are proposing to limit application of
the Operating Advisor provisions to special servicers, rather than any affiliated servicers
as originally proposed in the original proposal. Consequently, the agencies are also
proposing a revised CMBS option to require as a separate condition the appointment of
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an Operating Advisor in all CMBS transactions that rely on the CMBS risk retention
option.
As stated in the original proposal, the agencies believe that the introduction of an
independent Operating Advisor provides a check on third-party purchasers by limiting
the ability of third-party purchasers to manipulate cash flows through special servicing.
In approving loans for inclusion in the securitization, third-party purchasers ideally will
be mindful of the limits on their ability to offset the consequences of poor underwriting
through servicing tactics if loans become troubled, thereby providing a stronger incentive
for third-party purchasers to be diligent in assessing the credit quality of pool assets at the
time of securitization. Because the agencies are proposing that an Operating Advisor be
required for all CMBS transactions relying on the CMBS option, the prohibition on thirdparty purchasers having control rights related to servicing is no longer necessary and has
been removed.
(3) Operating Advisor Independence
The original proposal would have prohibited the Operating Advisor from being
affiliated with any party to the transaction and from having, directly or indirectly, any
financial interest in the transaction other than its fees from its role as Operating Advisor.
An investor commenter supported complete independence for the Operating
Advisor, reasoning that the Operating Advisor should not in any way be conflicted when
representing all holders of ABS. Other commenters did not support the independence
criteria, instead proposing to rectify any conflicts of interest through disclosure. One of
these commenters commented that it would be counter-productive to preclude current
Operating Advisors from serving in that capacity in the future, as such a framework
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would leave only smaller firms with little or no experience as the only eligible candidates
and could result in diminution of available investment capital. Independence concerns
should instead be addressed by the Operating Advisor’s disclosure at the time it initiates
proceedings to replace a special servicer, of whether the Operating Advisor has any
conflicts of interest.
Consistent with the original proposal, the CMBS option in the proposed rule
would require that the Operating Advisor not be affiliated with other parties to the
securitization transaction. Also consistent with the original proposal, the Operating
Advisor would be prohibited from having, directly or indirectly, any financial interest in
the securitization transaction other than fees from its role as Operating Advisor and
would be required to act in the best interest of, and for the benefit of, investors as a
collective whole. As stated above, the agencies believe that an independent Operating
Advisor is a key factor in providing a check on third-party purchasers and special
servicers, thereby protecting investors’ interests.
(4) Qualifications of the Operating Advisor
In the original proposal, the agencies did not propose qualifications for the
Operating Advisor other than independence from other parties to the securitization
transaction.
One commenter recommended that the final rule include eligibility requirements
for Operating Advisors, such as requiring an Operating Advisor to have an existing
servicing platform (not necessarily rated); have at least 25 full time employees; have at
least $25 million in capital; and have some metric for assuring that the Operating Advisor
will have an ongoing real estate market presence and the in-house expertise necessary to
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effectively carry out their responsibilities. Another commenter requested clarification
regarding the qualifications of an Operating Advisor but did not expressly advocate for or
against particular qualifications.
Based in part on comments received, the agencies are proposing certain general
qualifications for the Operating Advisor. Under the proposed rule, the underlying
transaction documents must provide for standards with respect to the Operating Advisor’s
experience, expertise and financial strength to fulfill its duties and responsibilities under
the applicable transaction documents over the life of the securitization transaction.
Additionally, the transaction documents must describe the terms of the Operating
Advisor’s compensation with respect to the securitization transaction.
The agencies do not believe it is necessary to mandate specific minimum levels of
experience, expertise and financial strength for Operating Advisors in CMBS transactions
relying on the CMBS option. Rather, the agencies believe that CMBS transaction parties
should be permitted to establish Operating Advisor qualification standards and
compensation in each transaction. By requiring disclosure to investors of such
qualification standards, how an Operating Advisor satisfies such standards, and the
Operating Advisor’s related compensation, the proposed rule provides investors with an
opportunity to evaluate the Operating Advisor’s qualifications and compensation in the
relevant transaction.
(5) Role of the Operating Advisor
Under the original proposal, the duties of the Operating Advisor were generally to
(1) act in the best interest of investors as a collective whole, (2) require the servicer for
the securitized assets to consult with the Operating Advisor in connection with, and prior
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to, any major decision in connection with servicing, which would include any material
loan modification and foreclosures and acquisitions of properties, and (3) review the
actions of the affiliated servicer and report to investors and the issuing entity on a
periodic basis.
With respect to the role of the Operating Advisor in the original proposal,
comments were mixed. Investor commenters generally supported the consultative role
given to Operating Advisors under the original proposal. Issuers and industry association
commenters did not support such role and believed that the powers granted to the
Operating Advisor under the original proposal were too broad. In particular, these
commenters generally did not support the proposed requirement that the servicer consult
with the Operating Advisor prior to any major servicing decision.
Another commenter recommended a framework such that after the change-incontrol event (that is, when the B-piece position is reduced to less than 25 percent of its
original principle balance), the Operating Advisor’s role would be that of a monitoring
role and investigate claims of special servicer noncompliance when initiated by a
specified percentage of investors, and provide its findings on a regular basis to CMBS
investors, the sponsor and the servicers.
A trade association commenter, supported by two other commenters, preferred an
approach in which the Operating Advisor’s role would be reactive while the third-party
purchaser is the controlling class, and become proactive when the third-party purchaser is
no longer the controlling class. Under this commenter’s approach, the rule would
provide that the third-party purchaser is no longer in control if the sum of principal
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payments, appraisal reductions and realized losses have reduced the third-party
purchaser’s initial positions to less than 25 percent of its original face amount.
Consistent with the original proposal, the proposed rule would require
consultation with the Operating Advisor in connection with, and prior to, any major
investing decision in connection with the servicing of the securitized assets. However,
based on comments received, the consultation requirement only applies to special
servicers and only takes effect once the eligible horizontal residual interest held by thirdparty purchasers in the transaction has a principal balance of 25 percent or less of its
initial principal balance.
(6) Operating Advisor’s Evaluation of Servicing Standards
The original proposal would have included a requirement that the Operating
Advisor be responsible for reviewing the actions of any affiliated servicer and issue a
report evaluating whether the servicer is operating in compliance with any standard
required of the servicer, as provided in the applicable transaction documents.
One trade association commenter recommended that the rule establish the
standard by which the Operating Advisor evaluates the special servicer. It stated that one
such standard would be to include language in the pooling and servicing agreement or
similar transaction document that would require the special servicer to maximize the net
present value of the loan without consideration of the impact of such action on any
specific class of ABS. However, as this trade association was unsupportive of requiring
the servicer to consult with the Operating Advisor prior to any material workout, it also
stated that an alternative to actually including the servicing standard would be for the
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Operating Advisor to monitor all loan workouts and, if the special servicer is not meeting
the stated standard, the Operating Advisor could then take the appropriate action.
The agencies are proposing that the CMBS option require the Operating Advisor
to have adequate and timely access to information and reports necessary to fulfill its
duties under the transaction documents. Further, the proposed rule would require the
Operating Advisor to be responsible for reviewing the actions of the special servicer,
reviewing all reports made by the special servicer to the issuing entity, reviewing for
accuracy and consistency calculations made by the special servicer within the transaction
documents, and issuing a report to investors and the issuing entity on special servicer’s
performance.
(7) Servicer Removal Provisions
Under the original proposal, the Operating Advisor would have had the authority
to recommend that a servicer be replaced if it determined that the servicer was not in
compliance with the servicing standards outlined in the transaction documents. This
recommendation would be submitted to investors and would be approved unless a
majority of each class of investors voted to retain the servicer.
Many commenters were of the view that the rule granted too much authority to
the Operating Advisor in regards to the removal of a servicer. As discussed above, many
commenters believed that the Operating Advisor’s authority should only apply to special
servicers. Following on this point, many commenters commented that the special
servicer should be removed only upon the affirmative vote of ABS holders (instead of a
negative vote as originally proposed).
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One commenter suggested that the special servicer removal process should be
negotiated among the CMBS transaction parties and specified in the pooling and
servicing agreement or similar transaction document. In this scenario, the special
servicer would have the opportunity to explain its conduct, the Operating Advisor would
be required to publicly explain its rationale for recommending special servicer removal,
and investors in non-controlling classes would vote in the affirmative for special servicer
removal. Another commenter proposed that an Operating Advisor’s recommendation to
remove a special servicer would have to be approved by two-thirds of all ABS holders
voting as a whole, or through an arbitration mechanism. Another commenter proposed
that a minimum of 5 percent of all ABS holders based on par dollar value of holdings be
required for quorum, and decisions would be adopted with the support of a simple
majority of the dollar value of par of quorum. Another commenter advocated removal
only after the third-party purchaser is no longer the controlling class.
After considering comments that the servicer removal provision should only apply
to special servicers, the agencies are proposing that the Operating Advisor’s authority to
recommend removal and replacement would be limited to special servicers.
Additionally, based on comments received, the agencies are proposing that the actual
removal of the special servicer would require the affirmative vote of a majority of the
outstanding principal balance of all ABS interests voting on the matter, and require a
quorum of 5 percent of the outstanding principal balance of all ABS interests.
Because of the agencies’ belief that the introduction of an independent Operating
Advisor provides a check on third-party purchasers by limiting the ability of third-party
purchasers to manipulate cash flows through special servicing, the agencies believe that
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the removal of the special servicer should be independent of whether the third-party
purchaser is the controlling class in the securitization transaction or similar
considerations. The proposed affirmative majority vote and quorum requirements are
designed to provide additional protections to investors in this regard.
c. Disclosures
Under the original proposal, the sponsor would have been required to provide, or
cause to be provided, to potential purchasers and federal supervisors certain information
concerning the third-party purchaser and other information concerning the CMBS
transaction, such as the third-party purchaser’s name, the purchaser’s experience
investing in CMBS, and any other material information about the third-party purchaser
deemed material to investors in light of the particular securitization transaction.
Additionally, a sponsor would have been required to disclose to investors the
amount of the eligible horizontal residual interest that the third-party purchaser will retain
(or has retained) in the transaction (expressed as a percentage of the fair value of all ABS
interests issued in the securitization transaction and the dollar amount of the fair value of
such ABS interests); the purchase price paid for such interest; the material terms of such
interest; the amount of the interest that the sponsor would have been required to retain if
the sponsor had retained an interest in the transaction; the material assumptions and
methodology used in determining the aggregate amount of ABS interests of the issuing
entity; and certain information about the representations and warranties concerning the
securitized assets.
While commenters generally supported the proposed disclosure requirements,
many commenters raised concerns about specific portions of these requirements.
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Under the original proposal, the sponsor would have been required to disclose to
investors the name and form of organization of the third-party purchaser as well as a
description of the third-party purchaser’s experience in investing in CMBS. The original
proposal also solicited comment as to whether disclosure concerning the financial
resources of the third-party purchaser would be necessary in light of the requirement that
the third-party purchaser fund the acquisition of the eligible horizontal residual interest in
cash, without direct or indirect financing from a party to the transaction. Some
commenters supported these proposed requirements, while others did not.
Under the original proposal, a third-party purchaser would have been required to
disclose the actual purchase price paid for the retained residual interest. Several
commenters did not support requiring purchase price disclosure. These commenters
noted that price disclosure raises confidentiality concerns and could reveal the
purchaser’s price parameters to its competitors. These commenters provided suggestions
for maintaining the confidentiality of such information or alternatives to actual disclosure
of prices paid.
Under the original proposal, sponsors would have been required to disclose to
investors the material assumptions and methodology used in determining the aggregate
amount of ABS interests issued by the issuing entity, including those pertaining to any
estimated cash flows and the discount rate used. One commenter did not support
requiring this disclosure and believed that such disclosure would be irrelevant in CMBS
transactions in that the principal balance of the certificates sold to investors would equal
the aggregate initial principal balance of the mortgage loans, and CMBS transactions did
not utilize overcollateralization (as is the case with covered bonds and other structures).
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Under the original proposal, the sponsor would have been required to disclose the
representations and warranties concerning the assets, a schedule of exceptions to these
representations and warranties, and what factors were used to make the determination
that such exceptions should be included in the pool even though they did not meet the
representations and warranties.
One commenter agreed that loan-by-loan exceptions should be disclosed but did
not comment on whether the disclosure of subjective factors disclosure should be
required. This commenter also advocated for a standardized format of disclosure of
representations and warranties. Another commenter noted that in recent CMBS
transactions, all representations and warranties and all exceptions thereto are fully
disclosed. Two commenters were unsupportive of requiring disclosure of why exceptions
were allowed into the pool because they stated that such determinations are often
qualitative and the benefit of such disclosure would be outweighed by the burden
imposed on the issuer. The original proposal also requested comment on whether the rule
should require that a blackline of the representations and warranties for the securitization
transaction against an industry-accepted standard for model representations and
warranties be provided to investors at a reasonable time prior to sale. One commenter
noted that it was unnecessary to require that investors be provided with a blackline so
long as the representations and warranties are themselves disclosed.
The original proposal requested comment on whether the rule should specify the
particular types of information about a third-party purchaser that should be disclosed,
rather than requiring disclosure of any other information regarding the third-party
purchaser that is material to investors in light of the circumstances of the particular
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securitization transaction. One investor commenter generally supported requiring
disclosure of any other information regarding the purchaser that is material to investors in
light of the circumstances. A few commenters were unsupportive of this disclosure
requirement. One commenter stated that there should be a safe harbor for the types of
information about the third-party purchaser and that requiring this material information
disclosure is too broad. Another commenter stated that disclosure of “material
information” is already required under existing disclosure rules.
The agencies are proposing disclosure requirements for the CMBS option
substantially consistent with the original proposal. The agencies have carefully
considered the concerns raised by commenters, but believe that the importance of the
proposed disclosures to investors with respect to third-party purchasers, the retained
residual interest (including the purchase price), the material terms of the eligible
horizontal residual interest retained by each third-party purchaser (including the key
inputs and assumptions used in measuring the total fair value of all classes of ABS
interests, and the fair value of the eligible horizontal residual interest), and the
representations and warranties concerning the securitized assets, outweigh any issues
associated with the sponsor or third-party purchaser to making such information
available.
The agencies are also proposing again to require disclosure of the material terms
of the applicable transaction documents with respect to the Operating Advisor, including
without limitation, the name and form of organization of the Operating Advisor, the
qualification standards applicable to the Operating Advisor and how the Operating
Advisor satisfies these standards, and the terms of the Operating Advisor’s compensation.
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d. Transfer of B-Piece
As discussed above, consistent with the original proposal, the proposed rule
would allow a sponsor of a CMBS transaction to meet its risk retention requirement
where a third-party purchaser acquires the B-piece, and all other criteria and conditions of
the proposed requirements for this option as described are met.
Under the original proposal, the sponsor or, if an eligible third-party purchaser
purchased the B-piece, the third-party purchaser, would have been required to retain the
required eligible horizontal residual interest for the full duration of the securitization
transaction. Numerous commenters urged that this proposal be changed to allow transfer
of the B-piece prior to the end of the securitization transaction. Some of the commenters
making this recommendation requested a specified termination point (or “sunset”) for the
CMBS risk retention requirement. Other commenters recommended that third-party
purchasers be permitted to transfer the retained interest to other third-party purchasers,
either immediately or after a maximum waiting period of one year. Some commenters
proposed that there be both an overall sunset period for any risk retention requirement
and that, prior to the end of that period, transfers between qualified third-party purchasers
be permitted.
Several commenters asserted that permitting transfers by third-party purchasers
was critical to the continuation of the third-party purchaser structure for CMBS
transactions. Another commenter, a securitization sponsor, stated that the transfer
restrictions included in the original proposal would undermine the effectiveness of the
CMBS option because some investors could not (due to fiduciary or contractual
obligations) or did not desire to invest where such restrictions would be imposed. A
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broker-dealer commenter stated that it was crucial for the rules to give third-party
purchasers some ability to sell the B-piece to qualified transferees because third-party
purchasers or their investors would not be able to agree to a prohibition on the sale of the
B-piece investment for the entire life of the transaction.
Commenters that advocated a sunset for CMBS risk retention generally requested
that it occur after two-to-five years. Commenters that requested permitted transfers to a
qualified third-party purchaser by the original B-piece holder prior to the end of the risk
retention requirement advocated that there be no minimum retention period by the
original B-piece holder, while one commenter suggested a one-year initial retention
period.
Certain commenters contended that the restrictions of the original proposal were
not necessary to promote good underwriting and that permitting transfer of the B-piece
prior to the end of the securitization transaction would be warranted because after a
certain amount of time, performance of the underlying commercial mortgages is
dependent more on economic conditions rather than an underwriting requirement. One
industry group stated that three years would be sufficient to provide all securitization
participants the opportunity to determine the quality of underwriting, arguing that after a
three-year period, deficient underwriting or other performance factors would be reflected
in the sale price of the retained interest.
Some of the commenters that recommended permitting transfers to qualified
third-party purchasers suggested additional conditions, such as that the third-party
purchaser also be a qualified institutional buyer or accredited investor for purposes of the
Securities Act of 1933, or that the transferee certify that it had performed the same due
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diligence and had the same access to information as the original third-party purchaser.
One commenter suggested that qualified institutional buyer or accredited investor status
alone should cause an entity to qualify as a qualified transferee of a third-party purchaser.
The agencies have considered the points raised by commenters on the original
proposal with respect to transferability of the B-piece and believe, for the reasons
discussed further below, that limited transfers prior to the end of the securitization
transaction are warranted. The agencies are therefore proposing, as an exception to the
transfer and hedging restrictions of the proposed rule and section 15G of the Exchange
Act, to permit the transfer of the retained interest by any initial third-party purchaser to
another third-party purchaser at any time after five years after the date of the closing of
the securitization transaction, provided that the transferee satisfies each of the conditions
applicable to the initial third-party purchaser under the CMBS option (as described
above) in connection with such purchase. The proposed rule also would permit transfers
by any such subsequent third-party purchaser to any other purchaser satisfying the criteria
applicable to initial third-party purchasers. In addition, in the event that the sponsor
retained the B-piece at closing, the proposed rule would permit the sponsor to transfer
such interest to a purchaser satisfying the criteria applicable to third-party purchasers
after a five-year period following the closing of the securitization transaction has expired.
The proposed rule would require that any transferring third-party purchaser provide the
sponsor with complete identifying information as to the transferee third-party purchaser.
In considering the comments and formulating the revised proposed rule, the
agencies attempted to balance two overriding goals: (1) not disrupting the existing CMBS
third-party purchaser structure, and (2) ensuring that risk retention promotes good
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underwriting. The agencies followed the analysis of the commenters who asserted that,
after a five year period, the quality of the underwriting would be sufficiently evident that
the initial third-party purchaser or, if there was no initial third-party purchaser, the
sponsor would suffer the consequences of poor underwriting in the form of a reduced
sales price for such interest. The agencies also believe that the initial holder of the Bpiece, whether a third-party purchaser or the sponsor, would need to assume that
retention for a five-year period would result in such holder bearing the consequences of
poor underwriting and, thus, that by permitting transfer after the five year period the
agencies would not be creating a structure which resulted in the initial holder being less
demanding of the underwriting than if it was required to retain the B-piece until the full
sunset period applicable to CMBS securitizations had expired. In connection with this,
the requirement (among other conditions) that a subsequent purchaser, like the initial
third-party purchaser, conduct an independent review of the credit risk of each securitized
asset was important to the agencies, as this requirement would emphasize to the initial Bpiece holder that the performance of the securitized assets would be scrutinized by any
potential purchaser, thus exposing the initial purchaser to the full risks of poor
underwriting.
The standards for the Federal banking agencies to provide exemptions to the risk
requirements and prohibition on hedging are outlined in section 941(e) of the Dodd-Frank
Act. The exemption described above would allow third-party purchasers and sponsors to
transfer a horizontal risk retention interest after a five year period to sponsors or thirdparty purchasers that meet the same standards. The agencies believe that under 15 U.S.C.
§ 78o-11(e)(2), a five-year retention duration helps ensure high underwriting standards
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for the securitizers and originators of assets that are securitized or available for
securitization by forcing sponsors or initial third-party purchasers to absorb a significant
portion of losses related to underwriting deficiencies. Furthermore, the agencies believe
that this exemption would meet the statute’s requirement that the exemption encourage
appropriate risk management practices by the securitizers and originators of assets,
improve the access of consumers and businesses to credit on reasonable terms, or
otherwise is in the public interest and for the protection of investors. By limiting the risk
retention requirement for CMBS to five years rather than the entire duration of the
underlying assets, the agencies are responding to commenters’ concerns that lifetime
retention requirements would eliminate B-piece buyers’ ability to participate in the
CMBS market, and without their participation, market liquidity for commercial
mortgages would be severely impacted. The proposed approach of requiring the thirdparty purchaser to hold for at least five years accommodates continuing participation of
B-piece buyers in the market, in a way that still requires meaningful risk retention as an
incentive to good risk management practices by securitizers in selecting assets, and
addressing specific concerns about maintaining consumers’ and businesses’ access to
commercial mortgage credit.
The agencies have not adopted the recommendations made by several
commenters that transfers to qualified third-party purchasers be permitted with no
minimum holding period or after a one year holding period. The agencies decided that
unless there was a holding period that was sufficiently long to enable underwriting
defects to manifest themselves, the original third-party purchaser might not be
incentivized to insist on effective underwriting of the securitized assets. This, in turn,
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would be in violation of section 941(e)’s requirement that any exemption continue to help
ensure high quality underwriting standards. The agencies are therefore proposing a
period of five years based on the more conservative comments received as to duration of
the CMBS retention period. The agencies believe that permitting transfers to qualifying
third-party purchasers after five years should not diminish in any respect the pressure on
the sponsor to use proper underwriting methods.
Request for Comment
46. Should the period for B-piece transfer be any longer or shorter than five
years? Please provide any relevant data analysis to support your conclusion.
47(a). Should the agencies only allow one third-party purchaser to satisfy the risk
retention requirement? 47(b). Should the agencies consider allowing for more than two
third-party purchasers to satisfy the risk retention requirement?
48(a). Are the third-party qualifying criteria the agencies are proposing
appropriate? 48(b). Why or why not? 48(c). Would a sponsor be able to track the
source of funding for other purposes to determine if funds are used for the purchase of the
B-piece?
49(a). Are the Operating Advisor criteria and responsibilities the agencies are
proposing appropriate? 49(b). Why or why not?
e. Duty to Comply
The original proposal would have required the sponsor of a CMBS transaction to
maintain and adhere to policies and procedures to monitor the third-party purchaser’s
compliance with the CMBS option and to notify investors if the sponsor learns that the
third-party purchaser no longer complies with such requirements.
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Several commenters criticized the proposed monitoring obligations because they
believed that such monitoring would not be feasible for a sponsor, especially the
restriction on hedging. Some commenters proposed alternatives, such as making the
Operating Advisor responsible for compliance by the third-party purchaser or using
contractual representations and warranties and covenants to ensure compliance.
Another commenter suggested that the pooling and servicing agreement or similar
transaction document set forth a dispute resolution mechanism for investors, including
the ability of investors to demand an investigation of possible noncompliance by the
special servicer upon request from a specified percentage of ABS and how the costs of
resulting investigations would be borne and that independent parties would perform such
investigations.
The agencies have considered these comments but continue to believe that it is
important for the sponsor to monitor third-party purchasers. A transfer of risk to a thirdparty purchaser is not, under the agencies’ view of the risk retention requirement, a
transfer of the sponsor’s general obligation to satisfy the requirement. Although the
proposal allows third-party purchasers to retain the required eligible horizontal residual
interest, the agencies believe that the sponsor of the CMBS transaction should ultimately
be responsible for compliance with the requirements of the CMBS option, rather than
shifting the obligation to the third-party purchaser or Operating Advisor, as some
commenters on the original proposal suggested, by requiring certifications or
representations and warranties. Additionally, the agencies are not proposing a specific
requirement that the pooling and servicing agreement or similar transaction document
include dispute resolution provisions because the agencies believe that most investor
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disputes, particularly disputes related to possible noncompliance by the special servicer,
will be resolved through the proposed Operating Advisor process. However, this is not
intended to limit investors and other transaction parties from continuing to include
negotiated rights and remedies in CMBS transaction documents, including dispute
resolution provisions in addition to the proposed Operating Advisor provisions.
Accordingly, the agencies are proposing the same monitoring and notification
requirements as under the original proposal with no modifications. The sponsor would be
required to maintain policies and procedures to actively monitor the third-party
purchaser’s compliance with the requirements of the rule and to notify (or cause to be
notified) ABS holders in the event of any noncompliance with the rule.
6. Government-Sponsored Enterprises
a. Overview of Original Proposal and Public Comment
In the original proposal, the agencies proposed that the guarantee (for timely
payment of principal and interest) by the Enterprises while they operate under the
conservatorship or receivership of FHFA with capital support from the United States
would satisfy the risk retention requirements of section 15G of the Exchange Act with
respect to the mortgage-backed securities issued by the Enterprises. Similarly, an
equivalent guarantee provided by a limited-life regulated entity that has succeeded to the
charter of an Enterprise, and that is operating under the authority and oversight of FHFA
under section 1367(i) of the Federal Housing Enterprises Financial Safety and Soundness
Act of 1992, would satisfy the risk retention requirements, provided that the entity is
operating with capital support from the United States. The original proposal also
provided that the hedging and finance provisions would not apply to an Enterprise while
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operating under conservatorship or receivership with capital support from the United
States, or to a limited-life regulated entity that has succeeded to the charter of an
Enterprise and is operating under the authority and oversight of FHFA with capital
support from the United States. Under the original proposal, a sponsor (that is, the
Enterprises) utilizing this option would have been required to provide to investors, in
written form under the caption “Credit Risk Retention” and, upon request, to FHFA and
the Commission, a description of the manner in which it met the credit risk retention
requirements.
As the agencies explained in the original proposal, if either an Enterprise or a
successor limited-life regulated entity began to operate other than as described, the
Enterprise or successor entity would no longer be able to avail itself of the credit risk
retention option provided to the Enterprises and would have become subject to the related
requirements and prohibitions set forth elsewhere in the proposal.
In the original proposal, the agencies explained what factors they took into
account regarding the treatment of the Enterprises while they were in conservatorship or
receivership with capital support from the United States. 75 First, the agencies observed
that because the Enterprise fully guaranteed the timely payment of principal and interest
on the mortgage-backed securities they issued, the Enterprises were exposed to the entire
credit risk of the mortgages that collateralize those securities. The agencies also
highlighted that the Enterprises had been operating under the conservatorship of FHFA
since September 6, 2008, and that as conservator, FHFA had assumed all powers
75
See Original Proposal, 76 FR at 24111-24112.
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formerly held by each Enterprise’s officers, directors, and shareholders and was directing
its efforts as conservator toward minimizing losses, limiting risk exposure, and ensuring
that the Enterprises priced their services to adequately address their costs and risk.
Finally, the agencies described how each Enterprise, concurrent with being placed in
conservatorship, entered into a Senior Preferred Stock Purchase Agreement (PSPA) with
the United States Department of the Treasury (Treasury) and that the PSPAs provided
capital support to the relevant Enterprise if the Enterprise’s liabilities had exceeded its
assets under GAAP. 76
The agencies received a number of comments on the original proposal with
respect to the Enterprises, including comments from banks and other financial businesses,
trade organizations, public interest and public policy groups, members of Congress and
individuals. A majority of the commenters supported allowing the Enterprises’ guarantee
to be an acceptable form of risk retention in accordance with the original proposal.
76
Under each PSPA as amended, Treasury purchased senior preferred stock of each
Enterprise. In exchange for this cash contribution, the liquidation preference of the
senior preferred stock that Treasury purchased from the Enterprise under the respective
PSPA increases in an equivalent amount. The senior preferred stock of each Enterprise
purchased by Treasury is senior to all other preferred stock, common stock or other
capital stock issued by the Enterprise.
Treasury’s commitment to each Enterprise is the greater of: (1) $200 billion; or (2) $200
billion plus the cumulative amount of the Enterprise’s net worth deficit as of the end of
any calendar quarter in 2010, 2011 and 2012, less any positive net worth as of December
31, 2012. Under amendments to each PSPA signed in August 2012, the fixed-rate
quarterly dividend that each Enterprise had been required to pay to Treasury was
replaced, beginning on January 1, 2013, with a variable dividend based on each
Enterprise’s net worth, helping to ensure the continued adequacy of the financial
commitment made under the PSPA and eliminating the need for an Enterprise to borrow
additional amounts to pay quarterly dividends to Treasury. The PSPAs also require the
Enterprises to reduce their retained mortgage portfolios over time.
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Many of the comments that supported the original proposal noted that the capital
support by the United States government, coupled with the Enterprises’ guarantee,
equated to 100 percent risk retention by the Enterprises. Others believed the treatment of
the Enterprises in the original proposal was important to support the mortgage market and
to ensure adequate credit in the mortgage markets, especially for low down payment
loans. One commenter representing community banks stated that, without the provision
for the Enterprises in the original proposal, many community banks would have difficulty
allocating capital to support risk retention and, by extension, continued mortgage activity.
A few commenters specifically supported the original proposal’s exception for the
Enterprises from the prohibitions on hedging. These commenters asserted that preventing
the Enterprise from hedging would be unduly burdensome, taking into consideration the
100 percent guarantee of the Enterprises, while other sponsors would only be required to
meet a 5 percent risk retention requirement. At least one commenter noted that applying
the hedging prohibition to the Enterprises could have negative consequences for
taxpayers, given the capital support from the United States.
A number of the commenters said that, even though they supported the original
proposal, they believed that it could create an advantage for the Enterprises over private
lenders. These commenters recommended that the agencies adopt a broader definition
for QRM to address any potential disadvantages for private lenders, rather than change
the risk retention option proposed for the Enterprises. 77
77
The comments that relate to the QRM definition are addressed in Part VI of this
Supplementary Information, which discusses the proposed QRM definition.
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Those commenters that opposed the treatment of the Enterprises in the original
proposal generally believed that it would provide the Enterprises with an unfair
advantage over private capital, and asserted that it would be inconsistent with the intent
of section 15G of the Exchange Act. Many of these commenters stated that this aspect of
the original proposal, if adopted, would prevent private capital from returning to the
mortgage markets and would otherwise make it difficult to institute reform of the
Enterprises. One commenter believed the original proposal interfered with free market
competition and placed U.S. government proprietary interests ahead of the broader
economic interests of the American people. Other comments suggested that the original
proposal’s treatment of the Enterprises could have negative consequences for taxpayers.
b. Proposed Treatment
The agencies have carefully considered the comments received with respect to the
original proposal’s provision for the Enterprises. While the agencies understand the
issues involved with the Enterprises’ participation in the mortgage market, the agencies
continue to believe that it is appropriate, from a public policy perspective, to recognize
the guarantee of the Enterprises as fulfilling their risk retention requirement under section
15G of the Exchange Act, while in conservatorship or receivership with the capital
support of the United States. The authority and oversight of the FHFA over the
operations of the Enterprises or any successor limited-life regulated entity during a
conservatorship or receivership, 78 the full guarantee provided by these entities on the
78
In this regard, FHFA is engaged in several initiatives to contract the Enterprises
presence in the mortgage markets, including increasing and changing the structure of the
guarantee fees charged by the Enterprises and requiring the Enterprises to develop risksharing transactions to transfer credit risk to the private sector. See, e.g., FHFA 2012
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timely payment of principal and interest on the mortgage-backed securities that they
issue, and the capital support provided by Treasury under the PSPAs 79 provide a
reasonable basis consistent with the goals and intent of section 15G for recognizing the
Enterprise guarantee as meeting the Enterprises’ risk retention requirement.
Accordingly, the agencies are now proposing the same treatment for the
Enterprises as under the original proposal, without modification. Consistent with the
original proposal, if any of the conditions in the proposed rule cease to apply, the
Enterprises or any successor organization would no longer be able to rely on its guarantee
to meet the risk retention requirement under section 15G of the Exchange Act and would
need to retain risk in accordance with one of the other applicable sections of this risk
retention proposal.
For similar reasons, the restrictions and prohibitions on hedging and transfers of
retained interests in the proposal (like the original proposal) would not apply to the
Enterprises or any successor limited-life regulated entities, as long as the Enterprise (or,
as applicable, successor entity) is operating consistent with the conditions set out in the
rule. In the past, the Enterprises have sometimes acquired pool insurance to cover a
percentage of losses on the mortgage loans comprising the pool. 80 FHFA also has made
risk-sharing through a variety of alternative mechanisms to be a major goal of its
Annual Report to Congress, at 7 -11 (June 2013), available at www.FHFA.gov (FHFA
2012 Report).
79
By its terms, a PSPA with an Enterprise may not be assigned, transferred, inure to the
benefit of, any limited-life, regulated entity established with respect to the Enterprise
without the prior written consistent of Treasury.
80
Typically, insurers would pay the first losses on a pool of loans, up to 1 or 2 percent of
the aggregate unpaid principal balance of the pool.
139
Strategic Plan for the Enterprise Conservatorships. 81 Because the proposed rule would
require each Enterprise, while in conservatorship or receivership, to hold 100 percent of
the credit risk on mortgage-backed securities that it issues, the prohibition on hedging in
the proposal related to the credit risk that the retaining sponsor is required to retain would
limit the ability of the Enterprises to require such pool insurance in the future or take
other reasonable actions to limit losses that would otherwise arise from the Enterprises’
100 percent exposure to the credit risk of the securities that they issue. Because the
proposal would apply only so long as the relevant Enterprise operates under the authority
and control of FHFA and with capital support from the United States, the agencies
continue to believe that the proposed treatment of the Enterprises as meeting the risk
retention requirement of section 15G of the Exchange Act should be consistent with the
maintenance of quality underwriting standards, in the public interest, and consistent with
the protection of investors. 82
As explained in the original proposal and noted above, the agencies recognize
both the need for, and importance of, reform of the Enterprises, and expect to revisit and,
if appropriate, modify the proposed rule after the future of the Enterprises and of the
statutory and regulatory framework for the Enterprises becomes clearer.
7. Open Market Collateralized Loan Obligations
a. Overview of Original Proposal and Public Comment
In the original proposal, the agencies observed that, in the context of CLOs, the
CLO manager generally acts as the sponsor by selecting the commercial loans to be
81
See, e.g., FHFA 2012 Report at 7 -11.
82
See Original Proposal, 76 FR at 24112.
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purchased by the CLO issuing entity (the special purpose vehicle that holds the CLO’s
collateral assets and issues the CLO’s securities) and then manages the securitized assets
once deposited in the CLO structure. 83 Accordingly, the original proposal required the
CLO manager to satisfy the minimum risk retention requirement for each CLO
securitization transaction that it manages. The original proposal did not include a form of
risk retention designed specifically for CLO securitizations. Accordingly, CLO managers
generally would have been required to satisfy the minimum risk retention requirement by
holding a sufficient amount of standard risk retention in horizontal, vertical, or L-shaped
form.
Many commenters, including several participants in CLOs, raised concerns
regarding the impact of the proposal on certain types of CLO securitizations, particularly
CLOs that are securitizations of commercial loans originated and syndicated by third
parties and selected for purchase on the open market by asset managers unaffiliated with
the originators of the loans (open market CLOs). Some commenters asserted that most
asset management firms currently serving as open market CLO managers do not have the
balance sheet capacity to fund 5 percent horizontal or vertical slices of the CLO. Thus,
they argued, imposing standard risk retention requirements on these managers could
cause independent CLO managers to exit the market or be acquired by larger firms,
thereby limiting the number of participants in the market and raising barriers to entry.
According to these commenters, the resulting erosion in market competition could
increase the cost of credit for large, non-investment grade companies represented in CLO
83
See id. at 24098 n. 42.
141
portfolios above the level that would be consistent with the credit quality of these
companies.
Certain commenters also asserted that open market CLO managers are not
“securitizers” under section 15G of the Exchange Act. These commenters argued that
because the CLO managers themselves would never legally own, sell, or transfer the
loans that comprised the CLO’s collateral pool, but only direct which assets would be
purchased by the CLO issuing entity, they should not be “securitizers” as defined in
section 15G. Thus, these commenters argued that the agencies’ proposal to impose a
sponsor’s risk retention requirement on open market CLO managers is contrary to the
statute. 84
One commenter argued that CLO underwriters (typically investment banks) are
“securitizers” for risk retention purposes and agent banks of the underlying loans are
“originators.” This commenter noted that the CLO underwriter typically finances the
accumulation of most of the initial loan assets until the CLO securities are issued.
According to this commenter, the CLO manager selects the loans, but the CLO
underwriter legally transfers them and takes the market value risk of the accumulating
loan portfolio should the CLO transaction fail to close. However, other commenters
argued that no party within the open market CLO structure constitutes a “securitizer”
under section 15G. These commenters stated that they did not view the underwriter as a
“securitizer” because it does not select or manage the loans securitized in a CLO
84
See Part II.A.2 of this Supplementary Information for a discussion of the definition of
“securitizer” under section 15G of the Exchange Act.
142
transaction or transfer them to the issuer. These commenters requested that the agencies
establish an exemption from the risk retention requirement for certain open market CLOs.
In addition to the above comments, a commenter proposed that subordinated
collateral management fees and incentive fees tied to the internal rate of return received
by investors in the CLO’s equity tranche be counted towards the CLO manager’s risk
retention requirement, as receipt of these fees is contingent upon the satisfactory
performance of the CLO and timely payment of interest to CLO bondholders, thereby
aligning the interest of CLO managers and investors.
b. Proposed Requirement
The agencies have considered the concerns raised by commenters with respect to
the original proposal and CLOs. As explained in the original proposal, the agencies
believe that the CLO manager is a “securitizer” under section 15G of the Exchange Act
because it selects the commercial loans to be purchased by the CLO issuing entity for
inclusion in the CLO collateral pool, and then manages the securitized assets once
deposited in the CLO structure. The agencies believe this is consistent with part (B) of
the definition of securitizer which includes “a person who organizes and initiates an
asset-backed securities transaction by selling or transferring assets, either directly or
indirectly, including through an affiliate, to the issuer.” 85 The CLO manager typically
organizes and initiates the transaction as it has control over the formation of the CLO
collateral pool, the essential aspect of the securitization transaction. It also indirectly
85
See 15 U.S.C. 78o-11(a)(3)(B).
143
transfers the underlying assets to the CLO issuing entity typically by selecting the assets
and directing the CLO issuing entity to purchase and sell those assets.
The agencies believe that reading the definition of “securitizer” to include a
typical CLO manager or other collateral asset manager that performs such functions is
consistent with the purposes of the statute and principles of statutory interpretation. The
agencies believe that the text itself supports the interpretation that a CLO manager is a
securitizer because, as explained above, the agencies believe that the CLO manager
organizes and initiates a securitization transaction by indirectly transferring assets to the
issuing entity. However, in the case that any ambiguity exists regarding the statutory
meaning of “transfer” and whether or not it means a legal sale or purchase, the agencies
may look to the rest of the statute, including the context, when interpreting its meaning.
Furthermore, as stated by the Supreme Court, “a statute should be construed so that effect
is given to all its provisions, so that no part will be inoperative or superfluous, void or
insignificant.” 86
It is clear from the statutory text and legislative history of section 15G of the
Exchange Act that Congress intended for risk retention to be held by collateral asset
managers (such as CLO or CDO managers), who are the parties who determine the credit
risk profile of securitized assets in many types of securitization transactions and therefore
should be subject to a regulatory incentive to monitor the quality of the assets they cause
to be transferred to an issuing entity. 87 Additionally, the agencies believe a narrow
86
See, e.g. Corley v. United States, 556 U.S. 303, 129 S.Ct 1558, 1566, 173 L.Ed.2d 443
(2009).
87
S. Rep. No. 111-176 (April 30, 2010).
144
reading could enable market participants to evade the operation of the statute by
employing an agent to select assets to be purchased and securitized. This could
potentially render section 15G of the Exchange Act practically inoperative for any
transaction where this structuring could be achieved, and would have an adverse impact
on competition and efficiency by permitting market participants to do indirectly what
they are prohibited from doing directly.
The agencies also recognize that the standard forms of risk retention in the
original proposal could, if applied to open market CLO managers, result in fewer CLO
issuances and less competition in this sector. The agencies therefore have developed a
revised proposal that is designed to allow meaningful risk retention to be held by a party
that has significant control over the underwriting of assets that are typically securitized in
CLOs, without causing significant disruption to the CLO market. The agencies’ goal in
proposing this alternative risk retention option is to avoid having the general risk
retention requirements create unnecessary barriers to potential open market CLO
managers sponsoring CLO securitizations. The agencies believe that this alternate risk
retention option could benefit commercial borrowers by making additional credit
available in the syndicated loan market.
Under the proposal, an open market CLO would be defined as a CLO whose
assets consist of senior, secured syndicated loans acquired by such CLO directly from
sellers in open market transactions and servicing assets, and that holds less than 50
percent of its assets by aggregate outstanding principal amount in loans syndicated by
lead arrangers that are affiliates of the CLO or originated by originators that are affiliates
of the CLO. Accordingly, this definition would not include CLOs (often referred to as
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“balance sheet” CLOs) where the CLO obtains a majority of its assets from entities that
control or influence its portfolio selection. Sponsors of balance sheet CLOs, would be
subject to the standard risk retention options in the proposed rule because the particular
considerations for risk retention relevant to an open market CLO (as discussed above)
should not affect sponsors of balance sheet CLOs in the same manner. Furthermore, as
commenters on the original proposal indicated, sponsors of balance sheet CLOs should
be able to obtain sufficient support to meet any risk retention requirement from the
affiliate that is the originator of the securitized loans in a balance sheet CLO.
Under the proposal, in addition to the standard options for vertical or horizontal
risk retention, an open market CLO could satisfy the risk retention requirement if the firm
serving as lead arranger for each loan purchased by the CLO were to retain at the
origination of the syndicated loan at least 5 percent of the face amount of the term loan
tranche purchased by the CLO. The lead arranger would be required to retain this portion
of the loan tranche until the repayment, maturity, involuntary and unscheduled
acceleration, payment default, or bankruptcy default of the loan. This requirement would
apply regardless of whether the loan tranche was purchased on the primary or secondary
market, or was held at any particular time by an open market CLO issuing entity.
The sponsor of an open market CLO could presumably negotiate that the lead
arranger of each loan tranche purchased for the CLO portfolio retain a portion of the
relevant loan tranche at origination. However, the sponsors of open market CLOs have
frequently arranged for the purchase of loans in the secondary market as well as from
originators. For purchases on the secondary market, negotiation of risk retention in
connection with such purchases would likely be impractical. Accordingly, the proposal
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contemplates that specific senior, secured term loan tranches within a broader syndicated
credit facility would be designated as “CLO-eligible” at the time of origination if the lead
arranger committed to retain 5 percent of each such CLO-eligible tranche, beginning on
the closing date of the syndicated credit facility.
A CLO-eligible tranche could be identical in its terms to a tranche not so
designated, and could be sized based on anticipated demand by open market CLOs. For
the life of the facility, loans that are part of the CLO-eligible tranche could then trade in
the secondary market among both open market CLOs and other investors. The agencies
acknowledge that this approach may result in the retention by loan originators of risk
associated with assets that are no longer held in securitizations, but have narrowly
tailored this option to eliminate that result as much as possible.
In order to ensure that a lead arranger retaining risk had a meaningful level of
influence on loan underwriting terms, the lead arranger would be required to have taken
an initial allocation of at least 20 percent of the face amount of the broader syndicated
credit facility, with no other member of the syndicate assuming a larger allocation or
commitment. Additionally, a retaining lead arranger would be required to comply with
the same sales and hedging restrictions as sponsors of other securitizations until the
repayment, maturity, involuntary and unscheduled acceleration, payment default, or
bankruptcy default of the loan tranche.
Under the proposal, a lead arranger retaining a “CLO-eligible” loan tranche must
be identified at the time of the syndication of the broader credit facility, and legal
documents governing the origination of the syndicated credit facility must include
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covenants by the lead arranger with respect to satisfaction of requirements described
above.
Voting rights within the broader syndicated credit facility must also be defined in
such a way that holders of the “CLO-eligible” loan tranche had, at a minimum, consent
rights with respect to any waivers and amendments of the legal documents governing the
underlying CLO-eligible loan tranche that can adversely affect the fundamental terms of
that tranche. This is intended to prevent the possible erosion of the economic terms,
maturity, priority of payment, security, voting provisions or other terms affecting the
desirability of the CLO-eligible loan tranche by subsequent modifications to loan
documents. Additionally, the pro rata provisions, voting provisions and security
associated with the CLO-eligible loan tranche could not be materially less advantageous
to the holders of that tranche than the terms of other tranches of comparable seniority in
the broader syndicated credit facility.
Under the proposal, the sponsor of an open market CLO could avail itself of the
option for open market CLOs only if: (1) the CLO does not hold or acquire any assets
other than CLO-eligible loan tranches (discussed above) and servicing assets (as defined
in the proposed rule); (2) the CLO does not invest in ABS interests or credit derivatives
(other than permitted hedges of interest rate or currency risk); and (3) all purchases of
assets by the CLO issuing entity (directly or through a warehouse facility used to
accumulate the loans prior to the issuance of the CLO’s liabilities) are made in open
market transactions. The governing documents of the open market CLO would require,
at all times, that the assets of the open market CLO consist only of CLO-eligible loan
tranches and servicing assets.
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The proposed option for open market CLOs is intended to allocate risk retention
to the parties that originate the underlying loans and that likely exert the greatest
influence on how the loans are underwritten, which is an integral component of ensuring
the quality of assets that are securitized. In developing the proposed risk retention option
for open market CLOs, the agencies have considered the factors set forth in section
15G(d)(2) of the Exchange Act. 88 Section 15G permits the agencies to allow an
originator (rather than a sponsor) to retain the required amount of credit risk and to
reduce the amount of credit risk required of the sponsor by the amount retained by the
originator. 89
The terms of the proposed option for eligible open market CLOs include
conditions designed to provide incentive to lead arrangers to monitor the underwriting of
loans they syndicate that may be sold to an eligible open market CLO by requiring that
lead arrangers retain risk on these leveraged loans that could be securitized through
CLOs. The agencies believe that this proposed risk retention option for open market
CLOs would meaningfully align the incentives of the party most involved with the credit
quality of these loans – the lead arranger – with the interests of investors. Alternatively,
incentive would be placed on the CLO manager to monitor the credit quality of loans it
securitizes if it retains risk under the standard risk retention option.
88
15 U.S.C. 78o-11(d)(2). These factors are whether the assets sold to the securitizer
have terms, conditions, and characteristics that reflect low credit risk; whether the form
or volume of transactions in securitization markets creates incentives for imprudent
origination of the type of loan or asset to be sold to the securitizer; and the potential
impact of risk retention obligations on the access of consumers and business to credit on
reasonable terms, which may not include the transfer of credit risk to a third party.
89
See id. at § 78o-11(c)(G)(iv) and (d) (permitting the Commission and Federal banking
agencies to allow the allocation of risk retention from a sponsor to an originator).
149
In response to commenter requests that the agencies recognize incentive fees as
risk retention, the agencies recognize that management fees incorporate credit risk
sensitivity and contribute to aligning the interests of the CLO manager and investors with
respect to the quality of the securitized loans. However, these fees do not appear to
provide an adequate substitute for risk retention because they typically have small
expected value (estimated as equivalent to a horizontal tranche of less than 1 percent),
especially given that CLOs securitize leveraged loans, which carry higher risk than many
other securitized assets. Additionally, these fees are not funded in cash at closing and
therefore may not be available to absorb losses as expected. Generally, the agencies have
declined to recognize unfunded forms of risk retention for purposes of the proposal (such
as fees or guarantees), except in the case of the Enterprises under the conditions specified
with regard to their guarantees.
Under the option for open market CLOs, the sponsor relying on the option would
be required to provide, or cause to be provided, certain disclosures to potential investors.
The sponsor would be required to disclose this information a reasonable period of time
prior to the sale of the asset-backed securities in the securitization transaction (and at
least annually with respect to information regarding the assets held by the CLO) and,
upon request, to the Commission and its appropriate Federal banking agency, if any.
First, a sponsor relying on the CLO option would need to disclose a complete list of
every asset held by an open market CLO (or before the CLO’s closing, in a warehouse
facility in anticipation of transfer into the CLO at closing). This list would need to
include the following information (i) the full legal name and Standard Industrial
Classification category code of the obligor of the loan or asset; (ii) the full name of the
150
specific loan tranche held by the CLO; (iii) the face amount of the loan tranche held by
the CLO; (iv) the price at which the loan tranche was acquired by the CLO; and (v) for
each loan tranche, the full legal name of the lead arranger subject to the sales and hedging
restrictions of §__.12 of the proposed rule. Second, the sponsor would need to disclose
the full legal name and form of organization of the CLO manager.
Request for Comment
50(a). Does the proposed CLO risk retention option present a reasonable
allocation of risk retention among the parties that originate, purchase, and sell assets in a
CLO securitization? 50(b). Are there any changes that should be made in order to better
align the interests of CLO sponsors and CLO investors?
51. Are there technical changes to the proposed CLO option that would be
needed or desirable in order for lead arrangers to be able to retain the risk as proposed,
and for CLO sponsors to be able to rely on this option?
52(a). Who should assume responsibility for ensuring that lead arrangers comply
with requirement to retain an interest in CLO-eligible tranches? 52(b). Would some sort
of ongoing reporting or periodic certification by the lead arranger to holders of the CLOeligible tranche be feasible? 52(c). Why or why not?
53(a). The agencies would welcome suggestions for alternate or additional
criteria for identifying lead arrangers. 53(b). Do loan syndications typically have more
than one lead arranger who has significant influence over the underwriting and
documentation of the loan? 53(c). If so, should the risk retention requirement be
permitted to be shared among more than one lead arranger? 53(d). What practical
difficulties would this present, including for the monitoring of compliance with the
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retention requirement? 53(e). How could the rule assure that each lead arranger’s
retained interest is significant enough to influence its underwriting of the loan?
54(a). Is the requirement for the lead arranger to take an initial allocation of 20
percent of the broader syndicated credit facility sufficiently large to ensure that the lead
arranger can exert a meaningful level of influence on loan underwriting terms? 54(b).
Could a smaller required allocation accomplish the same purpose?
55(a). The proposal permits lead arrangers to sell or hedge their retained interest
in a CLO-eligible loan tranche if those loans experience a payment or bankruptcy default
or are accelerated. Would the knowledge that it could sell or hedge a defaulted loan in
those circumstances unduly diminish the lead arranger’s incentive to underwrite and
structure the loan prudently at origination? 55(b). Should the agencies restrict the ability
of lead arrangers to sell or hedge their retained interest under these circumstances? 55(c).
Why or why not?
56(a). Should the lead arranger role for “CLO-eligible” loan tranches be limited
to federally supervised lending institutions, which are subject to regulatory guidance on
leveraged lending? 56(b). Why or why not?
57(a). Should additional qualitative criteria be placed on CLO-eligible loan
tranches to ensure that they have lower credit risk relative to the broader leveraged loan
market? 57(b). What such criteria would be appropriate?
58(a). Should managers of open market CLOs be required to invest principal in
some minimal percentage of the CLO’s first loss piece in addition to meeting other
requirements for open market CLOs proposed herein? 58(b). Why or why not?
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59(a). Is the requirement that all assets (other than servicing assets) consist of
CLO-eligible loan tranches appropriate? 59(b). To what extent could this requirement
impede the ability of a CLO sponsor to diversify its assets or its ability to rely on this
option? 59(c). Does this requirement present any practical difficulties with reliance on
this option, particularly the ability of CLO sponsors to accumulate a sufficient number of
assets from CLO-eligible loan tranches to meet this requirement? 59(d). If so, what are
they? 59(e). Would it be appropriate for the agencies to provide a transition period (for
example, two years) after the effective date of the rule to allow some investment in
corporate or other obligations other than CLO-eligible loan tranches or servicing assets
while the market adjusts to the new standards? 59(f). What transition would be
appropriate? 59(g). Would allowing a relatively high percentage of investment in such
other assets in the early years following the effective date (such as 10 percent), followed
by a gradual reduction, facilitate the ability of the market to utilize the proposed option?
59(h). Why or why not? 59(i). What other transition arrangements might be
appropriate?
60(a). Should an open market CLO be allowed permanently to hold some de
minimis percentage of its collateral assets in corporate obligations other than CLOeligible loan tranches under the option? 60(b). If so, how much?
61(a). Is the requirement that permitted hedging transactions be limited to interest
rate and currency risks appropriate? 61(b). Are there other derivative transactions that
CLO issuing entities engage in to hedge particular risks arising from the loans they hold
and not as means of gaining synthetic exposures?
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62(a). Is the requirement that the holders of a CLO-eligible loan tranche have
consent rights with respect to any material waivers and amendments of the underlying
legal documents affecting their tranche appropriate? 62(b). How should waivers and
amendments that affect all tranches (such as waivers of defaults or amendments to
covenants) be treated for this purpose? 62(c). Should holders of CLO-eligible loan
tranches be required to receive special rights with respect those matters, or are their
interests sufficiently aligned with other lenders?
63. How would the proposed option facilitate (or not facilitate) the continuance
of open market CLO issuances?
64(a). What percentage of currently outstanding CLOs, if any, have securitized
assets that consist entirely of syndicated loans? 64(b). What percentage of securitized
assets of currently outstanding CLOs consist of syndicated loans?
65(a). Should unfunded portions of revolving credit facilities be allowed in open
market CLO collateral portfolios, subject to some limit, as is current market practice?
65(b). If yes, what form should risk retention take? 65(c). Would the retention of 5
percent of an unfunded revolving commitment to lend (plus 5 percent of any outstanding
funded amounts) provide the originator with incentives similar to those provided by
retention of 5 percent of a funded term loan? 65(d). Why or why not?
66(a). Would a requirement for the CLO manager to retain risk in the form of
unfunded notes and equity securities, as proposed by an industry commenter, be a
reasonable alternative for the above proposal? 66(b). How would this meet the
requirements and purposes of section 15G of the Exchange Act?
8. Municipal Bond “Repackaging” Securitizations
154
Several commenters on the original proposal requested that the agencies exempt
municipal bond repackagings securitizations from risk retention requirements, the most
common form of which are often referred to as “tender option bonds” (TOBs). 90 These
commenters argued that these transactions should be exempt from risk retention for the
following reasons:
•
Securities issued by municipal entities are exempt, so securitizations involving
these securities should also be exempt;
•
Municipal bond repackagings are not the type of securitizations that prompted
Congress to enact section 15G of the Exchange Act, but rather are
securitizations caught in the net cast by the broad definition of ABS. In fact,
the underlying collateral of TOBs has very lower credit risk and is structured
to meet the credit quality requirements of Rule 2a-7 under the Investment
Company Act of 1940; 91
90
As described by one commenter, a typical TOBs transaction consists of the deposit of
a single issue of highly rated, long-term municipal bonds in a trust and the issuance by
the trust of two classes of securities: a floating rate, puttable security (the “floaters”), and
an inverse floating rate security (the “residual”). No tranching is involved. The holders of
floaters have the right, generally on a daily or weekly basis, to put the floaters for
purchase at par, which put right is supported by a liquidity facility delivered by a highly
rated provider and causes the floaters to be a short-term security. The floaters are in large
part purchased and held by money market mutual funds. The residual is held by a longer
term investor (bank, insurance company, mutual fund, hedge fund, etc.). The residual
investors take all of the market and structural risk related to the TOBs structure, with the
floaters investors only taking limited, well-defined insolvency and default risks
associated with the underlying municipal bonds, which risks are equivalent to those
associated with investing in such municipal bonds directly.
91
17 CFR 270.2a-7.
155
•
Imposing risk retention in the TOBs market would reduce the liquidity of
municipal bonds, which would lead to an increase in borrowing costs for
municipalities and other issuers of municipal bonds, as well a decrease the
short-term investments available for tax-exempt money market funds; and
•
TOB programs are financing vehicles that are used because more traditional
forms of securities financing are inefficient in the municipal securities market;
TOB programs are not intended to, and do not, transfer material investment
risk from the securitizer to investors. The securitizer in a TOB program
(whether the TOB program sponsor or a third-party investor) has “skin in the
game” by virtue of (i) the nature of the TOB inverse floater interest it owns,
which represents ownership of the underlying municipal securities and is not
analogous to other types of ABS programs, or (ii) its provision of liquidity
coverage or credit enhancement, or its obligation to reimburse the provider of
liquidity coverage or credit enhancement for any losses.
Another commenter asserted that TOBs and other types of municipal repackaging
transactions continue to offer an important financing option for municipal issuers by
providing access to a more diverse investor base, a more liquid market and the potential
for lower interest rates. According to this commenter, if TOBs were subject to the risk
retention requirements of the proposal, the cost of such financing would increase
significantly, sponsor banks would likely scale back the issuance of TOBs, and as a result
the availability of tax-exempt investments in the market would decrease.
In order to reflect and incorporate the risk retention mechanisms currently
implemented by the market, the agencies are proposing to provide two additional risk
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retention options for certain municipal bond repackagings. The proposed rule closely
tracks certain requirements for these repackagings, outlined in IRS Revenue Procedure
2003-84, that are relevant to risk retention. 92 Specifically, the re-proposed rule proposes
additional risk retention options for certain municipal bond repackagings in which:
•
Only two classes of securities are issued: a tender option bond and a
residual interest;
•
The tender option bond qualifies for purchase by money market funds
under Rule 2a-7 under the Investment Company Act of 1940;
•
The holder of a tender option bond must have the right to tender such
bonds to the issuing entity for purchase at any time upon no more than 30
days’ notice;
•
The collateral consists solely of servicing assets and municipal securities
as defined in Section 3(a)(29) of the Securities Exchange Act of 1934 and
all of those securities have the same municipal issuer and the same
underlying obligor or source of payment;
•
Each of the tender option bond, the residual interest and the underlying
municipal security are issued in compliance with the Internal Revenue
Code of 1986, as amended (the “IRS Code”), such that the interest
payments made on those securities are excludable from the gross income
of the owners;
92
Revenue Procedure 2003-84, 2003-48 I.R.B. 1159.
157
•
The issuing entity has a legally binding commitment from a regulated
liquidity provider to provide 100 percent guarantee or liquidity coverage
with respect to all of the issuing entity’s outstanding tender option
bonds; 93 and
•
The issuing entity qualifies for monthly closing elections pursuant to IRS
Revenue Procedure 2003-84, as amended or supplemented from time to
time.
An issuing entity that meets these qualifications would be a Qualified Tender Option
Bond Entity.
The sponsor of a Qualified Tender Option Bond Entity may satisfy its risk
retention requirements under section 10 of the proposed rule if it retains an interest that
upon issuance meets the requirements of an eligible horizontal residual interest but that
upon the occurrence of a “tender option termination event” as defined in section 4.01(5)
of IRS Revenue Procedure 2003-84, as amended or supplemented from time to time, will
93
The agencies received very few comments with respect to the definition of regulated
liquidity provider included in the original proposal with respect to the proposed ABCP
option. The proposed rule includes the same definition and defines a regulated liquidity
provider as a depository institution (as defined in section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813)); a bank holding company (as defined in 12 U.S.C. 1841)
or a subsidiary thereof; a savings and loan holding company (as defined in 12 U.S.C.
1467a) provided all or substantially all of the holding company’s activities are
permissible for a financial holding company under 12 U.S.C. 1843(k) or a subsidiary
thereof; or a foreign bank (or a subsidiary thereof) whose home country supervisor (as
defined in § 211.21 of the Federal Reserve Board’s Regulation K (12 CFR 211.21)) has
adopted capital standards consistent with the Capital Accord of the Basel Committee on
Banking Supervision, as amended, provided the foreign bank is subject to such standards.
158
meet requirements of an eligible vertical interest. 94 The agencies believe that the
proposed requirements for both an eligible horizontal residual interest and an eligible
vertical interest adequately align the incentives of sponsors and investors.
The sponsor of a Qualified Tender Option Bond Entity may also satisfy its risk
retention requirements under this Section if it holds municipal securities from the same
issuance of municipal securities deposited in the Qualified Tender Option Bond Entity,
the face value of which retained municipal securities is equal to 5 percent of the face
value of the municipal securities deposited in the Qualified Tender Option Bond Entity.
The prohibitions on transfer and hedging set forth in section 12 of the proposed rule
would apply to any municipal securities retained by the sponsor of a Qualified Tender
Option Bond Entity in satisfactions of its risk retention requirements under this section.
The sponsor of a Qualified Tender Option Bond Entity could also satisfy its risk
retention requirements under subpart B of the proposed rule using any of the other risk
retention options in this proposal, provided the sponsor meets the requirements of that
option.
Request for Comment
94
Section 4.01(5) of IRS Revenue Procedure 2003-84 defines a tender option
termination event as: (1) a bankruptcy filing by or against a tax-exempt bond issuer; (2) a
downgrade in the credit-rating of a tax-exempt bond and a downgrade in the credit rating
of any guarantor of the tax-exempt bond, if applicable, below investment grade; (3) a
payment default on a tax-exempt bond; (4) a final judicial determination or a final IRS
administrative determination of taxability of a tax-exempt bond for Federal default on the
underlying municipal securities and credit enhancement, where applicable; (5) a credit
rating downgrade below investment grade; (6) the bankruptcy of the issuer and, when
applicable, the credit enhancer; or (7) the determination that the municipal securities are
taxable.
159
67(a). Do each of the additional options proposed with respect to repackagings of
municipal securities accommodate existing market practice for issuers and sponsors of
tender option bonds? 67(b). If not, are there any technical adjustments that need to be
made in order to accommodate existing market practice?
68(a). Do each of the additional options proposed with respect to repackagings of
municipal securities adequately align the incentives of sponsors and investors? 68(b). If
not, are there any additional requirements that should be added in order to better align
those incentives?
9. Premium Capture Cash Reserve Account
a. Overview of Original Proposal and Public Comment
In the original proposal, the agencies were concerned with two different forms of
evasive behavior by sponsors to reduce the effectiveness of risk retention. First, in the
context of horizontal risk retention, it could have been difficult to measure how much risk
a sponsor was retaining where the risk retention requirement was measured using the “par
value” of the transaction. In particular, a first loss piece could be structured with a face
value of 5 percent, but might have a market value of only cents on the dollar. As the
sponsor might not have to put significant amounts of its own funds at risk to acquire the
horizontal interest, there was concern that the sponsor could structure around its risk
retention requirements and thereby evade a purpose of section 15G.
Second, in many securitization transactions, particularly those involving
residential and commercial mortgages, conducted prior to the financial crisis, sponsors
sold premium or interest-only tranches in the issuing entity to investors, as well as more
traditional obligations that paid both principal and interest received on the underlying
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assets. By selling premium or interest-only tranches, sponsors could thereby monetize at
the inception of a securitization transaction the “excess spread” that was expected to be
generated by the securitized assets over time and diminish the value, relative to par value,
of the most subordinated credit tranche. By monetizing excess spread before the
performance of the securitized assets could be observed and unexpected losses realized,
sponsors were able to reduce the impact of any economic interest they may have retained
in the outcome of the transaction and in the credit quality of the assets they securitized.
This created incentives to maximize securitization scale and complexity, and encouraged
unsound underwriting practices.
In order to achieve the goals of risk retention, the original proposal would have
increased the required amount of risk retention by the amount of proceeds in excess of 95
percent of the par value of ABS interests, or otherwise required the sponsor to deposit the
difference into a first-loss premium capture cash reserve account. The amount placed
into the premium capture cash reserve account would have been separate from and in
addition to the sponsor’s base risk retention requirement, and would have been used to
cover losses on the underlying assets before such losses were allocated to any other
interest or account. As a likely consequence to those proposed requirements, the
agencies expected that few, if any, securitizations would require the establishment of a
premium capture cash reserve account, as sponsors would simply adjust by holding more
risk retention.
The agencies requested comment on the effectiveness and appropriateness of the
premium capture cash reserve account and sought input on any alternative methods.
Several commenters were supportive of the concept behind the premium capture cash
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reserve account to prevent sponsors from structuring around the risk retention
requirement. However, most commenters generally objected to the premium capture
cash reserve account. Many commenters expressed concern that the premium capture
cash reserve account would prevent sponsors and originators from recouping the costs of
origination and hedging activities, give sponsors an incentive to earn compensation in the
form of fees from the borrower instead of cash from deal proceeds, and potentially cause
the sponsor to consolidate the entire securitization vehicle for accounting purposes.
Commenters stated that these potential negative effects would ultimately make
securitizations uneconomical for many sponsors, and therefore would have a significant
adverse impact on the cost and availability of credit. Some commenters also argued that
the premium capture cash reserve account exceeded the statutory mandate and legislative
intent of the Dodd-Frank Act.
b. Proposed Treatment
After careful consideration of all the comments regarding the premium capture
cash reserve account, and in consideration of the use of fair value in the measurement of
the standard risk retention amount in the proposed rule (as opposed to the par value
measurement in the original proposal), the agencies have decided not to include a
premium capture cash reserve account provision in the proposed rule. The agencies still
consider it important to ensure that there is meaningful risk retention and that sponsors
cannot effectively negate or reduce the economic exposure they are required to retain
under the proposed rule. However, the proposal to use fair value to measure the amount
of risk retention should meaningfully mitigate the ability of a sponsor to evade the risk
retention requirement through the use of deal structures. The agencies also took into
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consideration the potential negative unintended consequences the premium capture cash
reserve account might cause for securitizations and lending markets. The elimination of
the premium capture cash reserve account should reduce the potential for the proposed
rule to negatively affect the availability and cost of credit to consumers and businesses.
Request for Comment
69(a). Should the proposed rule require a sponsor to fund all or part of its risk
retention requirement with own funds, instead of using proceeds from the sale of ABS
interests to investors? 69(b). Would risk retention be more effective if sponsors had to
fund it entirely with their own funds? 69(c). Why or why not?
70(a). Should the agencies require a higher amount of risk retention specifically
for transaction structures which rely on premium proceeds, or for assets classes like
RMBS and CMBS which have relied historically on the use of premium proceeds?
70(b). If so, how should this additional risk requirement be sized in order to ensure risk
retention achieves the right balance of cost versus effectiveness?
C. Allocation to the Originator
1. Overview of Original Proposal and Public Comment
As a general matter, the original proposal was structured so that the sponsor of a
securitization transaction would be solely responsible for complying with the risk
retention requirements established under section 15G of the Exchange Act and the
proposed implementing regulations, consistent with that statutory provision. However,
subject to a number of considerations, section 15G authorizes the agencies to allow a
sponsor to allocate at least a portion of the credit risk it is required to retain to the
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originator(s) of securitized assets. 95 Accordingly, subject to conditions and restrictions
discussed below, the original proposal would have permitted a sponsor to reduce its
required risk retention obligations in a securitization transaction by the portion of risk
retention obligations assumed by the originators of the securitized assets.
When determining how to allocate the risk retention requirements, the agencies
are directed to consider whether the assets sold to the sponsor have terms, conditions, and
characteristics that reflect low credit risk; whether the form or volume of the transactions
in securitization markets creates incentives for imprudent origination of the type of loan
or asset to be sold to the sponsor; and the potential impact of the risk retention obligations
on the access of consumers and businesses to credit on reasonable terms, which may not
include the transfer of credit risk to a third party. 96
In the original proposal, the agencies proposed a framework that would have
permitted a sponsor of a securitization to allocate a portion of its risk retention obligation
to an originator that contributed a significant amount of assets to the underlying asset
pool. The agencies endeavored to create appropriate incentives for both the securitization
sponsor and the originator(s) to maintain and monitor appropriate underwriting standards
without creating undue complexity, which potentially could mislead investors and
95
As discussed above, 15 U.S.C. 78o-11(a)(4) defines the term “originator” as a person
who, through the extension of credit or otherwise, creates a financial asset that
collateralizes an asset-backed security; and who sells an asset directly or indirectly to a
securitizer (i.e., a sponsor or depositor).
96
15 U.S.C. 78o-11(d)(2). The agencies note that section 15G(d) appears to contain an
erroneous cross-reference. Specifically, the reference at the beginning of section 15G(d)
to “subsection (c)(1)(E)(iv)” is read to mean “subsection (c)(1)(G)(iv)”, as the former
subsection does not pertain to allocation, while the latter is the subsection that permits the
agencies to provide for the allocation of risk retention obligations between a securitizer
and an originator in the case of a securitizer that purchases assets from an originator.
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confound supervisory efforts to monitor compliance. Importantly, the original proposal
did not require allocation to an originator. Therefore, it did not raise the types of
concerns about credit availability that might arise if certain originators, such as mortgage
brokers or small community banks (that may experience difficulty obtaining funding to
retain risk positions), were required to fulfill a sponsor’s risk retention requirement.
The allocation to originator option in the original proposal was designed to work
in tandem with the base vertical or horizontal risk retention options that were set forth in
that proposal. The provision would have made the allocation to originator option
available to a sponsor that held all of the retained interest under the vertical option or all
of the retained interest under the horizontal option, but would not have made the option
available to a sponsor that satisfied the risk retention requirement by retaining a
combination of vertical and horizontal interests.
Additionally, the original proposal would have permitted a securitization sponsor
to allocate a portion of its risk retention obligation to any originator of the underlying
assets that contributed at least 20 percent of the underlying assets in the pool. The
amount of the retention interest held by each originator that was allocated credit risk in
accordance with the proposal was required to be at least 20 percent, but not in excess of
the percentage of the securitized assets it originated. The originator would have been
required to hold its allocated share of the risk retention obligation in the same manner as
would have been required of the sponsor, and subject to the same restrictions on
transferring, hedging, and financing the retained interest. Thus, for example, if the
sponsor satisfied its risk retention requirements by acquiring an eligible horizontal
residual interest, an originator allocated risk would have been required to acquire a
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portion of that horizontal first-loss interest, in an amount not exceeding the percentage of
pool assets created by the originator. The sponsor’s risk retention requirements would
have been reduced by the amount allocated to the originator. Finally, the original
proposal would have made the sponsor responsible for any failure of an originator to
abide by the transfer and hedging restrictions included in the proposed rule.
Several commenters opposed the original proposal on allocation to originators in
its entirety for a variety of reasons. A common reason stated was that originators would
be placed in an unequal bargaining position with sponsors. Other commenters supported
the proposed provision, but many urged that it be revised. Several commenters stated
that requiring that the originator use the same form of risk retention as the sponsor should
be removed, while one commenter proposed that if a sponsor desired to allocate a portion
of risk retention to an originator, only the horizontal retention option should be used.
Many commenters stated that the proposed 20 percent origination threshold required in
order for the option to be used was too high. One commenter urged that an originator
that originated more than 50 percent of the securitized assets be required to retain at least
50 percent of the required retention. Another commenter suggested that an originator
retaining a portion of the required interest be allocated only a percentage of the loans it
originated, rather than an allocation of the entire pool, as proposed. The agencies also
received comments that the definition of “originator” ought to include parties that
purchase assets from entities that create the assets and that allocation to originators
should be permitted where the L-shaped option or horizontal cash reserve account option
was used as a form of risk retention.
2. Proposed Treatment
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The agencies have carefully considered the concerns raised by commenters with
respect to the original proposal on allocation to originators. The agencies do not believe,
however, that a significant expansion of the allocation to originator option would be
appropriate and that allocation limits on originators are necessary to realize the agencies’
goal of better aligning securitizers’ and investors’ interests.
Therefore, the agencies are proposing an allocation to originator provision that is
substantially similar to the provision in the original proposal. The only modifications to
this option would be technical changes that reflect the proposed flexible standard risk
retention (discussed above in Part III.B.1 of this Supplementary Information). The rule,
like the original proposal, would require that an originator to which a portion of the
sponsor’s risk retention obligation is allocated acquire and retain ABS interests or eligible
horizontal residual interests in the same manner as would have been retained by the
sponsor. Under the proposed rule, this condition would require an originator to acquire
horizontal and vertical interests in the securitization transaction in the same proportion as
the interests originally established by the sponsor. This requirement helps to align the
interests of originators and sponsors, as both face the same likelihood and degree of
losses if the collateralized assets begin to default.
In addition, the proposed rule would permit a sponsor that uses a horizontal cash
reserve account to use this option. Finally, consistent with the change in the general risk
retention from par value to fair value (discussed above in Part III.B.1 of this
Supplementary Information) in determining the maximum amount of risk retention that
could be allocated to an originator, the current NPR refers to the fair value, rather than
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the dollar amount (or corresponding amount in the foreign currency in which the ABS are
issued, as applicable), of the retained interests.
As explained in the original proposal, by limiting this option to originators that
originate at least 20 percent of the asset pool, the agencies seek to ensure that the
originator retains risk in an amount significant enough to function as an actual incentive
for the originator to monitor the quality of all the assets being securitized (and to which it
would retain some credit risk exposure). In addition, by restricting originators to holding
no more than their proportional share of the risk retention obligation, the proposal seeks
to prevent sponsors from circumventing the purpose of the risk retention obligation by
transferring an outsized portion of the obligation to an originator that may have been
seeking to acquire a speculative investment. These requirements are also intended to
reduce the proposal’s potential complexity and facilitate investor and regulatory
monitoring.
The re-proposal again requires that an originator hold retained interests in the
same manner as the sponsor. As noted, the proposed rule provides the sponsor with
significant flexibility in determining the mix of vertical and horizontal interests that it
would hold to meet its risk retention requirement. In addition, unlike the original
proposal, the proposed rule would permit a sponsor that holds a combination of vertical
and horizontal interests to utilize the allocation to originator option. If originators were
permitted to retain their share of the sponsor’s risk retention obligation in a proportion
that is different from the sponsor’s mix of the vertical and horizontal interests, investor
and regulatory monitoring could become very complex.
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The re-proposal does not incorporate commenters’ suggestion that an originator
be allocated retention in only the loans that it originated. The operational burden on both
securitization sponsors and federal supervisors to ensure that retention is held by
originators on the correct individual loans would be exceedingly high. Therefore, the
proposal continues to require that originators allocated a portion of the risk retention
requirement be allocated a share of the entire securitization pool.
The agencies are not proposing a definition of originator modified from the
original proposal and are not proposing to include persons that acquire loans and transfer
them to a sponsor. The agencies continue to believe that the definition of the term
originator in section 15G 97 does not provide the agencies with flexibility to make this
change. This definition limits an originator to a person that “through the extension of
credit or otherwise, creates a financial asset.” A person that acquires an asset created by
another person would not be the “creator” of such asset.
The agencies are not proposing to eliminate the allocation to originator provision,
as some commenters suggested. Although the agencies are sensitive to concerns that
smaller originators might be forced to accept allocations from sponsors due to unequal
bargaining power, the 20 percent threshold would make the allocation option available
only for entities whose assets form a significant portion of a pool and who, thus,
ordinarily could be expected to have some bargaining power with a sponsor.
Finally, the agencies do not believe that it is necessary, as some commenters
suggested, to require retention by a non-sponsor originator which provides more than half
97
15 U.S.C. 78o-11(a)(4).
169
of the securitized asset pool. In most circumstances, such an originator would be a
sponsor. In any circumstance where such an originator was not the sponsor, the agencies
believe that risk retention goals would be adequately served by retention by the sponsor,
if allocation to the originator did not otherwise occur.
Request for Comment
71(a). If originators were allocated risk only as to the loans they originate, would
it be operationally feasible to allocate losses on a loan-by-loan basis? 71(b). What would
be the degree of burden to implement such a system and accurately track and allocate
losses?
D. Hedging, Transfer, and Financing Restrictions
1. Overview of the Original Proposal and Public Comment
Section 15G(c)(1)(A) provides that the risk retention regulations prescribed shall
prohibit a securitizer from directly or indirectly hedging or otherwise transferring the
credit risk that the securitizer is required to retain with respect to an asset. Consistent
with this statutory directive, the original proposal prohibited a sponsor from transferring
any interest or assets that it was required to retain under the rule to any person other than
an affiliate whose financial statements are consolidated with those of the sponsor (a
consolidated affiliate). An issuing entity, however, would not be deemed a consolidated
affiliate of the sponsor for the securitization even if its financial statements were
consolidated with those of the sponsor under applicable accounting standards.
In addition to the transfer restrictions, the original proposal prohibited a sponsor
or any consolidated affiliate from hedging the credit risk the sponsor was required to
retain under the rule. However, hedge positions that are not materially related to the
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credit risk of the particular ABS interests or exposures required to be retained by the
sponsor or its affiliate would not have been prohibited under the original proposal. The
original proposal also prohibited a sponsor and a consolidated affiliate from pledging as
collateral for any obligation any interest or asset that the sponsor was required to retain
unless the obligation was with full recourse to the sponsor or consolidated affiliate.
Commenters generally expressed support for the proposed restrictions in the
original proposal as they felt that the restrictions were appropriately structured.
However, several commenters recommended that sponsors only be required to maintain a
fixed percentage of exposure to a securitization over time rather than a fixed amount of
exposure. Some commenters also recommended that the transfer restriction be modified
so that not only could sponsors transfer retained interests or assets to consolidated
affiliates, but consolidated affiliates could hold the risk retention initially as well.
2. Proposed Treatment
The agencies have carefully considered the comments received with respect to the
original proposal’s hedging, transfer, and financing restrictions, and the agencies do not
believe that any significant changes to these restrictions would be appropriate (other than
the exemptions provided for CMBS and duration of the hedging and transfer restrictions,
as described in Part IV.F of this Supplementary Information).
The agencies are, however, proposing changes in connection with the
consolidated affiliate treatment. As noted above, the “consolidated affiliate” definition
would be operative in two respects. First, the original proposal would have permitted
transfers of the risk retention interest to a consolidated affiliate. The agencies proposed
this treatment under the rationale that financial losses are shared equally within a group
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of consolidated entities; therefore, a sponsor would not “avoid” losses by transferring the
required risk retention asset to an affiliate. Upon further consideration, the agencies are
concerned that, under current accounting standards, consolidation of an entity can occur
under circumstances in which a significant portion of the economic losses of one entity
will not, in economic terms, be suffered by its consolidated affiliate.
To avoid this outcome, the current proposal introduces the concept of a “majorityowned affiliate,” which would be defined under the proposal as an entity that, directly or
indirectly, majority controls, is majority controlled by, or is under common majority
control with, another entity For purposes of this definition, majority control would mean
ownership of more than 50 percent of the equity of an entity or ownership of any other
controlling financial interest in the entity (as determined under GAAP). The agencies are
also, in response to commenters, revising the proposal to allow risk retention to be
retained as an initial matter by a majority-owned affiliate; in other words, it would not be
necessary for the sponsor to go through the steps of holding the required retention interest
for a moment in time before moving it to the affiliate.
Second, the original proposal prohibited a consolidated affiliate of the sponsor
from hedging a risk retention interest required to be retained under the rule. Again, the
rationale was that the sponsor’s consolidated affiliate would obtain the benefits of the
hedging transaction and they would offset any losses sustained by the sponsor. In the
current proposal, the agencies are eliminating the concept of the “consolidated” affiliate
and instead applying the hedging prohibition to any affiliate of the sponsor.
In all other respects, the agencies are again proposing the same hedging, transfer,
and financing restrictions as under the original proposal, without modification. The
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proposal would prohibit a sponsor or any affiliate from hedging the credit risk the
sponsor is required to retain under the rule or from purchasing or selling a security or
other financial instrument, or entering into an agreement (including an insurance
contract), derivative or other position, with any other person if: (i) payments on the
security or other financial instrument or under the agreement, derivative, or position are
materially related to the credit risk of one or more particular ABS interests that the
retaining sponsor is required to retain, or one or more of the particular securitized assets
that collateralize the asset-backed securities; and (ii) the security, instrument, agreement,
derivative, or position in any way reduces or limits the financial exposure of the sponsor
to the credit risk of one or more of the particular ABS interests or one or more of the
particular securitized assets that collateralize the asset-backed securities.
Similar to the original proposal, under the proposed rule holding a security tied to
the return of an index (such as the subprime ABX.HE index) would not be considered a
prohibited hedge by the retaining sponsor so long as: (1) any class of ABS interests in the
issuing entity that were issued in connection with the securitization transaction and that
are included in the index represented no more than 10 percent of the dollar-weighted
average of all instruments included in the index, and (2) all classes of ABS interests in all
issuing entities that were issued in connection with any securitization transaction in
which the sponsor was required to retain an interest pursuant to the proposal and that are
included in the index represent, in the aggregate, no more than 20 percent of the dollarweighted average of all instruments included in the index.
Such positions would include hedges related to overall market movements, such
as movements of market interest rates (but not the specific interest rate risk, also known
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as spread risk, associated with the ABS interest that is otherwise considered part of the
credit risk), currency exchange rates, home prices, or of the overall value of a particular
broad category of asset-backed securities. Likewise, hedges tied to securities that are
backed by similar assets originated and securitized by other sponsors, also would not be
prohibited. On the other hand, a security, instrument, derivative or contract generally
would be “materially related” to the particular interests or assets that the sponsor is
required to retain if the security, instrument, derivative or contract refers to those
particular interests or assets or requires payment in circumstances where there is or could
reasonably be expected to be a loss due to the credit risk of such interests or assets (e.g., a
credit default swap for which the particular interest or asset is the reference asset).
Consistent with the original proposal, the proposed rule would prohibit a sponsor
and any affiliate from pledging as collateral for any obligation (including a loan,
repurchase agreement, or other financing transaction) any ABS interest that the sponsor is
required to retain unless the obligation is with full recourse to the sponsor or a pledging
affiliate (as applicable). Because the lender of a loan that is not with full recourse to the
borrower has limited rights against the borrower on default, and may rely more heavily
on the collateral pledged (rather than the borrower’s assets generally) for repayment, a
limited recourse financing supported by a sponsor’s risk retention interest may transfer
some of the risk of the retained interest to the lender during the term of the loan. If the
sponsor or affiliate pledged the interest or asset to support recourse financing and
subsequently allowed (whether by consent, pursuant to the exercise of remedies by the
counterparty or otherwise) the interest or asset to be taken by the counterparty to the
financing transaction, the sponsor will have violated the prohibition on transfer.
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Similar to the original proposal, the proposed rule would not prohibit an issuing
entity from engaging in hedging activities itself when such activities would be for the
benefit of all investors in the asset-backed securities. However, any credit protection by
or hedging protection obtained by an issuing entity could not cover any ABS interest or
asset that the sponsor is required to retain under the proposed rule. For example, if the
sponsor retained a 5 percent eligible vertical interest, an issuing entity may purchase (or
benefit from) a credit insurance wrap that covers up to 95 percent of the tranches, but not
the 5 percent of such tranches required to be retained by the sponsor.
Request for Comment
72(a). Is the scope of the proposed restriction relating to majority-owned
affiliates, and affiliates generally, appropriate to prevent sponsors from avoiding losses
arising from a risk retention asset? 72(b). Should the agencies, instead of the majorityowned affiliate approach, increase the 50 percent ownership requirement to a 100 percent
ownership threshold under a wholly-owned approach?
IV. General Exemptions
Section 15G(c)(1)(G) and section 15G(e) of the Exchange Act require the
agencies to provide a total or partial exemption from the risk retention requirements for
certain types of ABS or securitization transactions. 98 In addition, section 15G(e)(1)
permits the agencies jointly to adopt or issue additional exemptions, exceptions, or
adjustments to the risk retention requirements of the rules, including exemptions,
exceptions, or adjustments for classes of institutions or assets, if the exemption,
98
15 U.S.C. 78o-11(c)(1)(G) and (e).
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exception, or adjustment would: (A) help ensure high quality underwriting standards for
the securitizers and originators of assets that are securitized or available for
securitization; and (B) encourage appropriate risk management practices by the
securitizers and originators of assets, improve the access of consumers and businesses to
credit on reasonable terms, or otherwise be in the public interest and for the protection of
investors.
Consistent with these provisions, the original proposal would have exempted
certain types of ABS or securitization transactions from the credit risk retention
requirements of the rule, each as discussed below, along with the comments and the new
or revised proposals of the proposed rule.
A. Exemption for Federally Insured or Guaranteed Residential, Multifamily, and
Health Care Mortgage Loan Assets
The original proposal would have implemented section 15G(e)(3)(B) of the
Exchange Act by exempting from the risk retention requirements any securitization
transaction that is collateralized solely by residential, multifamily, or health care facility
mortgage loan assets if the assets are insured or guaranteed as to the payment of principal
and interest by the United States or an agency of the United States. 99 Also, the original
proposal would have exempted any securitization transaction that involves the issuance
of ABS if the ABS are insured or guaranteed as to the payment of principal and interest
by the United States or an agency of the United States and that are collateralized solely
99
Id. at § 78o-11(e)(3)(B).
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by residential, multifamily, or health care facility mortgage loan assets, or interests in
such assets.
Commenters on the original proposal generally believed the agencies had
appropriately proposed to implement this statutory exemption from the risk retention
requirement. Some commenters remarked that the broad exemptions granted to
government institutions and programs, which are unrelated to prudent underwriting, are
another reason that transactions securitizing loans with private mortgage insurance should
be exempted because, without including private mortgage insurance, the rule may
encourage excessive reliance on such exemption and undermine the effectiveness of risk
retention.
Commenters also generally believed that the agencies were correct in believing
the federal department or agency issuing, insuring or guaranteeing the ABS or collateral
would monitor the quality of the assets securitized. One commenter noted that, in its
experience, federal programs are sufficiently monitored to ensure the safety and
consistency of the securitization and public interest. One commenter said that it would
seem that any U.S. guarantee or insurance program should be exempt if it provides at
least the same amount of coverage as the risk retention requirement, and another
commenter said that the exemption should be broad enough to cover all federal insurance
and guarantee programs. One commenter noted that the exemption seemed to prevent the
mixing of U.S. direct obligations and U.S. insured or guaranteed obligations because the
proposed rule would only allow an exemption for transactions collateralized either solely
by U.S. direct obligations or solely by assets that are fully insured or guaranteed as to the
payment of principal and interest by the U.S. Certain commenters urged the agencies to
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extend the government-backed exemptions to ABS backed by foreign governments,
similar to the European Union’s risk retention regime which includes a general
exemption for transactions backed by “central government” claims without restriction.
Several commenters urged the agencies to revise the government institutions and
programs exemption to include an exemption for securitizations consisting of student
loans made under the Federal Family Education Loan Program (“FFELP”). In particular,
these commenters believe an exemption is warranted because FFELP loans have a U.S.backed guarantee on 97 percent to 100 percent of defaulted principal and interest under
the FFELP guarantee programs administered by the Department of Education. These
commenters noted that FFELP loans benefit from a higher level of federal government
support than Veterans Administration loans (25 percent to 50 percent) and Department of
Agriculture Rural Development loans (up to 90 percent). These commenters also noted
that risk retention would have no effect on the underwriting standards since these loans
have been funded already and the program is no longer underwriting new loans. A
securitizer of student loans also noted that the Department of Education set the standards
by which FFELP loans were originated and serviced. Some commenters said that, if the
agencies do not entirely exclude FFELP loan securitizations from the risk retention
requirement, at a minimum the agencies should only require risk retention on the nonFFELP portion of the ABS portfolio. 100
100
One commenter requested an exemption for the sponsor of short-term notes issued by
Straight-A Funding, LLC. As Straight-A Funding, LLC will not have ABS interests
outstanding after January 19, 2014, such an exemption is not necessary.
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Two commenters on the original proposal urged the agencies to include an
exemption for ABS collateralized by any credit instrument extended under the federal
guarantee program for bonds and notes issued for eligible community or economic
development purposes established under the Community Development Financial
Institutions (“CDFI”) bond program. Therefore, because credit risk retention was
addressed and tailored specifically for the CDFI program, it was this commenter’s view
that the CDFI program transactions were designed to be exempt from the final credit risk
retention requirements of section 15G of the Exchange Act in accordance with section
94l(b) of the Dodd-Frank Act.
The agencies are again proposing, without changes from the original proposal, the
exemption from the risk retention requirements for any securitization transaction that is
collateralized solely by residential, multifamily, or health care facility mortgage loan
assets if the assets are insured or guaranteed in whole or in part as to the payment of
principal and interest by the United States or an agency of the United States. The
agencies are also proposing, without changes from the original proposal, the exemption
from the risk retention requirements for any securitization transaction that involves the
issuance of ABS if the ABS are insured or guaranteed as to the payment of principal and
interest by the United States or an agency of the United States and that are collateralized
solely by residential, multifamily, or health care facility mortgage loan assets, or interests
in such assets.
In addition, taking into consideration comments received on the original proposal,
the agencies are proposing a separate provision for securitization transactions that are
collateralized by FFELP loans. Under the proposed rule, a securitization transaction that
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is collateralized (excluding servicing assets) solely by FFELP loans that are guaranteed as
to 100 percent of defaulted principal and accrued interest (i.e., FFELP loans with first
disbursement prior to October 1993 or pursuant to certain limited circumstances where a
full guarantee was required) would be exempt from the risk retention requirements. A
securitization transaction that is collateralized solely (excluding servicing assets) by
FFELP loans that are guaranteed as to at least 98 percent of defaulted principal and
accrued interest would have its risk retention requirement reduced to 2 percent. 101 This
means that if the lowest guaranteed amount for any FFELP loan in the pool is 98 percent
(i.e., a FFELP loan with first disbursement between October 1993 and June 2006), the
risk retention requirement for the entire transaction would be 2 percent. Similarly, under
the proposed rule, a securitization transaction that is collateralized solely (excluding
servicing assets) by FFELP loans that are guaranteed as to at least 97 percent of defaulted
principal and accrued interest (in other words, all other securitizations collateralized
solely by FFELP loans) would have its risk retention requirement reduced to 3 percent.
Accordingly, if the lowest guaranteed amount for any FFELP loan in the pool is 97
percent (i.e., a FFELP loan with first disbursement of July 2006 or later), the risk
retention requirement for the entire transaction would be 3 percent.
The agencies believe this reduction in the risk retention requirement is appropriate
because FFELP loans have a guarantee on 97 percent to 100 percent of defaulted
principal and interest under the FFELP guarantee programs backed by the U.S.
Department of Education. Further, fairly extensive post-default servicing must be
101
The definition of “servicing assets” is discussed in Part II.B of this Supplementary
Information.
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properly performed under FFELP rules as a prerequisite to guarantee payment. Sponsors
would therefore be encouraged to select assets for securitization with high quality
underwriting standards. Furthermore, appropriate risk management practices would be
encouraged as such proper post-default servicing will be required to restore the loan to
payment status or successfully collect upon the guarantee.
The agencies generally are not proposing to expand general exemptions from risk
retention for other types of assets, as described in commenters’ requests above. The
agencies are not creating an exemption for short-term promissory notes issued by the
Straight-A Funding program. The agencies do not believe such an exemption is
appropriate because of the termination of the FFELP program and the presence in the
market of other sources of funding for student lending. Additionally, the agencies are not
proposing to exempt securitization transactions that employ a mix of governmentguaranteed and direct government obligations from risk retention requirements, because
the agencies have not found evidence that such securitization transactions currently exist
in the market and the agencies have concerns about the development of such transactions
for regulatory arbitrage purposes.
The agencies are not proposing an exemption from risk retention for
securitizations of assets issued, guaranteed or insured by foreign government entities.
The agencies do not believe it would be appropriate to exempt such transactions from risk
retention if they were offered in the United States to U.S. investors.
Finally, the agencies are not proposing an exemption for the CDFI program,
because the agencies do not believe such an exemption is necessary. It does not appear
that CDFI program bonds are ABS. Although the proceeds of the bonds flow to CDFIs
181
for use in funding community development lending, and the community development
loans are ultimately the source of repayment on the bond, they do not collateralize the
bonds. Furthermore, even if the bonds were ABS, the bonds are fully guaranteed by the
U.S. government and therefore would qualify for other exemptions from risk retention
contemplated by section 15G of the Exchange Act, discussed below.
B. Exemption for Securitizations of Assets Issued, Insured, or Guaranteed by the
United States or any Agency of the United States and Other Exemptions
Section 15G(c)(1)(G)(ii) of the Exchange Act requires that the agencies, in
implementing risk retention regulations, provide for a total or partial exemption from risk
retention for securitizations of assets that are issued or guaranteed by the United States or
an agency of the United States, as the agencies jointly determine appropriate in the public
interest and the protection of investors. 102 The original proposal would have contained
full exemptions from risk retention for any securitization transaction if the ABS issued in
the transaction were (1) collateralized solely (excluding cash and cash equivalents) by
obligations issued by the United States or an agency of the United States; (2)
collateralized solely (excluding cash and cash equivalents) by assets that are fully insured
or guaranteed as to the payment of principal and interest by the United States or an
agency of the United States (other than residential, multifamily, or health care facility
mortgage loan securitizations discussed above); or (3) fully guaranteed as to the timely
payment of principal and interest by the United States or any agency of the United States.
102
Id. at 78o–11(c)(1)(G).
182
Consistent with section 15G(e)(3)(A) of the Exchange Act, the original proposal
also would have provided an exemption from risk retention for any securitization
transaction that is collateralized solely (excluding cash and cash equivalents) by loans or
other assets made, insured, guaranteed, or purchased by any institution that is subject to
the supervision of the Farm Credit Administration, including the Federal Agricultural
Mortgage Corporation. 103 Additionally, the original proposal provided an exemption
from risk retention, consistent with section 15G(c)(1)(G)(iii) of the Exchange Act, 104 for
securities (1) issued or guaranteed by any state of the United States, or by any political
subdivision of a state or territory, or by any public instrumentality of a state or territory
that is exempt from the registration requirements of the Securities Act by reason of
section 3(a)(2) of the Securities Act or (2) defined as a qualified scholarship funding
bond in section 150(d)(2) of the Internal Revenue Code of 1986.
Commenters on the original proposal generally believed that the proposed
exemptions would appropriately implement the relevant provisions of the Exchange Act.
Two commenters requested that the final rule clarify that this exemption extends to
securities issued on a federally taxable as well as on a federal tax-exempt basis.
Similarly, another commenter requested that the agencies make it clear that, in order to
satisfy the qualified scholarship funding bond exemption, it is sufficient that the issuer be
the type of entity described in the definition of qualified scholarship funding bond. One
commenter did not support the broad exemption for municipal and government entities
because it believed the exemption would provide an unfair advantage to public mortgage
103
Id. at 78o-11(e)(3)(A).
104
Id. at 78o-11(c)(1)(G)(iii).
183
insurance that is not otherwise available to private mortgage insurance. Three
commenters requested that the municipal exemption be broadened to include special
purpose entities created by municipal entities because such special purpose entities are
fully accountable to the public and are generally created to accomplish purposes
consistent with the mission of the municipal entity.
Another commenter said that the exemption should be broadened to cover
securities issued by entities on behalf of municipal sponsors because the Commission has
historically, through no-action letters, deemed such securities to be exempt under section
3(a)(2) of the Securities Act. This commenter also asked that the final rule or adopting
release clarify that any “separate security” under Rule 131 under the Securities Act would
also be exempt under the risk retention rule. One commenter stated that an exemption
was appropriate in this circumstance because state and municipal issuers are required by
state constitutions to carry out a “public purpose,” which excludes a profit motive.
Several commenters recommended the agencies broaden the exemption so that all
state agency and nonprofit student lenders (regardless of section 150(d) qualification)
would be exempt from the rule. In general, these commenters stated that an exemption
would be appropriate because requiring risk retention by these entities would be
unnecessary and will cause them financial distress, thus impairing their ability to carry
out their public-interest mission. One commenter said that the original proposal would
make an erroneous distinction between nonprofit lenders that use section 150(d) and
those who do not because both types of nonprofit student lenders offer the same level of
retained risk. Also, the group noted that nonprofit and state agency student lenders are
chartered to perform a specific public purpose — to provide financing to prospective
184
students who want to enroll in higher education institutions. However, one commenter
did not support a broad exemption for nonprofit student lenders because there did not
appear to be anything inherent in a nonprofit structure that would protect investors in
securitizations. Further, this commenter noted that there have been nonprofit private
education lenders whose business model differs little from for-profit lenders.
After considering the comments received, the agencies are again proposing the
exemptions under section 15G(c)(1)(G)(ii) of the Exchange Act without substantive
modifications from the original proposal. The agencies believe that broadening the scope
of the exemption to cover private entities that are affiliated with municipal entities, but
that are not themselves municipal entities, would go beyond the statutory scope of section
15G(c)(1)(G)(iii) of the Exchange Act. Similarly, the agencies are not expanding the
originally proposed exemptions to cover nonprofit student loan lenders. The agencies
believe that nonprofit student loan lending differs little from for-profit student loan
lending and that there does not appear to be anything inherent in the underwriting
practices of nonprofit student loan lending to suggest that these securitizations align
interests of securitizers with interests of investors so that an exemption would be
appropriate under section 15G(c)(1)(G) or section 15G(e) of the Exchange Act.
C. Exemption for Certain Resecuritization Transactions
Under the original proposal, certain ABS issued in resecuritization transactions 105
(resecuritization ABS) would have been exempted from the credit risk retention
requirements if they met two conditions. First, the transaction had to be collateralized
105
In a resecuritization transaction, the asset pool underlying the ABS issued in the
transaction comprises one or more asset-backed securities.
185
solely by existing ABS issued in a securitization transaction for which credit risk was
retained as required under the original proposal, or which was otherwise exempted from
credit risk retention requirements (compliant ABS). Second, the transaction had to be
structured so that it involved the issuance of only a single class of ABS interests and
provided for a pass through of all principal and interest payments received on the
underlying ABS (net of expenses of the issuing entity) to the holders of such class of
ABS. Because the holder of a resecuritization ABS structured as a single-class passthrough security would have a fractional undivided interest in the pool of underlying
ABS and in the distributions of principal and interest (including prepayments) from these
underlying ABS, the agencies reasoned that a resecuritization ABS meeting these
requirements would not alter the level or allocation of credit and interest rate risk on the
underlying ABS.
In the original proposal, the agencies proposed to adopt this exemption under the
general exemption provisions of section 15G(e)(1) of the Exchange Act. 106 The agencies
noted that a resecuritization transaction that created a single-class pass-through would
neither increase nor reallocate the credit risk inherent in that underlying compliant ABS,
and that the transaction could allow for the combination of ABS backed by smaller pools,
and the creation of ABS that may be backed by more geographically diverse pools than
106
As discussed above in Part IV of this Supplementary Information, the agencies may
jointly adopt or issue exemptions, exceptions, or adjustments to the risk retention rules, if
such exemption, exception, or adjustment would: (A) help ensure high quality
underwriting standards for the securitizers and originators of assets that are securitized or
available for securitization; and (B) encourage appropriate risk management practices by
the securitizers and originators of assets, improve the access of consumers and businesses
to credit on reasonable terms, or otherwise be in the public interest and for the protection
of investors. 15 U.S.C. 78o-11(e)(1).
186
those that can be achieved by the pooling of individual assets. As a result, the exemption
for this type of resecuritization could improve the access of consumers and businesses to
credit on reasonable terms. 107
Under the original proposal, sponsors of resecuritizations that were not structured
purely as single-class pass-through transactions would have been required to meet the
credit risk retention requirements with respect to such resecuritizations unless another
exemption for the resecuritization was available. Thus, the originally proposed rule
would subject resecuritizations to separate risk retention requirements that separate the
credit or pre-payment risk of the underlying ABS into new tranches. 108
The agencies received a number of comments on the resecuritization exemption in
the original proposal, principally but not exclusively from financial entities and financial
trade organizations. The commenters, including investor members of one trade
107
See Original Proposal, 76 FR at 24138.
108
For example, under the proposed rules, the sponsor of a CDO would not meet the
proposed conditions of the exemption and therefore would be required to retain risk in
accordance with the rule with respect to the CDO, regardless of whether the underlying
ABS have been drawn exclusively from compliant ABS. See 15 U.S.C. 78o-11(c)(1)(F).
In a typical CDO transaction, a securitizer pools interests in the mezzanine tranches from
many existing ABS and uses that pool to collateralize the CDO. Repayments of principal
on the underlying ABS interests are allocated so as to create a senior tranche, as well as
supporting mezzanine and equity tranches of increasing credit risk. Specifically, as
periodic principal payments on the underlying ABS are received, they are distributed first
to the senior tranche of the CDO and then to the mezzanine and equity tranches in order
of increasing credit risk, with any shortfalls being borne by the most subordinate tranche
then outstanding.
Similarly, with regard to ABS structured to protect against pre-payment risk or that are
structured to achieve sequential paydown of tranches, the agencies reasoned that although
losses on the underlying ABS would be allocated to holders in the resecuritization on a
pro rata basis, holders of longer duration classes in the resecuritization could be exposed
to a higher level of credit risk than holders of shorter duration classes. See Original
Proposal, 76 FR at 24138 n.193.
187
organization, generally favored expanding the resecuritization exemption and allowing
greater flexibility in these transactions, although individual commenters differed in how
broad a new exemption should be. Further, while many commenters generally supported
the first criterion for the proposed exemption that the ABS used in the resecuritization
must be compliant with, or exempt from, the risk retention rules, they did not support the
second criterion that only a single class pass-through be issued in the resecuritization
transaction for the proposed exemption to apply. In particular, they did not believe that
this condition would further the goal of improving underwriting of the underlying assets,
although they believed that it would unnecessarily restrict a source of liquidity in the
market place.
A few commenters asserted that applying risk retention to resecuritization of ABS
that are already in the market place, whether or not the interests are compliant ABS,
cannot alter the incentives for the original ABS sponsor to create high-quality assets.
Some commenters also stated that resecuritizations allowed the creation of specific
tranches of ABS interests, such as planned asset class securities, or principal or interest
only strips, that are structured to meet specific demands of investors, so that subjecting
such transactions to additional risk retention (possibly discouraging the issuance of such
securities) could prevent markets from efficiently fulfilling investor needs. Commenters
also noted that resecuritization transactions allow investors to sell ABS interests that they
may no longer want by creating assets that are more highly valued by other investors,
thereby improving the liquidity of these assets. Another commenter advised that the rule
should encourage resecuritizations that provided additional collateral or enhancements
such as insurance policies for the resecuritization ABS. Another commenter noted that
188
resecuritizations of mortgage backed securities were an important technical factor in the
recent run up in prices and that requiring additional risk retention would chill the market
unnecessarily.
Some comments suggested that the agencies should expand the exemption to
some common types of resecuritizations, but not apply it to CDOs. To distinguish which
should be subject to the exemption, commenters suggested not extending the exemption
to transactions with managed pools of collateral, or limiting the types or classes of ABS
that could be resecuritized, and the derivatives an issuing entity could use. A few
commenters specifically stated that the resecuritization exemption should be extended to
include sequential pay resecuritizations or resecuritizations structured to address
prepayment risk, if they were collateralized by compliant ABS. Another commenter
recommended that the exemption include any tranched resecuritizations (such as typical
collateralized mortgage obligations) of ABS issued or guaranteed by the U.S.
government, the Government National Mortgage Associations or the Enterprises, as these
instruments were an important source of liquidity for the underlying assets.
Finally, one commenter requested clarification as to whether the resecuritizations
of Enterprise ABS, guaranteed by the Enterprises, would be covered by the provision for
Enterprises in the original proposal. The agencies are clarifying that to the extent the
Enterprises act as sponsor for a resecuritization of their ABS, fully guarantee the resulting
securities as to principal and interest, and meet the other conditions the agencies are again
proposing, that provision would apply to the Enterprise securitization transaction. 109
109
See proposed rule at § __.8. The wording of the provision as proposed is not limited
to just initial Enterprise-sponsored securitization transactions but would also apply to
189
The agencies continue to believe that the resecuritization exemption from the
original proposal is appropriate for the reasons discussed in that proposal, and above.
Accordingly, the agencies are again proposing this provision without substantive change.
Additionally, the agencies have carefully considered comments asking for expansion of
the resecuritization exemption. In this respect, the agencies have considered that
sponsors of resecuritization transactions would have considerable flexibility in choosing
what ABS interests to include in an underlying pool as well as in creating the specific
structures. This choice of securities is essentially the underwriting of those securities for
selection in the underlying pool. The agencies consider it appropriate, therefore, to
propose rules that would provide sponsors with sufficient incentive to choose ABS that
have lower levels of credit risk and to not use a resecuritization to obscure what might
have been sub-par credit performance of certain ABS. It is also appropriate to apply the
risk retention requirements in resecuritization transactions because resecuritization
transactions can result in re-allocating the credit risk of the underlying ABS interest.
Taking into account these considerations, the agencies believe that requiring additional
risk retention as the standard for most resecuritization transactions is consistent with the
intent of section 15G of the Exchange Act, both in light of recent history and the specific
statutory requirement that the agencies adopt risk retention standards for CDOs, and
similar instruments collateralized by ABS. 110
The agencies note that to qualify for the proposed resecuritization exemptions, the
ABS that are resecuritized would have to be compliant ABS. As the agencies noted in
ABS created by Enterprise-sponsored resecuritizations, as long as all the proposed
conditions are met.
110
See 15 U.S.C. 78o-11(c)(1)(F).
190
the original proposal, section 15G of the Exchange Act would not apply to ABS issued
before the effective date of the agencies’ final rules, 111 and that as a practical matter,
private-label ABS issued before the effective date of the final rules would typically not be
compliant ABS. ABS issued before the effective date that meet the terms of an
exemption from the proposed rule or that are guaranteed by the Enterprises, however,
could qualify as compliant ABS.
The agencies also do not believe that many of the commenters’ suggestions for
distinguishing “typical” resecuritizations from CDOs or other higher risk transactions
could be applied consistently across transactions. The agencies, however, are proposing
a modification to the original proposal in an effort to address comments about liquidity
provision to the underlying markets and access to credit on reasonable terms while
remaining consistent with the purpose of the statute. Certain RMBS resecuritizations are
designed to address pre-payment risk for RMBS, because RMBS tend to have longer
maturities than other types of ABS and high pre-payment risk. In this market, investors
often seek securities structured to protect against pre-payment risk and have greater
certainty as to expected life. At the same time, these resecuritizations do not divide again
the credit risk of the underlying ABS with new tranches of differing subordination and
therefore do not give rise to the same concerns as CDOs and similar resecuritizations that
involve a subsequent tranching of credit risk.
111
See id. at § 78o-11(i) (regulations become effective with respect to residential
mortgage-backed ABS one year after publication of the final rules in the Federal
Register, and two years for all other ABS).
191
Accordingly, the agencies are proposing a limited expansion of the
resecuritization exemption to include certain resecuritizations of RMBS that are
structured to address pre-payment risk, but that do not re-allocate credit risk by tranching
and subordination structures. To qualify for this exemption, the transaction would be
required to meet all of the conditions set out in the proposed rule. First, the transaction
must be a resecuritization of first-pay classes of ABS, which are themselves
collateralized by first-lien residential mortgage located in a state of the United States or
its territories. 112 The proposal would define “first-pay class” as a class of ABS interests
for which all interests in the class are entitled to the same priority of principal payment
and that, at the time of closing of the transaction, are entitled to repayments of principal
and payments of interest prior to or pro-rata, except for principal-only and interest only
tranches that are prior in payment, with all other classes of securities collateralized by the
same pool of first-lien residential mortgages until such class has no principal or notional
balance remaining. 113 The proposed rule also would allow a pool collateralizing an
exempted resecuritization to contain servicing assets. 114
112
Section 2 of the proposed rule defines “state” as having the same meaning as in
section 3(a)(16) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(16)). Thus,
the mortgages underlying the ABS interest that would be re-securitized in a transaction
exempted under this provision must be on property located in a state of the United States,
the District of Columbia, Puerto Rico, the Virgin Islands, or any other possession of the
United States.
113
A single class pass-through ABS under which an investor would have a fractional,
undivided interest in the pool of mortgages collateralizing the ABS would qualify as a
“first pay class” under this definition.
114
The proposed definition of “servicing assets” is discussed in Part II of this
Supplementary Information.
192
In addition, the proposed rule would require that the first-pay classes of ABS used
in the resecuritization transaction consist of compliant ABS. Further, to qualify for the
exemption any ABS interest issued in the resecuritization would be required to share pro
rata in any realized principal losses with all other ABS holders of ABS interests issued in
the resecuritization based on the unpaid principal balance of such interest at the time the
loss is realized.
The proposed rule would also require the transaction to be structured to reallocate
pre-payment risk and specifically would prohibit any structure which re-allocates credit
risk (other than credit risk reallocated only as a collateral consequence of reallocating
pre-payment risk). It would also prohibit the issuance of an inverse floater or any
similarly structured class of ABS as part of the exempt resecuritization transaction. The
proposal would define “inverse floater” as an ABS interest issued as part of a
securitization transaction for which interest or other income is payable to the holder
based on a rate or formula that varies inversely to a reference rate of interest.
The exclusion from the proposed exemption of transactions involving the issuance
of an inverse floater class would address the high risk of loss that has been associated
with these instruments.
The agencies are proposing the expanded exemptions from risk retention for
resecuritizations of first- pay classes of RMBS under the general exemption provisions of
section 15G(e)(1) of the Exchange Act, and believe that the provision is consistent with
the requirements of this section. The provisions that would limit the exemption to
resecuritizations of first-pay classes of RMBS, and the specific prohibitions on structures
193
that re-allocate credit risk, would also help minimize credit risk associated with the
resecuritization ABS and prevent the transaction from reallocating existing credit risk.
Request for Comment
73(a). Would the issuance of an inverse floater class of ABS be necessary to
properly structure other classes of ABS to provide adequate pre-payment protection for
investors as part of the resecuritization transaction? 73(b). Would this prohibition
frustrate the goals of the proposed exemption?
D. Other Exemptions from Risk Retention Requirements
In the original proposal, the agencies’ requested comment about whether there
were other securitization transactions not covered by the exemptions in the original
proposal that should be exempted from risk retention. The agencies received requests
from commenters for exemptions from risk retention for some types of assets, as
discussed below. After carefully considering the comments, the agencies are proposing
some additional exemptions from risk retention that were not included in the original
proposal.
1. Utility Legislative Securitizations
Some commenters on the original proposal requested that the agencies exempt
ABS issued by regulated electric utilities that are backed by stranded costs, transition
property, system restoration property and other types of property specifically created or
defined for regulated utility-related securitizations by state legislatures (utility legislative
securitizations). These commenters asserted that risk retention for these transactions
would not encourage better underwriting or otherwise promote the purposes of the risk
retention requirement, because a utility legislative securitization can generally only occur
194
after findings by a state legislature and a public service commission that it is desirable in
the interest of utility consumers and after utility executives representing the utility’s
investors seek such financing. According to commenters, the structure is used to
minimize the costs of financing significant utility related costs, and the increase in the
cost of such financing that would result from risk retention would not be warranted,
because it would not affect credit quality of the underlying assets. Further, commenters
asserted that this type of financing avoids the risk of poor underwriting standards, adverse
selection and minimizes credit risk, because the utility sponsor does not choose among its
customers for inclusion or exclusion from the transaction and because the financing order
mechanism, or choose order of repayment.
The agencies have considered these comments and are proposing to provide an
exemption from risk retention for utility legislative securitizations. Specifically, the reproposed rule would exempt any securitization transaction where the ABS are issued by
an entity that is wholly owned, directly or indirectly, by an investor-owned utility
company that is subject to the regulatory authority of a state public utility commission or
other appropriate state agency. Additionally, ABS issued in an exempted transaction
would be required to be secured by the intangible property right to collect charges for the
recovery of specified costs and such other assets of the issuing entity. The proposed rule
would define “specified cost” to mean any cost identified by a state legislature as
appropriate for recovery through securitization pursuant to “specified cost recovery
legislation,” which is legislation enacted by a state that:
•
Authorizes the investor-owned utility company to apply for, and authorized
the public utility commission or other appropriate state agency to issue, a
195
financing order determining the amount of specified costs the utility will be
allowed to recover;
•
Provides that pursuant to a financing order, the utility acquires an intangible
property right to charge, collect, and receive amounts necessary to provide for
the full recovery of the specified costs determined to be recoverable, and
assures that the charges are non-bypassable and will be paid by customers
within the utility’s historic service territory who receive utility goods or
services through the utility’s transmission and distribution system, even if
those customers elect to purchase these goods or services from a third party;
and
•
Guarantees that neither the state nor any of its agencies has the authority to
rescind or amend the financing order, to revise the amount of specified costs,
or in any way to reduce or impair the value of the intangible property right,
except as may be contemplated by periodic adjustments authorized by the
specified cost recovery legislation. 115
As a general matter, the agencies believe that, although it falls somewhat short of
being an explicit state guarantee, the financing order mechanism typical in utility
legislative securitizations (by which, under state law, the state periodically adjusts the
115
The eligibility standards for the exemption are similar to certain requirements for
these securitizations outlined in IRS Revenue Procedure 2005-62, 2005-2 C.B. 507, that
are relevant to risk retention. This Revenue Procedure outlines the Internal Revenue
Service’s requirements in order to treat the securities issued in these securitizations as
debt for tax purposes, which is the primary motivation for states and public utilities to
engage in such securitizations.
196
amount the utility is authorized to collect from users of its distribution network) would
ensure to a sufficient degree that adequate funds are available to repay investors.
2. Seasoned Loans
Some commenters on the original proposal urged the agencies to create an
exemption for securitizations of loans that were originated a significant period of time
prior to securitization (seasoned loans) and that had remained current, because
underwriting quality would no longer be as relevant to the credit performance of such
loans. Commenters representing different groups provided different suggestions on the
length of time required for a loan to be seasoned: sponsors representing issuers suggested
a two-year seasoning period for all loans, whereas commenters representing investors
suggested fully amortizing fixed-rate loans should be outstanding and performing for
three years and for adjustable-rate loans the time period should depend on the reset date
of the loan.
The agencies believe that risk retention as a regulatory tool to promote sound
underwriting is less relevant after loans have been performing for an extended period of
time. Accordingly, for reasons similar to the sunset provisions in section 12(f) of the
proposed rule (as discussed in Part IV.F of this Supplementary Information), the agencies
are proposing an exemption from risk retention for securitizations of seasoned loans that
is similar to the sunset provisions. The proposed rule would exempt any securitization
transaction that is collateralized solely (excluding servicing assets) by seasoned loans that
(1) have not been modified since origination and (2) have never been delinquent for 30
197
days or more. 116 With respect to residential mortgages, the proposed rule would define
“seasoned loan” to mean a residential mortgage loan that either (1) has been outstanding
and performing for the longer of (i) five years or (ii) the period until the outstanding
principal balance of the loan has been reduced to 25 percent of the original principal
balance; or (2) has been outstanding and performing for at least seven years. For all other
asset classes, the proposed rule would define “seasoned loan” to mean a loan that has
been outstanding and performing for the longer of (1) two years, or (2) the period until
the outstanding principal balance of the loan has been reduced to 33 percent of the
original principal balance.
3. Legacy Loan Securitizations
Some commenters on the original proposal recommended an exemption from risk
retention for securitizations and resecuritizations of loans made before the effectiveness
of the final rule, or legacy loans, arguing that risk retention would not affect the
underwriting standards used to create those loans.
The agencies are not proposing to provide an exemption from risk retention for
securitizations of loans originated before the effective date of the rule (legacy loans).
The agencies do not believe that such securitizations should be exempt from risk
retention because underwriting occurred before the effective date of the rule. The
agencies believe that requiring risk retention does affect the quality of the loans that are
selected for a securitization transaction, as the risk retention requirements are designed to
incentivize securitizers to select well-underwritten loans, regardless of when those loans
116
The definition of “servicing assets” is discussed in Part II.B of this Supplementary
Information.
198
were underwritten. Furthermore, the agencies do not believe that exempting
securitizations of legacy loans from risk retention would satisfy the statutory criteria for
an exemption under 15G(e) of the Exchange Act. 117
4. Corporate Debt Repackagings
Several commenters urged the agencies to adopt an exemption from risk retention
for “corporate debt repackaging” 118 securitization transactions. One commenter asserted
that currently in corporate debt repackaging transactions, depositors and sponsors do not
hold any interest in the repackaging vehicle. These commenters asserted that sponsors
would not pursue corporate debt repackagings if they were required to retain risk,
because it would fundamentally change the dynamics of these transactions and could
raise accounting and other issues. Another commenter observed that corporate debt
obligations are, generally, full recourse obligations of the issuing company and the issuer
of the corporate bonds bears 100 percent of the credit risk. The commenters stated that
adding an additional layer of risk retention to a repackaging of obligations that are
themselves the subject of 100 percent risk retention by requiring the sponsor of the
repackaging transaction to retain an additional 5 percent of the credit risk would serve no
regulatory purpose. Another commenter asserted that not granting an exemption for
corporate debt repackagings would reduce the ability of investors to invest in tailored
117
See 15 U.S.C. 78o-11(e).
118
According to commenters, corporate debt repackagings are created by the deposit of
corporate debt securities purchased by the sponsoring institution in the secondary market
into a trust which issues certificates backed by cash flows on the underlying corporate
bonds.
199
repackaged securities and likewise reduce funding and liquidity to the detriment of access
of businesses to credit on reasonable terms.
The agencies are not proposing an exemption from risk retention for corporate
debt repackagings. The agencies do not believe an exemption is warranted because the
underlying assets (the corporate bonds) are not ABS. Regardless of the level of credit
risk a corporate debt issuer believes it holds on its underlying corporate bonds, the risk
retention requirement would apply at the securitization level, and the sponsor of the
securitization should be required to hold 5 percent of the credit risk of the securitization
transaction. Risk retention at the securitization level for corporate debt repackagings
aligns the sponsor’s interests in selecting the bonds in the pool with investors in the
securitization, who are often retail investors.
200
5. “Non-conduit” CMBS Transactions
Some commenters on the original proposal requested that the agencies include an
exemption or special treatment for “non-conduit” CMBS transactions. Examples of
“non-conduit” CMBS transactions include single-asset transactions; single-borrower
transactions; large loan transactions (fixed and floating) with pools of one to 10 loans;
and large loan transactions having only an investment-grade component. Commenters
asserted that, because such transactions involve very small pools of loans (or a single
loan), a prospective investor is able to scrutinize each loan and risk retention would be
unnecessary for investor protection. In particular, commenters noted that the CMBS
menu option would work only for “conduit” CMBS securitizations in which originators
of commercial mortgage loans aggregate loan pools of 10 to 100 loans. Suggestions for
the treatment of “non-conduit” CMBS transactions included:
•
Providing a complete exemption for single-asset transactions; single-borrower
transactions; large loan transactions (fixed and floating) with pools of one to
10 loans; and large loan transactions having only an investment-grade
component;
•
Allowing mezzanine loans in single borrower and floating rate CMBS
transactions to satisfy the risk retention requirement and any PCCRA
requirements; and
•
Exempting single borrower and large loan transactions with less than a certain
number of loans.
The agencies are not proposing an exemption from risk retention for “nonconduit” CMBS securitizations. While the agencies do not dispute that the smaller pools
201
of loans in these transaction allow for fuller asset-level disclosure in offering documents
and could allow prospective investors the opportunity to review each loan in the pool, the
agencies do not believe that this fact alone is sufficient grounds to satisfy the exemption
standards of section 15G of the Exchange Act. Furthermore, the agencies do not believe
that there are significant differences between “conduit” and “non-conduit” CMBS to
warrant a special exemption for “non-conduit” CMBS.
6. Tax Lien-Backed Securities Sponsored by a Municipal Entity
One commenter on the original proposal asserted that tax lien-backed
securitizations are not ABS under the Exchange Act and should not be subject to risk
retention requirement. According to this commenter, under state and municipal law, all
property taxes, assessment and sewer and water charges become liens on the day they
become due and payable if unpaid. These taxes, assessments and charges, and any
related tax liens, arise by operation of law and do not involve an extension of credit by
any party or any underwriting decision on the party of the city. If the agencies disagreed
with the position that tax lien securitizations are not ABS, this commenter requested that
the agencies provide a narrowly tailored exemption for any tax lien-backed securitization
transactions sponsored by a municipality. In this regard, the commenter argued that such
securitizations do not involve any of the public policy concerns underlying the risk
retention requirement because the tax liens arise by operation of law and do not involve
an extension of credit or underwriting decisions on the part of the city. As a result, this
commenter stated that applying the credit risk retention rules would not further the
agencies’ stated goals of encouraging prudent underwriting standards and ensuring the
quality of the assets underlying a securitization transaction.
202
The agencies are not proposing an exemption from risk retention for
securitizations of tax lien-backed securities sponsored by municipal entities. The
agencies believe that there is insufficient data to justify granting a specific exemption.
Furthermore, the agencies are concerned that this type of exemption could end up being
overly broad in its application and be used to exempt sponsors of securitizations of
securities from programs, such as Property Assessed Clean Energy programs, that use a
securitized “tax lien” structure to fund and collect consensual financing for property
improvements desired by private property owners.
7. Rental Car Securitizations
One commenter on the original proposal requested that the agencies exempt rental
car securitizations because of the extensive overcollateralization required to support a
rental car securitization, the on-going structural protections with respect to collateral
valuation, and the importance of the vehicles to the business operations of the car rental
operating company.
The agencies are not proposing an exemption from risk retention for rental car
securitizations. Risk retention is required of other sponsors that similarly rely on
securitization for funding and that sponsor securitizations with similar
overcollateralization protections and structural features. The agencies do not believe that
there are particular features of this type of securitization that would warrant an exemption
under the factors that the agencies must consider in section 15G(e) of the Exchange Act.
E. Safe Harbor for Foreign Securitization Transactions
The original proposal included a “safe harbor” provision for certain securitization
transactions based on the limited nature of the transactions’ connections with the United
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States and U.S. investors (foreign securitization transactions). The safe harbor was
intended to exclude from the proposed risk retention requirements transactions in which
the effects on U.S. interests are sufficiently remote so as not to significantly impact
underwriting standards and risk management practices in the United States or the
interests of U.S. investors. Accordingly, the conditions for use of the safe harbor limited
involvement by persons in the United States with respect to both assets being securitized
and the ABS sold in connection with the transaction. Finally, as originally proposed, the
safe harbor would not have been available for any transaction or series of transactions
that, although in technical compliance with the conditions of the safe harbor, was part of
a plan or scheme to evade the requirements of section 15G Exchange Act and the
proposed rules.
As set forth in the original proposal, the risk retention requirement would not
apply to a securitization transaction if: (1) the securitization transaction is not required to
be and is not registered under the Securities Act; (2) no more than 10 percent of the dollar
value by proceeds (or equivalent if sold in a foreign currency) of all classes of ABS
interests sold in the securitization transaction are sold to U.S. persons or for the account
or benefit of U.S. persons; (3) neither the sponsor of the securitization transaction nor the
issuing entity is (i) chartered, incorporated, or organized under the laws of the United
States, or a U.S. state or territory or (ii) the unincorporated branch or office located in the
United States of an entity not chartered, incorporated, or organized under the laws of the
United States, or a U.S. state or territory (collectively, a U.S.-located entity); (4) no more
than 25 percent of the assets collateralizing the ABS sold in the securitization transaction
204
were acquired by the sponsor, directly or indirectly, from a consolidated affiliate of the
sponsor or issuing entity that is a U.S.-located entity. 119
Commenters on the original proposal generally favored the creation of a safe
harbor for certain foreign securitizations. Several commenters, however, requested that
the exemption be broadened. Specifically, several commenters noted that the U.S. risk
retention rules may be incompatible with foreign risk retention requirements, such as the
European Union risk retention requirements, and requested that the safe harbor be
modified to more readily facilitate cross-border compliance with varied foreign risk
retention requirements.
Several commenters supported a mutual recognition system for some cross-border
offerings. For example, commenters recommended various methodologies for
establishing a mutual recognition framework that would permit non-U.S. securitizers to
either satisfy or be exempt from U.S. risk retention requirements if a sufficient minimum
amount of a foreign securitization complies with foreign risk retention requirements that
would be recognized under such a framework. A few commenters recommended that in
the absence of a mutual recognition framework, a higher proceeds limit threshold of 30
percent, or as much as 33 percent, would be more appropriate to preserve cross-border
market liquidity, in at least some circumstances. A few commenters also requested
clarification of how the percentage value of ABS sold to U.S. investors under the 10
percent proceeds limit should be calculated.
119
See infra note 112 for the definition of “state.”
205
The agencies are proposing a foreign safe harbor that is similar to the original
proposal but modified to address some commenter concerns. The proposal makes a
revision to the safe harbor eligibility calculation to clarify that interests retained by the
sponsor may be included in calculating the percentage of ABS interests sold in the
securitization transaction that are sold to U.S. persons or for the account or benefit of
U.S. persons. The proposed safe harbor eligibility calculation also would clarify that any
ABS transferred to U.S. persons or for the account or benefit of U.S. persons, including
U.S. affiliates of non-U.S. sponsors, must be included in calculating eligibility for the
safe harbor.
The agencies are again proposing a 10 percent limit on the value of classes of
ABS sold to U.S. persons for safe harbor eligibility, similar to the original proposal. The
agencies continue to believe that the proposed 10 percent limit appropriately aligns the
safe harbor with the objective of the rule, which is to exclude only those transactions with
limited effect on U.S. interests, underwriting standards, risk management practices, or
U.S. investors.
In addition, the agencies are concerned that expansion of the 10 percent limit
would not effectively address the concerns of foreign securitization sponsors, some of
whom rely extensively on U.S. investors for liquidity. However, the agencies also
believe that the proposed rule incorporates sufficient flexibility for sponsors with respect
to forms of eligible risk retention to permit foreign sponsors seeking a significant U.S.
investor base to retain risk in a format that satisfies home country and U.S. regulatory
requirements. For example, in response to comments from mortgage securitizers in the
United Kingdom who use revolving trust structures, the agencies are proposing to permit
206
seller’s interest to qualify as risk retention for revolving master trusts securitized by nonrevolving assets. The agencies’ revisions to the original proposal that are designed to
provide flexibility to foreign securitization sponsors that use the revolving master trust
structure are discussed in detail in Part III.B.2 of this Supplementary Information.
The agencies considered the comments requesting a mutual recognition
framework and observe that such a framework has not been generally adopted in nonU.S. jurisdictions with risk retention requirements. The agencies believe that given the
many differences between jurisdictions, finding comparability among securitization
frameworks that place the obligation to comply with risk retention requirements upon
different parties in the securitization transaction, have different requirements for hedging,
risk transfer, or unfunded risk retention, or otherwise vary materially, it likely would not
be practicable to construct such a “mutual recognition” system that would meet all the
requirements of section 15G of the Exchange Act. Moreover, in several such
jurisdictions, the risk retention framework recognizes unfunded forms of risk retention,
such as standby letters of credit, which the agencies do not believe provide sufficient
alignment of incentives and have rejected as eligible forms of risk retention under the
U.S. framework.
Request for Comment
74. Are there any extra or special considerations relating to these circumstances
that the agencies should take into account?
75(a). Should the more than 10 percent proceeds trigger be higher or lower (e.g.,
0 percent, 5 percent, 15 percent, or 20 percent)? 75(b). If so, what should the trigger be
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and why? 75(c). Are the eligibility calculations appropriate? 75(d). If not, how should
they be modified?
F. Sunset on Hedging and Transfer Restrictions
As discussed in Part III.D of this Supplementary Information, Section
15G(c)(1)(A) of the Exchange Act provides that sponsors may not hedge or transfer the
risk retention interest they are required to hold. 120
The agencies originally proposed that sponsors generally would have to hold risk
retention for the duration of a securitization transaction. The proposal did not provide
any sunset provisions after which the prohibitions on sale and hedging of retained
interests would expire, though the proposal did specifically include a question related to
including a sunset provision in the final rule and requested commenter feedback.
While a few commenters representing the investor community expressed support
for risk retention for the life of the security, the majority of commenters who discussed
this topic in their letters opposed risk retention lasting for the duration of the transaction.
Generally, these commenters argued that credit losses on underlying assets due to poor
underwriting tend to occur in the first few years of the securitization and that defaults
occur less frequently as the assets are seasoned. Additionally, they asserted that the risk
retention requirement as proposed would reduce liquidity in the financial system and
increase the amount of capital banks would be required to hold, thereby reducing credit
availability and raising borrowing costs for consumers and businesses. Thus, they
120
15 U.S.C. 78o–11(c)(1)(A). As with other provisions of risk retention, the agencies
could provide an exemption under section 15G(e) of the Exchange Act if certain findings
were met. See id. at § 78o-11(e).
208
argued, a sunset provision should be included in the final rule to help offset the costs and
burden created by the retention requirement. After the mandated risk retention period,
sponsors or their consolidated affiliates would be allowed to hedge or transfer to an
unaffiliated third party the retained interest or assets.
Commenters proposed a variety of suggestions for incorporating a sunset
provision in the final rule. Some favored a blanket risk retention provision, whereby
retention of the interest would no longer be required after a certain period of time,
regardless of the asset class. They stated that a blanket sunset requirement would be the
easiest to implement and dovetails with the agencies’ stated goal of reducing regulatory
complexity. Among those commenters advocating for a blanket sunset, most stated that a
three year sunset provision would be ideal. A subset of these commenters acknowledged
that three years could be too long for some asset classes (such as automobile ABS),
however they maintained that historical loss rates show that this duration would be
appropriate for some of the largest asset classes, in particular CMBS and RMBS. They
stated that, after three years, losses related to underwriting defects have already occurred
and any future credit losses are typically attributed to financial events or, in the case of
RMBS, life events such as illness or unemployment, unrelated to the underwriting
quality. One commenter estimated that a three-year sunset would reduce the costs
associated with risk retention by 50 percent.
Other commenters suggested that the sunset provision should vary by asset class.
While this might be more operationally complex to implement than a blanket sunset
provision, they stated it would be more risk sensitive as it would take into account the
fact that different asset classes have varying default rates and underlying exposure
209
durations (for example, 30 years for a standard residential mortgage versus five years for
a typical automobile loan). For example, commenters suggested a range of risk retention
durations for RMBS, stating that anywhere from two to five years would be appropriate.
Another commenter advocated that the risk retention requirement for RMBS should end
at the later of five years or when the pool is reduced to 25 percent of its original balance.
Similarly for CMBS, some commenters suggested requiring risk retention for only two or
three years in the final rule. A few commenters stated that a sunset provision should be
based upon the duration of the asset in question. For instance, one commenter stated that
automobile ABS should have a sunset provision of less than five years since automobile
loans are of such a short duration, while another commenter advocated using the average
pool duration to determine the length of required risk retention.
The agencies have carefully considered the comments, as well as other
information on credit defaults for various asset classes in contemplating whether a limit
on the duration of the risk retention requirement would be appropriate. The agencies
have concluded that the primary purpose of risk retention—sound underwriting—is less
likely to be effectively promoted by risk retention requirements after a certain period of
time has passed and a peak number of delinquencies for an asset class has occurred.
Accordingly, the agencies are proposing two categories of duration for the
transfer and hedging restrictions under the proposed rule – one for RMBS and one for
other types of ABS. For all ABS other than RMBS, the transfer and hedging restrictions
under the rule would expire on or after the date that is the latest of (1) the date on which
the total unpaid principal balance of the securitized assets that collateralize the
securitization is reduced to 33 percent of the original unpaid principal balance as of the
210
date of the closing of the securitization, (2) the date on which the total unpaid principal
obligations under the ABS interests issued in the securitization is reduced to 33 percent of
the original unpaid principal obligations at the closing of the securitization transaction, or
(3) two years after the date of the closing of the securitization transaction.
Similarly, the agencies are proposing, as an exception to the transfer and hedging
restrictions of the proposed rule and section 15G of the Exchange Act, to permit the
transfer of the retained B-piece interest from a CMBS transaction by the sponsor or initial
third-party purchaser to another third-party purchaser five years after the date of the
closing of the securitization transaction, provided that the transferee satisfies each of the
conditions applicable to the initial third-party purchaser under the CMBS option (as
described above in Part III.B.5 of this Supplementary Information).
The agencies believe the exemptions to the prohibitions on transfer and hedging
for both non-residential mortgage ABS and CMBS would help ensure high quality
underwriting standards for the securitizers and originators of non-residential mortgage
ABS and CMBS, would improve the access of consumers and businesses to credit on
reasonable terms, and are in the public interest and for the protection of investors – and
thus satisfy the conditions for exceptions to the rule. 121 After losses due to underwriting
quality occur in the initial years following a securitization transaction, risk retention does
little to improve the underwriting quality of ABS as most subsequent losses are related to
financial events or, in the case of RMBS, life events not captured in the underwriting
process. In addition, these exemptions would improve access to credit for consumer and
121
15 U.S.C. 78o–11(e)(2).
211
business borrowers by increasing potential liquidity in the non-residential mortgage ABS
and CMBS markets.
Because residential mortgages typically have a longer duration than other assets,
weaknesses in underwriting may show up later than in other asset classes and can be
masked by strong housing markets. Moreover, residential mortgage pools are uniquely
sensitive to adverse selection through prepayments: if market interest rates fall,
borrowers refinance their mortgages and prepay their existing mortgages, but refinancing
is not available to borrowers whose credit has deteriorated, so the weaker credits become
concentrated in the RMBS pool in later years. Accordingly, the agencies are proposing a
different sunset provision for RMBS backed by residential mortgages that are subject to
risk retention. Under the rule, risk retention requirements with respect to RMBS would
end on or after the date that is the later of (1) five years after the date of the closing of the
securitization transaction or (2) the date on which the total unpaid principal balance of the
residential mortgages that collateralize the securitization is reduced to 25 percent of the
original unpaid principal balance as of the date of the closing of the securitization. In any
event, risk retention requirements for RMBS would expire no later than seven years after
the date of the closing of the securitizations transaction.
The proposal also makes clear that the proposed rule’s restrictions on transfer and
hedging end if a conservator or receiver of a sponsor or other holder of risk retention is
appointed pursuant to federal or state law.
Request for Comment
76(a). Are the sunset provisions appropriately calibrated for RMBS (i.e., later of
five years or 25 percent, but no later than seven years) and all other asset classes (i.e.,
212
later of two years or 33 percent)? 76(b). If not, please provide alternative sunset
provision calibrations and any relevant analysis to support your assertions.
77(a). Is it appropriate to provide a sunset provision for all RMBS, as opposed to
only amortizing RMBS? 77(b). Why or why not? 77(c). What effects might this have
on securitization market practices?
G. Federal Deposit Insurance Corporation Securitizations
The agencies are proposing an additional exemption from risk retention for
securitization transactions that are sponsored by the FDIC acting as conservator or
receiver under any provision of the Federal Deposit Insurance Act or Title II of the DoddFrank Act. This new exemption is being proposed because such exemption would help
ensure high quality underwriting and is in the public interest and for the protection of
investors. 122 These receivers and conservators perform a function that benefits creditors
in liquidating and maximizing the value of assets of failed financial institutions for the
benefit of creditors and, accordingly, their actions are guided by sound underwriting
practices. Such receivers and conservators do not originate loans or other assets and thus
are not engaged in “originate to distribute” activities that led to poorly underwritten loans
and that were a significant reason for the passage of section 941 of the Dodd-Frank
Act. The quality of the assets securitized by these receivers and conservators and the
ABS collateralized by those assets will be carefully monitored and structured so as to be
consistent with the relevant statutory authority. Moreover, this exemption is in the public
interest because it would, for example, allow the FDIC to maximize the value of assets of
122
See 15 U.S.C. 78o-11(e).
213
a conservatorship or receivership and thereby reduce the potential costs of financial
institution failures to creditors.
V. Reduced Risk Retention Requirements and Underwriting Standards for ABS
Backed by Qualifying Commercial, Commercial Real Estate, or Automobile Loans
As contemplated by section 15G of the Exchange Act, the original proposal
included a zero risk retention requirement, or exemption, for securitizations of
commercial loans, commercial real estate loans, and automobile loans that met specific
proposed underwriting standards. 123 All three categories of proposed underwriting
standards contained two identical requirements. First, a securitization exempt from risk
retention under these proposed provisions could be backed only by a pool consisting
entirely of assets that met the underwriting standards. Second, sponsors would be
required to repurchase any assets that were found not to have met the underwriting
criteria at origination.
The agencies note the concern expressed by some commenters with respect to all
three of these asset classes that, for the residential mortgage asset class and QRM, a
significant portion of the existing market would qualify for an exemption from risk
retention, whereas in proposing the underwriting standards for qualifying commercial
loans, commercial real estate loans, and automobile loans, the agencies have proposed
conservative underwriting criteria that will not capture an equivalent portion of the
123
Pursuant to section 15G, only the Federal banking agencies are proposing the
underwriting definitions in §__.14 (except the asset class definitions of automobile loan,
commercial loan, and commercial real estate loan, which are being proposed by the
Federal banking agencies and the Commission), and the exemption and underwriting
standards in §§__.15 through §__.18 of the proposed rules.
214
respective markets. The agencies believe this is appropriate because the homogeneity in
the securitized residential mortgage loan market is dissimilar to the securitization market
for commercial loan or commercial real estate loan asset classes. Commercial loans and
commercial real estate loans typically focus on a common set of borrower and collateral
metrics, but they are individually underwritten and tailored to a specific borrower or
property, and often certain terms developed in view not only of the borrower’s financial
position but also the general business cycle, industry business cycle, and standards for
appropriate leverage in that industry sub-sector. The agencies believe the additional
complexity needed to create underwriting standards for every major type of business in
every economic cycle would be so great that originators would almost certainly be
dissuaded from attempting to implement them or attempting to stay abreast of the
numerous regulatory revisions the agencies would be required to issue from time to time.
Moreover, the proposed underwriting standards establish clear requirements,
which are necessary to enable originators, sponsors, and investors to be certain as to
whether any particular loan meets the rule’s requirements for an exemption. For the
agencies to expand the underwriting criteria in the fashion suggested by some
commenters, the rules would need to accommodate numerous relative standards. The
resulting uncertainty on behalf of market participants whether any particular loan was
actually correctly designated on a particular point of those relative standards to qualify
for an exemption would be expected to eliminate the market’s willingness to rely on the
exemption.
While there may be more homogeneity in the securitized automobile loan class,
the agencies are concerned that attempting to accommodate a significantly large share of
215
the current automobile loan securitization market would require weakening the
underwriting standards to the point where the agencies are skeptical that they would
consistently reflect loans of a low credit risk. For example, the agencies note that current
automobile lending often involves no or small down payments, financing in excess of the
value of the automobile (which is itself a quickly depreciating asset) to accommodate
taxes and fees, and a credit score in lieu of an analysis of the borrower’s ability to repay.
These concerns as to credit quality are evidenced by the high levels of credit support
automobile securitization sponsors build into their ABS, even for so-called “prime”
automobile loans. Moreover, securitizers from the automobile sector explicitly
disavowed any interest in using any underwriting-based exemptive approach unless the
agencies incorporated the industry’s current model, which relies almost exclusively on
matrices of credit scores (like FICO) and LTV. As is discussed in the agencies’ original
proposal, the agencies are not persuaded that it would be appropriate for the
underwriting-based exemptions under the rule to incorporate a credit score metric.
Request for Comment
78(a). In light of the significant expansion of the proposed definition of QRM,
should the agencies similarly significantly expand the type of loans that would meet the
qualifying commercial, commercial real estate and automobile loan exemptions? 78(b).
If so, please provide sufficient detailed data regarding loan underwriting criteria for each
type of loan.
A. Qualifying Commercial Loans
The original proposal included definitions and underwriting standards for
qualifying commercial loans (QCL), that, when securitized in a pool of solely QCLs,
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would have been exempt from the risk retention requirements. The proposed definition
of commercial loan generally would have included any business loan that did not fit the
definition of a commercial real estate loan or 1-4 family residential real estate loan.
The proposed criteria for a QCL included reviewing two years of past data;
forecasting two years of future data; a total liabilities ratio less than or equal to
50 percent; a leverage ratio of less than or equal to 3.0 percent; a debt service coverage
ratio of greater than or equal to 1.5 percent; a straight-line amortizing payment; fixed
interest rates; a maximum five-year, fully amortizing loan term; and representations and
warranties against the borrower taking on additional debt. Additional standards were
proposed for QCLs that are backed by collateral, including lien perfection and collateral
inspection.
Commenters generally asserted the proposed criteria were too strict in one or
more areas. These commenters proposed a general loosening of the QCL standards to
incorporate more loans, and suggested the agencies develop underwriting standards that
would encompass 20 to 30 percent of loans currently issued. One commenter asserted
that if the criteria were not loosened, the small chance a loan might qualify as a QCL
would not incentivize lenders to go through all the initial tests and perform burdensome
monitoring after origination.
Comments on the specific underwriting criteria included an observation that some
commercial loans are offered with 15 or 20-year terms, with adjustable interest rates that
reset every five years, and that such loans should qualify for the exemption. Another
commenter suggested allowing second lien loans to qualify if they met all other
217
underwriting criteria. A third commenter suggested requiring qualifying appraisals for all
tangible or intangible assets collateralizing a qualified commercial loan.
In developing the underwriting standards for the original proposal, the agencies
intended for the standards to be reflective of very high-quality loans because the loans
would be completely exempt from risk retention. The agencies have carefully considered
the comments on the original proposal, and generally believe that the high standards
proposed are appropriate for an exemption from risk retention for commercial loans. In
addition, while commercial loans do exist with longer terms, the agencies do not believe
such long-term commercial loans are necessarily as safe as shorter-term commercial
loans, as longer loans involve more uncertainty about continued repayment ability.
Accordingly, the agencies are proposing underwriting standards for QCLs similar to
those in the original proposal. However, as discussed below, the agencies are proposing
to allow blended pools to facilitate the origination and securitization of QCLs.
The agencies are proposing some modifications to the standards in the original
proposal for QCLs. Under the proposal, junior liens may collateralize a QCL. However,
if the purpose of the commercial loan is to finance the acquisition of tangible or
intangible property, or to refinance such a loan, the lender would be required to obtain a
first lien on the property for the loan to qualify as a QCL. While a commercial lender
should consider the appropriate value of the collateral to the extent it is a factor in the
repayment of the obligation, the agencies are declining to propose a requirement of a
qualifying appraisal, so as not to increase the burden associated with underwriting a
QCL.
Request for Comment
218
79(a). Are the revisions to the qualifying commercial loan exemption
appropriate? 79(b). Should other revisions be made?
80(a). In evaluating the amortization term for qualifying commercial loans, is full
amortization appropriate? 80(b). If not, what would be an appropriate amortization
period or amount for high-quality commercial loans?
B. Qualifying Commercial Real Estate Loans
The original proposal included underwriting standards for CRE loans that would
have been exempt from risk retention (qualifying CRE loans, or QCRE loans). The
proposed standards focused predominately on the following criteria: the borrower’s
capacity to repay the loan; the value of, and the originator’s security interest in, the
collateral; the loan-to-value (LTV) ratio; and, whether the loan documentation includes
the appropriate covenants to protect the value of the collateral.
Commenters generally supported the exemption from risk retention in the original
proposal for QCRE loans. However, many questioned whether the QCRE loan
exemption would be practicable, due to the stringency of the qualifying criteria proposed
by the agencies. Some commenters asserted that less than 0.4 percent of conduit loans
that have been securitized since the beginning of the CMBS market would meet the
criteria. Most commenters requested that the agencies loosen the QCRE loan criteria to
allow more loans to qualify for the exemption.
In the original proposal, a commercial real estate (CRE) loan would have been
defined as any loan secured by a property of five or more residential units or by nonresidential real property, where the primary source of repayment would come from the
proceeds of sale or refinancing of the property or rental income from entities not
219
affiliated with the borrower. In addition, the definition would have specifically excluded
land loans and loans to real estate investment trusts (REITs).
Three main concerns were expressed by commenters with respect to the definition
of CRE loans in the original proposal. First, some commenters questioned why CRE
loans must be repaid from funds that do not include rental income from an affiliate of the
borrower. These commenters said that in numerous commercial settings, particularly
hotels and hospitals, entities often rent commercial properties from affiliated borrowers,
and those rental proceeds are used to repay the underlying loans. These commenters
strongly encouraged the agencies to remove the affiliate rent prohibition.
Second, some commenters questioned the exclusion of certain land loans from the
definition of CRE in the original proposal. Specifically, these commenters stated that
numerous CMBS securitizations include loans to owners of a fee interest in land that is
ground leased to a third party who owns the improvements and whose ground lease
payments are a source of income for debt service payments on the loan. These
commenters suggested that the agencies clarify that the exclusion did not apply to such
loans.
Third, many commenters criticized the agencies for excluding loans to REITs
from the definition of CRE loans in the original proposal. These commenters asserted
that mortgage loans on commercial properties where the borrower was a REIT are no
riskier than similar loans where the borrower was a non-REIT partnership or corporation
and that a significant portion of the CMBS market involves underlying loans to finance
buildings owned by REITs. These commenters requested that the agencies delete the
220
restriction against REITs, or in the alternative clarify that the prohibition only applies to
loans to REITs that are not secured by mortgages on specific commercial real estate.
The agencies are proposing the CRE definition from the original proposal again,
with some modifications to address the commenter concerns discussed above. Regarding
affiliate rental income, the agencies were concerned when developing the original
proposal that a parent company might lease a building to an affiliate and manipulate the
rental income so that the loan on the building would meet the requirements for a
qualifying CRE loan. However, the agencies did not intend to exclude the types of hotel
loans mentioned by commenters from the CRE loan definition, because the agencies do
not consider income from hotel guests to be derived from an affiliate. The agencies are
therefore proposing to specify that “rental income” in the CRE loan definition would be
any income derived from a party who is not an affiliate of the borrower, or who is an
affiliate but the ultimate income stream for repayment comes from unaffiliated parties
(for example, in a hotel, dormitory, nursing home, or similar property).
Regarding land loans, the agencies are concerned that weakening any restriction
on land loans would allow for riskier QCRE loans, as separate parties could own the land
and the building on the land and could make servicing and foreclosure on the loan more
difficult. Therefore, the agencies are continuing to propose to exclude all land loans from
the CRE loan definition.
Finally, in developing the original proposal, the agencies intended to not allow
unsecured loans to REITs, or loans secured by general pools of REIT assets rather than
by specific properties, to be qualifying CRE loans. However, the agencies did not intend
to exclude otherwise valid CRE loans from the definition solely because the borrower
221
was organized as a REIT structure. After reviewing the comments and the definition of
CRE loan, the agencies have decided to remove the language excluding REITs in the
proposed definition.
The agencies divided the underwriting criteria in the original proposal into four
categories: ability to repay, loan-to-value requirement, valuation of the collateral, and risk
management and monitoring.
1. Ability to Repay
The agencies proposed in the original proposal a number of criteria relating to the
borrower’s ability to repay in order for a loan to qualify as QCRE. The borrower would
have been required to have a debt service coverage (DSC) ratio of at least 1.7, or at least
1.5 for certain residential properties or certain commercial properties with at least
80 percent triple-net leases. 124 The proposed standards also would have required
reviewing two years of historical financial data and two years of prospective financial
data of the borrower. The loan would have been required to have either a fixed interest
rate or a floating rate that was effectively fixed under a related swap agreement. The loan
document also would have had to prohibit any deferral of principal or interest payments
and any interest reserve fund. The loan payment amount had to be based on straight-line
amortization over the term of the loan not to exceed 20 years, with payments made at
least monthly for at least 10 years of the loan’s term.
Numerous commenters objected to the agencies’ proposed DSC ratios as too
conservative, and proposed eliminating the DSC ratio, lowering qualifying DSC ratios to
124
The original proposal defined a triple-net lease as one in which the lessee, not the
lessor, is obligated to pay for taxes, insurance, and maintenance on the leased property.
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a range between 1.15 and 1.40, or establishing criteria similar to those used by Fannie
Mae or Freddie Mac to fund multifamily real estate loans.
Many commenters stated that, if the agencies retained the DSC ratios, they should
remove the triple-net-lease requirement. Many of these commenters stated that full
service gross leases, rather than triple-net leases, are used more often in the industry. 125
Some commenters supported replacing the proposed requirement to examine two
years of past and future borrower data with one to gather two or three years of historical
financial data on the property, not attempt to forecast two years of future data and to
allow new properties with no operating history to qualify. Many commenters supported
the requirement for fixed interest rate loans for QCRE. However, some commenters
suggested expanding the types of derivatives allowed to convert a floating rate into a
fixed rate. Many commenters also supported the restrictions on deferrals of principal and
interest and on interest reserve funds. However, a few commenters supported allowing
some interest-only loans or interest-only periods, in connection with a lower LTV ratio
(such at 50 percent).
Many commenters objected to the minimum length and amortization of QCRE
loans. These commenters said that 3, 5, and 7-year CRE loans have become common in
the industry, and so a minimum 10-year term would disqualify numerous loans. In
addition, most commenters supported a longer amortization period for QCRE loans, such
as 25 or 30 years. Some commenters also proposed replacing the amortization
125
In a full-service gross lease, the lessor pays for taxes, maintenance, and insurance
(presumably covering the additional costs by charging a higher rental amount to the
lessee than under a triple-net lease).
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requirement with a maximum LTV at maturity (based on value at origination) that is
lower than LTV at origination, which would require some amortization of the loan
principal.
After considering the comments on the underwriting criteria for QCREs, the
agencies are proposing criteria similar to that of the original proposal, with some
modifications. Based on a review of underwriting standards and performance data for
multifamily loans purchased by the Enterprises, the agencies are proposing to require a
1.25 DSCR for multifamily properties to be QCRE. 126 After review of the comments and
the Federal banking agencies’ historical standards for conservative CRE lending, 127 for
loans other than qualifying multifamily property loans, the agencies are proposing to
retain the 1.5 DSCR for leased QCRE loans and 1.7 for all other QCREs. As discussed
below, removing the criterion on triple-net leases should allow more loans to qualify for
an exemption with the 1.5 DSCR requirement, rather than the 1.7 DSCR requirement that
would have applied under the original proposal.
The agencies considered the comments requesting a debt yield requirement, but
have decided not to include that in the proposed rule. Historically, DSCR has been, and
continues to be, widely used in CRE lending. Debt yield is a relatively recent concept
that was not tracked in many historic CMBS deals, which makes it difficult for the
agencies to calculate historical performance and determine what the appropriate level
126
The agencies reviewed origination volume and performance history, as tracked by the
TREPP CMBS database, for multifamily loans securitized from 2000 through 2011.
127
These standards include the “Interagency Guidelines for Real Estate Lending.” 12
CFR part 34, subpart D, Appendix A (OCC); 12 CFR part 208, subpart C, Appendix A
(FRB); 12 CFR part 365, Appendix A (FDIC).
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should be for a CRE loan exempt from risk retention. The agencies recognize that the
DSCR is not a perfect measure, particularly in low interest rate environments. However,
the agencies also do not want to introduce a relatively new methodology into the CRE
market without long-term data to support the appropriateness of that measure.
Based on the agencies’ further review of applicable data, it appears that a
significant number of leases are written as full-service gross leases, not triple-net leases,
and that difference should not preclude treatment as a QCRE loan. Since the proposed
underwriting requirements are based on net operating income (NOI), whether a tenant has
a triple-net lease or full-service gross lease should not significantly affect the borrower’s
NOI.
The agencies propose to continue to require that the analysis of whether a loan is
a QCRE be made with respect to the borrower and not be limited to the property only.
While the agencies observe that some CRE loans are non-recourse, others include
guarantees by the borrowers. The agencies are concerned that focusing solely on the
property could be problematic in cases where the borrower may have other outstanding
commitments that may lead the borrower to siphon cash flow from the underwritten
property to service the other commitments. By analyzing the borrower’s position, and
not solely the property’s income, the underwriting should better address this risk. The
agencies believe that two years of historical data collection and two years of forecasted
data are appropriate, and that properties with less than two years of operating history
should not qualify as QCRE loans. The longer a property has been operating, particularly
after the first few years of operation, the better the originator can assess the stability of
cash flows from the property going forward. New properties present significant
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additional risks and loans on those properties generally should not be exempt from risk
retention.
The proposal would continue to require that the interest rate on a QCRE loan be
fixed or fully convertible into a fixed rate using a derivative product. The agencies are
not proposing to allow other types of derivatives because of concerns about transparency
with other types of derivative products, including mixed derivative products. For
example, if the agencies allowed a derivative that established an interest rate cap, it may
not be clear to investors whether a loan was underwritten using the current market rate or
the maximum rate allowed under the interest rate cap. The agencies are also proposing to
retain from the original proposal the requirement not to include interest-only loans or
interest-only periods in QCRE loans. The agencies believe that interest-only loans or
interest-only periods are associated with higher credit risk. If a borrower is not required
to make any form of principal payment, even with a 25-year amortization period, it raises
questions as to the riskiness of the loan, and would be inappropriate for qualifying CRE
loan treatment.
The agencies are proposing some modifications from the original proposal to the
standards for QCRE loan terms. The agencies recognize that there are CRE loans with
amortization periods in excess of 20 years. Allowing a longer amortization period
reduces the amount of principal paid on the CRE loan before maturity, which can
increase risks related to having to refinance a larger principal amount than would be the
case for a CRE loan with a shorter amortization period. Because the agencies believe
exemptions from risk retention should be available only for the most prudently
underwritten CRE loans, the agencies believe it is appropriate to consider the risks of an
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overly long amortization period for a QCRE. In balancing those risks with commenters’
concerns, the agencies are proposing to increase the amortization period to 30 years for
multifamily residential QCRE loans and to 25 years for all other QCRE loans.
The agencies are continuing to propose to set a 10-year minimum maturity for
QCRE loans. The agencies are concerned that introducing terms shorter than 10 years,
such as three or five years, may create improper underwriting incentives and not create
the low-risk CRE loans intended to qualify for the exemption. When making a shortterm CRE loan, an originator may focus only on a short timeframe in evaluating the
stability of the CRE underlying the loan in an industry that might be at or near the peak of
its business cycle. In contrast, a 10-year maturity CRE loan allows for underwriting
through a longer business cycle, including downturns that may not be appropriately
captured when underwriting to a three-year time horizon.
2. Loan-to-Value Requirement
The agencies proposed in the original proposal that the combined loan-to-value
ratio (CLTV) for QCRE loans be less than or equal to 65 percent (or 60 percent for
certain valuation assumptions).
Many commenters recognized the value in setting LTV ratio requirements in CRE
underwriting. While some commenters supported the agencies’ proposed ratios, others
did not. Some commenters suggested that higher LTV ratios should be allowed in the
QCRE standards, generally between 65 percent and 80 percent, particularly for properties
in stable locations with strong historical financial performance. One commenter
suggested lower LTVs for properties that may be riskier. Numerous commenters
suggested taking a different approach by setting maximum LTVs at origination and
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maturity, with a maturity LTV aimed at controlling the risk that the borrower would not
be able to refinance. A number of commenters also objected to setting the CLTV ratio at
65 percent. These commenters said that many commercial properties involve some form
of subordinate financing. Some commenters proposed eliminating the CLTV ratio
entirely and thus allow borrowers to use non-collateralized debt to finance the properties.
Other commenters proposed establishing a higher CLTV ratio (such as 80 percent) and
allow for non-QCRE second liens on the properties.
The agencies have considered the comments on LTV for QCRE loans and are
proposing to modify this aspect of QCRE underwriting standards from the standard in the
original proposal by proposing to establish a maximum LTV ratio of 65 percent for
QCRE loans. The agencies also are proposing to allow up to a 70 percent CLTV for
QCRE loans. The more equity a borrower has in a CRE project, generally the lower the
lender or investor’s exposure to credit risk. Overreliance on excessive mezzanine
financing instead of equity financing for a CRE property can significantly reduce the cash
flow available to the property, as investors in mezzanine finance often require high rates
of return to offset the increased risk of their subordinate position. In proposing
underwriting criteria for the safest CRE loans that would be exempt from risk retention
requirements, the agencies believe a 70 percent CLTV cap is appropriate, which would
require the borrower to have at least 30 percent equity in the project to help protect
securitization investors against losses from declining property values and potential
defaults on the CRE loans.
The agencies are also proposing to retain the requirement that the maximum
CLTV ratio be lowered by 5 percent if the CRE property was appraised with a low
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capitalization (cap) rate. Generally, assuming a low cap rate will inflate the appraised
value of the CRE property and thus increase the amount that can be borrowed given a
fixed LTV or CLTV. Therefore, such a loan would have a maximum 60 percent LTV
and 65 percent CLTV. In addition, to address the commenters’ concerns about high cap
rates, the agencies are proposing that the cap rates used in CRE appraisals be disclosed to
investors in securitizations that own CRE loans on those properties.
The agencies are declining to propose requirements for LTVs or CLTVs at both
origination and maturity. The agencies are concerned that introducing the concept of
front-end and back-end LTV ratios, rather than using straight-line amortization, would
allow borrowers to make nominal principal payments in early years and back-load a large
principal payment toward maturity. The effect would be to significantly increase the
riskiness of the CRE loan at maturity, rather than if the loan had been underwritten to
provide straight-line amortization throughout its life. Therefore, the agencies have
decided not to propose to include this amortization approach in the revised proposal and
instead continue to propose the straight-line amortization requirement.
3. Collateral Valuation
In the original proposal, the agencies proposed to require an appraisal and
environmental risk assessment for every property serving as collateral for a QCRE.
Commenters strongly supported both the valuation appraisal and environmental risk
assessment for all QCRE properties. Many commenters indicated this is already standard
industry practice. The agencies are continuing to include this requirement in the
proposed rule.
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4. Risk Management and Monitoring
The original proposal would have required that a QCRE loan agreement require
borrowers to supply certain financial information to the sponsor and servicer. In
addition, the agreement would have had to require lenders to take a first lien in the
property and restrict the ability to pledge the property as collateral for other loans.
Many commenters supported the risk management provisions for supplying
financial information. Some commenters requested clarification that such information
should relate to the property securing the QCRE loan rather than financial information on
the borrower. These commenters said that most CRE loans are non-recourse, making the
property the sole source of repayment and thus its financial condition as far more
important than the borrower’s condition.
Commenters supported the first-lien requirement. In addition, some commenters
requested removing the restriction on granting second liens on the property to allow
borrowers access to subordinate financing. These commenters suggested establishing a
CLTV to restrict the total debt on the property. Finally, some commenters supported the
requirement that a borrower retain insurance on the property up to the property value,
while other commenters supported a requirement to have insurance only for the
replacement cost of the property.
The agencies are proposing to modify the requirement in the original proposal that
the borrower provide information to the originator (or any subsequent holder) and the
servicer, including financial statements of the borrower, on an ongoing basis. The
agencies believe that the servicer would be in the best position to collect, store, and
disseminate the required information, and could make that information available to
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holders of the CRE loans. Therefore, to reduce burden on the borrowers, the agencies are
not proposing a requirement to provide this information directly to the originator or any
subsequent holder.
The agencies are retaining the proposed requirement from the original proposal
that the lender obtain a first lien on the financed property. The agencies note that most
CRE loan agreements allow the lender to receive additional security by taking an
assignment of leases or other occupancy agreements on the CRE property, and the right
to enforce those leases in case of a breach by the borrower. In addition, the agencies
observe that standard CRE loan agreements also often include a first lien on all interests
the borrower has in or arising out of the property used to operate the building (for
example, furniture in a hotel). The agencies believe these practices enhance prudent
lending and therefore would be appropriate to include this blanket lien requirement on
most types of borrower property to support a QCRE loan. There would be an exception
for purchase-money security interests in machinery, equipment, or other borrower
personal property.
The agencies continue to believe that as long as the machinery and equipment or
other personal property subject to a purchase-money security interest is also pledged as
additional collateral for the QCRE loan, it would be appropriate to allow such other liens.
In addition, the proposal would restrict junior liens on the underlying real property and
leases, rents, occupancy, franchise and license agreements unless a total CLTV ratio was
satisfied.
The agencies are continuing to propose a requirement that the borrower maintain
insurance against loss on the CRE property at least up to the amount of the CRE loan.
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The agencies believe that the insurance requirement should serve to protect the interests
of investors and the qualifying CRE loan in the event of damage to the property. Insuring
only the replacement cost would not sufficiently protect investors, who may be exposed
to loss on the CRE loan from significantly diminished cash flows during the period when
a damaged CRE property is being repaired or rebuilt.
Although commenters were concerned that few CMBS issuers will be able to use
this exemption due to the conservative QCRE criteria, the agencies are keeping many of
the same underwriting characteristics for the reasons discussed at the beginning of Part V
of this Supplementary Information.
Request for Comment
81(a). Is including these requirements in the QCRE exemption appropriate?
81(b). Why or why not?
82. The agencies request comment on the proposed underwriting standards,
including the proposed definitions and the documentation requirements
C. Qualifying Automobile Loans
The original proposal included underwriting standards for automobile loans that
would be exempt from risk retention (qualifying automobile loans, or QALs). Some
commenters proposed including an additional QAL-lite option, which would incorporate
less stringent underwriting standards but be subject to a 2.5 percent risk retention amount
based on a matrix of borrower FICO scores, loan terms and LTVs of up to 135 percent.
The agencies are declining to propose a QAL-lite standard to avoid imposing a regulatory
burden of monitoring multiple underwriting standards for this asset class. However, as
discussed below, the agencies are proposing to allow blended pools of QALs and non-
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QALs, which should help address commenters’ concerns. The definition of automobile
loan in the original proposal generally would have included only first-lien loans on light
passenger vehicles employed for personal use. It specifically would have excluded loans
for vehicles for business use, medium or heavy vehicles (such as commercial trucks and
vans), lease financing, fleet sales, and recreational vehicles such as motorcycles. The
underwriting standards from the original proposal focused predominately on the
borrower’s credit history and a down payment of 20 percent.
While some commenters supported the definition of automobile loan, others
stated it was too narrow. These commenters suggested expanding the definition to
include motorcycles because they may not be used solely as recreational vehicles. In
addition, commenters suggested allowing vehicles purchased by individuals for business
use, as it may be impossible to monitor the use of a vehicle after sale. Commenters
representing sponsors also supported allowing automobile leases to qualify as QALs,
with corresponding technical changes. In addition, a few commenters supported
expanding the definition to include fleet purchases or fleet leasing, on the basis that these
leases or sales are generally with corporations or government entities with strong
repayment histories.
The agencies have considered these comments and are proposing a definition of
automobile loans for QAL underwriting standards that is substantially similar to the
definition in the original proposal. The agencies believe it continues to be appropriate to
restrict the definition of automobile loan to not include loans on vehicles that are more
frequently used for recreational purposes, such as motorcycles or other recreational
vehicles. The agencies also do not believe it would be appropriate to expand the
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exemption to include vehicles used for business purposes, as the risks and underwriting
of such loans differ from those of vehicles used for personal transportation. For example,
a car or truck used in a business may endure significantly more wear and depreciate much
faster than a vehicle used only for normal household use.
The agencies are not proposing to expand the definition to include automobile
leases. While the difference between an automobile purchase and a lease may not be
significant to a customer, leases represent a different set of risks to securitization
investors. As one example, at the end of a lease, a customer has the right to return the
automobile, and the securitization may suffer a loss if the resale price of that automobile
is less than expected. In an automobile loan securitization, the customer owns the vehicle
at the end of the loan term, and cannot return it to the dealer or the securitization trust.
In the original proposal, the agencies proposed conservative underwriting
standards, including a 36 percent DTI requirement, a 20 percent down payment
requirement, and credit history standards. Generally, commenters opposed the QAL
criteria as too conservative, and asserted that less than 1 percent of automobile loans
would qualify. Even those commenters who otherwise supported the conservative QAL
underwriting suggested some revisions would be necessary to bring them in line with
current market standards. Automobile sponsor commenters acknowledged that the
agencies’ proposed terms would be consistent with very low credit risk, or “super-prime”
automobile loans, but believed that the standard should be set at the “prime” level,
consistent with low credit risk. In addition, commenters criticized the agencies for
applying to QALs underwriting criteria similar to those they applied to QRMs and
unsecured lending. Automobile sponsor commenters stated that automobile loans are
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significantly different from mortgage loans, as they are smaller and shorter in duration
and have readily-salable collateral. Investor commenters supported a standard that was
above “prime,” but indicated that they could support a standard that included loans that
did not meet the very conservative “super-prime” QAL criteria proposed by the agencies.
Although the agencies have taken into consideration the comments that these
standards do not reflect current underwriting practices, the agencies generally do not
believe it would be appropriate to include a standard based on FICO scores in the QAL
underwriting standards. Further, as discussed in Part III.B.1 of this Supplementary
Information, the agencies have revised the risk retention requirements to address some of
the concerns about risk retention for automobile securitizations to better enable sponsors
of automobile securitizations to comply with the risk retention requirements in a manner
consistent with their existing and current practices.
1. Ability to Repay
The agencies proposed in the original proposal for QALs a debt-to-income (DTI)
ratio not in excess of 36 percent of a borrower’s monthly gross income. Originators
would have been required to verify a borrower’s income and debt payments using
standard methods. Many commenters opposed including a DTI ratio as part of the
underwriting criteria for QALs. These commenters believed that the significant
additional burden of collecting documents to verify debts and income would far outweigh
any benefit, and could have the unanticipated result of only applying the burden to the
most creditworthy borrowers whose loans could potentially qualify for QAL status. A
few commenters asserted that it was nearly impossible to check information such as
required alimony or child support. In addition, these commenters were concerned about
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potentially changing DTIs between origination and securitization. Commenters also
asserted that in practice, only the most marginal of automobile lending used income or
employment verification. Some automobile sponsor commenters said the industry does
not use DTIs in prime automobile origination because they do not believe it is predictive
of default, and that the agencies should instead adopt the established industry practice of
setting FICO score thresholds as an indicator of ability to repay.
The agencies have considered these comments, but continue to believe that
assessing a borrower’s ability to repay is important in setting underwriting criteria to
identify automobile loans that would not be subject to risk retention. DTI is a meaningful
figure in calculating a customer’s ability to repay a loan, and therefore the agencies
continue to propose the same DTI requirement as in the original proposal. As discussed
in more detail, the agencies also observe that they generally do not believe it would be
appropriate to include a standard based on FICO scores in the QAL underwriting
standards, because it would tie a regulatory requirement to third party, private industry
models.
2. Loan Terms
Under the original proposal, QAL interest rates and payments would have had to
be fixed over the term of the loan. In addition, the loan would have had to be amortized
on a straight-line basis over the term. Loans could not have exceeded five years (60
months); for used car loans, the maximum term would have been one year shorter for
every year difference between the current year and the used car’s model year.
Furthermore, the terms would have required that the originator, or agent, to retain
physical possession of the title until full repayment.
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While commenters supported the proposed requirements for fixed interest rates
and fixed monthly payments, most commenters opposed one or more of the additional
proposed QAL loan terms. The straight-line amortization requirement was the most
problematic issue for commenters. Commenters asserted that automobile loans are
generally amortized using the simple interest method with fixed, level payments and that
the simple interest method provides that earlier payments would amortize less principal,
and later payments would amortize more principal, rather than a straight-line
amortization as proposed by the agencies.
In addition, many commenters were concerned that numerous states require the
vehicle’s owner (borrower) to retain the physical title, and that some states are moving to
issue electronic titles that cannot have a physical holder. These commenters suggested
revising the proposed rule to either remove the requirement, or condition it on
compliance with applicable state law.
Many commenters also opposed the 60-month maximum loan term, stating that
current industry standards allow for 72-month loans. Some commenters believed that the
used-car restrictions were too harsh, citing the “certified pre-owned” programs available
for most used cars and longer car lives in general. These commenters suggested either
removing the used car term restriction, or else loosening the standard to exclude from
QALs used cars over six years old, rather than over five years old, as proposed by the
agencies. Commenters also suggested a technical change to require the first payment
within 45 days of the contract date rather than on the closing date.
The agencies have considered these comments and are proposing the QAL
standards with some modifications to the original proposal’s standards. Instead of a
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straight-line amortization requirement, the agencies are proposing a requirement that
borrowers make level monthly payments that fully amortize the automobile loan over its
term. Second, the agencies are replacing the requirement in the original proposal that the
originator retain physical title with a proposed requirement that the lender comply with
appropriate state law for recording a lien on the title. Third, the agencies are proposing to
expand the maximum allowable loan term for QALs to the lesser of six years (72 months)
or 10 years less the vehicle’s age (current model year less vehicle’s model year). Due to
this modification, there would no longer be a distinction between new vehicles and used
vehicles for the QAL definition. Finally, the agencies are proposing that payment timing
be based on the contract date.
3. Reviewing Credit History
In the original proposal, an originator would have been required to verify, within
30 days of originating a QAL, that the borrower was not 30 days or more past due; was
not more than 60 days past due over the past two years; and was not a judgment debtor or
in bankruptcy in the past three years. The agencies also proposed a safe harbor requiring
the originator to review the borrower’s credit reports from two separate agencies, both
showing the borrower complies with the past-due standards. Also, the agencies proposed
a requirement that all QALs be current at the closing of the securitization.
Commenters were concerned that these criteria in the original proposal were so
strict as to require them to follow the safe harbor. They indicated substantial risk that
they may make a QAL, but then within 30 days after the loan, review the credit history
and note a single 30-day late payment, thus disqualifying the loan for QAL status. To
avoid this outcome, commenters (including some investors) suggested removing the 30-
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day past due criteria, also citing their belief that many otherwise creditworthy borrowers
could have inadvertently missed a single payment within that timeframe. Some sponsor
commenters favored elimination of the credit disqualification standards entirely in favor
of a FICO cutoff; some investor commenters acknowledged the established role of FICO
but favored maintaining most of the disqualification standards in addition to FICO.
On the assumption that all originators would rely on the credit report safe harbor,
commenters asserted that the requirement to obtain reports from two separate credit
reporting agencies unnecessarily increased costs. These commenters stated that so much
information is shared among the credit reporting agencies, that two credit reports are no
more predictive than one report of the creditworthiness of a borrower. The commenters
also stated that this report should be obtained within 30 days of the contract date, rather
than within 90 days as proposed.
Some commenters also opposed the requirement in the original proposal that
borrowers remain current when the securitization closes. These commenters stated that
securitizations have a “cutoff” date before the closing date, when all the QALs would be
pooled and information verified. It would be possible for a loan to become late between
the cutoff and closing date without the sponsor knowing until after closing. Instead,
sponsors suggested replacing the proposed rule requirement with a representation made
by the sponsor that no loan in the securitized pool is more than 30 days past due at cutoff,
with the securitizer being required to verify that representation for each loan no more
than 62 days from the securitization’s closing date.
The agencies believe that a QAL should meet conservative underwriting criteria,
including that the borrower not be more than 30 days late. However, to reduce the
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burden associated with reviewing credit reports for those delinquencies, the agencies are
proposing to require only one credit report rather than two, and that the report be
reviewed within 30 days of the contract date, as requested by commenters. The agencies
are proposing the same requirements as in the original proposal for verification that the
automobile loan is current when it is securitized. The agencies believe a securitization
exempt from risk retention should contain only current automobile loans.
Finally, the agencies are not proposing requirements that would rely on
proprietary credit scoring systems or underwriting systems. The agencies recognize that
much of the current automobile lending industry relies heavily or solely on a FICO score
to approve automobile loans. However, the agencies do not believe that a credit score
alone is sufficient underwriting for a conservative automobile loan with a low risk of
default. Furthermore, the agencies do not believe it is appropriate to establish regulatory
requirements that use a specific credit scoring product from a private company, especially
one not subject to any government oversight or investor review of its scoring model. The
agencies believe that the risks to investors of trusting in such proprietary systems and
models weighs against this alternative, and does not provide the transparency of the
bright line underwriting standards proposed by the agencies.
4. Loan-to-Value
In the original proposal, the agencies proposed to require automobile loan
borrowers to pay 100 percent of the taxes, title costs, and fees, in addition to 20 percent
of the net purchase price (gross price less manufacturer and dealer discounts) of the car.
For used cars, the purchase price would have been the lesser of the actual purchase price
or a value from a national pricing service.
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Most commenters opposed the down payment and loan-to-value requirements.
These commenters cited current automobile industry practices where up to 100 percent of
the purchase price of the car is financed, along with taxes, title costs, dealer fees,
accessories, and warranties. Some commenters proposed eliminating the LTV entirely,
or replacing it with a less conservative standard.
The agencies have considered the comments and the underwriting standards and
have concluded that a lower down payment could be required without a significant
decline in the credit quality of a QAL. Therefore, the agencies are proposing a down
payment of at least 10 percent of the purchase price of the vehicle, plus 100 percent of all
taxes, fees, and extended warranties. The agencies do not believe that a collateralized
loan with an LTV over 90 percent would be low-risk, and that a customer should put
some of the customer’s own cash into the deal to reduce risks for strategic default and
incent repayment of the loan. The agencies would also define purchase price consistently
across new and used vehicles to equal the price negotiated with the dealer less any
manufacturer rebates.
Request for Comment
83(a). Are the revisions to the qualifying automobile loan exemption appropriate?
83(b). If not, how can they be modified to more appropriately reflect industry standards?
84. Are all the proposed underwriting criteria appropriate?
D. Qualifying Asset Exemption
As discussed above, numerous industry and sponsor commenters on the original
proposal for reduced risk retention requirements for commercial, CRE, and automobile
loans asserted that the requirement that all assets in a collateral pool must meet the
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proposed underwriting standards (qualifying assets) to exempt the securitization
transaction from risk retention was too stringent. These commenters stated that requiring
every asset in a collateral pool to meet the proposed conservative underwriting
requirements would make it difficult to obtain a large enough pool of qualifying assets to
issue a securitization in a timely manner, and therefore some originators would not
underwrite to the qualifying asset standards. These commenters suggested that the
agencies allow a proportional reduction in required risk retention for those assets in a
collateral pool that met the proposed underwriting standards. For example, if a pool
contained 20 percent automobile loans that are qualifying assets and 80 percent of other
automobile loans, only 80 percent of the pool would be subject a risk retention
requirement.
Commenters representing investors in securitization transactions generally
opposed blended pools of qualifying assets and other assets. These investors stated that
blending could allow sponsors too much latitude to mix high-quality qualifying assets,
which may pay down first, with low-quality non-qualifying assets, which would create
significant risk of credit loss for investors over the course of the transaction.
The agencies have carefully considered the comments and are proposing to apply
a 0 percent risk retention requirement to qualifying assets, where both qualifying assets
and non-qualifying assets secure an asset-backed security. 128 Any non-qualifying assets
128
Under 15 U.S.C. 78o-11(c)(1)(B)(ii), the agencies may require a sponsor to retain less
than 5 percent of the credit risk for an asset that securitizes an asset-backed security, if
the asset meets the underwriting standards established by the agencies under 15 U.S.C.
78o-11(c)(2)(B). Accordingly, the agencies are proposing to require 0 percent risk
retention with respect to any asset securitizing an asset-backed security that meet the
proposed underwriting standards for automobile loans, commercial loans, or commercial
242
that secure an asset-backed security would be subject to the full risk retention
requirements in the proposed rule, including hedging and transfer restrictions.
The agencies believe that applying a 0 percent risk retention requirement to assets
that meet the proposed underwriting standards would be appropriate given the very high
credit quality of such assets. In addition, allowing both qualifying and non-qualifying
assets to secure an asset-backed security should promote liquidity in the relevant
securitization markets without harming the goals of risk retention requirement. The
agencies understand that a lender may not be able to originate, or a sponsor aggregate, an
entire pool of qualifying assets within a reasonable amount of time to promote efficient
securitization. The agencies believe that the proposal to apply a 0 percent risk retention
requirement to qualifying assets would likely enhance the liquidity of loans underwritten
to the qualifying asset underwriting standards, thereby encouraging originators to
underwrite more qualifying assets of high credit quality.
The agencies recognize that section 15G is generally structured in contemplation
of pool-level exemptions, and that investors, whom the statute is designed to protect,
expressed some preference during the agencies’ initial proposal for a pool-level approach.
The agencies believe the structure of the proposal could offset these concerns. The
real estate loans. See 15 U.S.C. 78o-11 (c)(1)(B)(ii). The agencies also believe that
exempting qualifying assets from risk retention would be consistent with 15 U.S.C. 78o11(e) and the purposes of the statute. The agencies believe the exemption could, in a
direct manner, help ensure high-quality underwriting standards for assets that are
available for securitization, and create additional incentives under the risk retention rules
for these high-quality assets to be originated in the market. The agencies further believe
such an exemption would encourage appropriate risk management practices by
securitization sponsors and asset originators, by establishing rigorous underwriting
standards for the exempt assets and providing additional incentives for these standards to
take hold in the marketplace.
243
agencies are proposing to reduce the sponsor’s 5 percent risk retention requirement by the
ratio of the combined unpaid principal balance (UPB) of qualified loans bears to the total
UPB of the loans in the pool. 129 The agencies believe this method is more appropriate
than a system based on the absolute number of qualifying loans in the pool, as a sponsor
could create a pool with a large number of small value qualifying loans combined with a
few low-quality loans with large principal balances. The agencies have also considered
an “average balance” approach as an alternative, but are concerned that it could be used
to reduce overall risk retention on pools of loans with disparate principal balances
skewed towards a few large non-qualified loans.
To address transparency concerns, the agencies are proposing that sponsors of
asset-backed securities that are secured by both qualifying and non-qualifying assets
disclose to investors, their primary Federal regulator (as appropriate), and the
Commission the manner in which the sponsor determined the aggregate risk retention
requirement for the pool after including qualifying assets with 0 percent risk retention, a
description of the qualified and nonqualified assets groups, and any material differences
between them with respect to the composition of each group’s loan balances, loan terms,
interest rates, borrower credit information, and characteristics of any loan collateral.
The agencies would not make blended pool treatment available for securitizations
of loans from different asset classes (i.e., automobile and commercial) that secure the
same asset-backed security. The agencies believe that blending across asset classes
129
If a $100 million pool of commercial mortgages included a sum total of $20 million
of qualified commercial mortgages (by UPB), the ratio would be 1/5, and the sponsor
could reduce its 5 percent risk retention requirement by one-fifth, for a retention holding
requirement of 4 percent.
244
would significantly reduce transparency to investors. In addition, the agencies are also
considering imposing a limit on the amount of qualifying assets a sponsor could include
in any one securitization involving blended pools through a 2.5 percent risk retention
minimum for any securitization transaction, but the agencies are also considering the
possibility of raising or lowering that limit by 1 or more percent. The agencies recognize
that it might be useful for sponsors acting on a transparent basis to attempt to allay
moderate investor reservations about some assets in a pool by including other highquality assets. However, one consistent theme in the agencies consideration of risk
retention has been to require sponsors to hold a meaningful exposure to all assets they
securitize that are subject to the full risk retention requirement. The agencies are
concerned that providing sponsors unlimited flexibility with respect to mixing qualifying
and non-qualifying collateral pools could create opportunities for practices that would be
inconsistent with this over-arching principle.
The agencies also acknowledge investor concerns about mixing qualifying and
non-qualifying assets, as noted above. For example, some investors commenting on the
original proposal expressed concern that sponsors might be able to manipulate such
combinations to achieve advantages that are not easily discernible to investors, such as
mixing high-quality shorter-term assets with lower-quality longer-term assets. In this
regard, the agencies observe the Commission’s current proposal on loan level disclosures
to investors in asset-backed securities represents a mechanism by which investors would
obtain a more detailed view of loans in the pool than they sometimes did in prior
245
markets. 130 However the agencies remain concerned about potential abuses of this aspect
of the proposed rule and seek comment on how to address this issue beyond the
disclosure requirements already included in the proposed rule. For example, an
additional requirement that qualifying assets and non-qualifying assets in the same
collateral pool do not have greater than a one year difference in maturity might alleviate
some investor concerns. Additional disclosure requirements might also alleviate this
concern.
In addition, the agencies are proposing (consistent with the original proposal) that
securitization transactions that are collateralized solely by qualifying assets (of the same
asset class) and servicing assets would be exempt from the risk retention requirements of
the proposed rule.
Request for Comment
85. Commenters on the QRM approach contained in the agencies’ original
proposal requested that the agencies permit blended pools for RMBS. The agencies
invite comment on whether and, if so how, such an approach may be constructed where
the underlying assets are residential mortgages, given the provisions of
paragraph (c)(1)(B)(i)(II) and the exemption authority in paragraph (c)(2)(B), (e)(1) and
(e)(2) of Section 15G.
86(a). How should the proportional reduction in risk retention be calculated?
86(b). What additional disclosures should the agencies require for collateral pools that
130
See Asset-Backed Securities, Release Nos. 33-9117, 34-61858, 75 FR 23328 (May 3,
2010), and Re-proposal of Shelf Eligibility Conditions for Asset-Backed Securities and
Other Additional Requests for Comment, Release Nos. 33-9244, 34-64968 76 FR 47948
(August 5, 2011).
246
include both qualifying and non-qualifying assets? 86(c). How would these additional
disclosures enhance transparency and reduce the risk of sponsors taking advantage of
information asymmetries? 86(d). Should a collateral pool that secures asset-backed
securities be subject to a minimum total risk retention requirement of 2.5 percent? 86(e).
If not, what would be an appropriate limit on the amount of qualifying assets that may be
included in a collateral pool subject to 0 percent risk retention? 86(f). What other
limiting mechanisms would be appropriate for mixed collateral pools?
87(a). Would a maturity mismatch limit such as the one discussed above (such
that qualifying and non-qualifying assets do not have a difference in maturity of more
than one year) be an appropriate requirement for collateral pools containing qualifying
and non-qualifying assets? 87(b). How should such a limit be structured? 87(c). What
other limits would be appropriate to address the investor and agency concerns discussed
above?
E. Buyback Requirement
The original proposal provided that, if after issuance of a qualifying asset
securitization, it was discovered that a loan did not meet the underwriting criteria, the
sponsor would have to repurchase the loan. Industry commenters asserted that if the
agencies retained this requirement, it should include a materiality standard. Alternately,
these groups suggested that the agencies allow curing deficiencies in the underwriting or
loans instead of requiring buyback. Finally, industry commenters stated that they should
not be responsible for post-origination problems with qualifying loans, and expressed
concern that investors may seek to use the buyback requirement to make the sponsor
repurchase poorly performing assets that met all the requirements at origination. Investor
247
commenters, on the other hand, supported the buyback requirement as the sole remedy,
and they opposed relying solely on representations and warranties.
The agencies have observed that during the recent financial crisis, investors who
sought a remedy through representations and warranties often struggled through litigation
with the sponsor or originator. Requiring the prompt repurchase of non-qualifying loans
affords investors a clear path to remedy problems in the original underwriting.
Therefore, the agencies are again proposing a buyback requirement for commercial, CRE,
and automobile loans subsequently found not to meet the underwriting requirements for
an exemption to the risk retention requirements. However, the agencies also agree with
the sponsor commenters that buyback should not be the sole remedy, and therefore are
proposing to allow a sponsor the option to cure a defect that existed at the time of
origination to bring the loan into conformity with the proposed underwriting standards.
Curing a loan should put the investor in no better or worse of a position than if the loan
had been originated correctly. Some origination deficiencies may not be able to be cured
after origination, and so for those deficiencies, buyback would remain the sole remedy.
The agencies also agree that buyback or cure should occur only when there are
material problems with the qualifying loan that caused it not to meet the qualifying
standards at origination. The agencies are not proposing any specific materiality
standards in the rule, but believe that sponsors and investors could be guided by standards
of materiality. 131
131
See, e.g., TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).
248
Finally, as the agencies explained in the original proposal, the underwriting
requirements need to be met only at the origination of the loan. Subsequent performance
of the loan, absent any failure to meet the underwriting requirements at origination or
failure of the loan to be current at the time of origination, would not be grounds for a loan
buyback or cure. The borrower’s failure to meet its continuing obligations under the loan
document covenants required for qualifying loan treatment, such as the requirement for
periodic financial statements for CRE loans, would also not be grounds for a buyback or
cure if the loan terms at origination appropriately imposed the obligation on the borrower.
Request for Comment
88. The agencies request comment on the buyback provision for qualifying loans,
including on the proposed changes discussed above to allow cure and to incorporate a
materiality standard.
VI. Qualified Residential Mortgages
A. Overview of Original Proposal and Public Comments
Section 15G of the Exchange Act exempts sponsors of securitizations from the
risk retention requirements if all of the assets that collateralize the securities issued in the
transaction are QRMs. 132 Section 15G directs the agencies to define QRM jointly, taking
into consideration underwriting and product features that historical loan performance data
indicate result in a lower risk of default. In addition, section 15G requires that the
definition of a QRM be “no broader than” the definition of a QM. 133
132
See 15 U.S.C. 78o-11(c)(1)(C)(iii).
133
See id. at § 78o-11(e)(4).
249
In developing the definition of a QRM in the original proposal, 134 the agencies
articulated several goals and principles. First, the agencies stated that QRMs should be of
very high credit quality, given that Congress exempted QRMs completely from the credit
risk retention requirements. Second, the agencies recognized that setting fixed
underwriting rules to define a QRM could exclude many mortgages to creditworthy
borrowers. In this regard, the agencies recognized that a trade-off exists between the
lower implementation and regulatory costs of providing fixed and simple eligibility
requirements and the lower probability of default attendant to requirements that
incorporate detailed and compensating underwriting factors. Third, the agencies sought
to preserve a sufficiently large population of non-QRMs to help enable the market for
securities backed by non-QRM mortgages to be relatively liquid. Fourth, the agencies
sought to implement standards that would be transparent and verifiable to participants in
the market.
The agencies also sought to implement the statutory requirement that the
definition of QRM be no broader than the definition of a QM, as mandated by the DoddFrank Act. 135 Under the original proposal, the agencies proposed to incorporate the
statutory QM standards, in addition to other requirements, into the definition of a QRM
and apply those standards strictly in setting the QRM requirements to ensure that the
definition of QRM would be no broader than the definition of a QM. The agencies noted
134
See Original Proposal, 76 FR at 24117.
135
See 15 U.S.C. 78o-11(e)(4)(C). At the time of issuance of the original proposal on
April 29, 2011, the Board had sole rulemaking authority for defining QM, which
authority transferred to CFPB on July 21, 2011, the designated transfer date under the
Dodd-Frank Act.
250
in the original proposal that they expected to monitor the rules adopted under TILA to
define a QM and review those rules to determine whether changes to the definition of a
QRM would be necessary or appropriate.
In considering how to determine if a mortgage is of sufficient credit quality, the
agencies examined data from several sources. 136 Based on these and other data, the
agencies originally proposed underwriting and product features that were robust
standards designed to ensure that QRMs would be of very high credit quality. 137 A
discussion of the full range of factors that the agencies considered in developing a
definition of a QRM can be found in the original proposal. 138
136
As provided in the original proposal, the agencies reviewed data supplied by McDash
Analytics, LLC, a wholly owned subsidiary of Lender Processing Services, Inc. (LPS),
on prime fixed-rate loans originated from 2005 to 2008, which included underwriting and
performance information on approximately 8.9 million mortgages; data from the 1992 to
2007 waves of the triennial Survey of Consumer Finances (SCF), which focused on
respondents who had purchased their homes either in the survey year or the previous
year, and included information on approximately 1,500 families; and data regarding loans
purchased or securitized by the Enterprises from 1997 to 2009, which consisted of more
than 78 million mortgages, and included data on loan products and terms, borrower
characteristics (e.g., income and credit score), and performance data through the third
quarter of 2010. See 76 FR at 24152.
137
The agencies acknowledged in the original proposal that any set of fixed underwriting
rules likely would exclude some creditworthy borrowers. For example, a borrower with
substantial liquid assets might be able to sustain an unusually high DTI ratio above the
maximum established for a QRM. As this example indicates, in many cases sound
underwriting practices require judgment about the relative weight of various risk factors
(e.g., the tradeoff between LTV and DTI ratios). These decisions are usually based on
complex statistical default models or lender judgment, which will differ across
originators and over time. However, incorporating all of the tradeoffs, that may
prudently be made as part of a secured underwriting process into a regulation would be
very difficult without introducing a level of complexity and cost that could undermine
any incentives for sponsors to securitize, and originators to originate, QRMs. See
Original Proposal, 76 FR at 24118.
138
See Original Proposal, 76 FR at 24117-29.
251
The agencies originally proposed to define QRM to mean a closed-end credit
transaction to purchase or refinance a one-to-four family property at least one unit of
which is the principal dwelling of a borrower that was not: (i) made to finance the initial
construction of a dwelling; (ii) a reverse mortgage; (iii) a temporary or ‘‘bridge’’ loan
with a term of 12 months or less, such as a loan to purchase a new dwelling where the
borrower plans to sell a current dwelling within 12 months; or (iv) a timeshare plan
described in 11 U.S.C. 101(53D). 139 In addition, under the original proposal, a QRM (i)
must be a first lien transaction with no subordinate liens; (ii) have a mortgage term that
does not exceed 30 years; (iii) have maximum front-end and back-end DTI ratios of 28
percent and 36 percent, respectively; 140 (iv) have a maximum LTV ratio of 80 percent in
the case of a purchase transaction, 75 percent in the case of rate and term refinance
transactions, and 70 percent in the case of cash out refinancings; (v) include a 20 percent
down payment from borrower funds in the case of a purchase transaction; and (vi) meet
certain credit history restrictions. 141
139
See id. at 24166.
140
A front-end DTI ratio measures how much of the borrower’s gross (pretax) monthly
income is represented by the borrower’s required payment on the first-lien mortgage,
including real estate taxes and insurance. A back-end debt-to-income ratio measures how
much of a borrower’s gross (pretax) monthly income would go toward monthly mortgage
and nonmortgage debt service obligations.
141
In order to facilitate the use of these standards for QRM purposes, the original
proposal included as an appendix to the proposed rule (Additional QRM Standards
Appendix) all of the standards in the HUD Handbook 4155-1 that are used for QRM
purposes. (See HUD Handbook, available at
http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/hand
books/hsgh/4155.1.) The only modifications made to the relevant standards in the HUD
Handbook would be those necessary to remove those portions unique to the FHA
252
The agencies sought comment on the overall approach to defining QRM as well
as on the impact of the QRM definition on the securitization market, mortgage pricing,
and credit availability, including to low-to-moderate income borrowers. The agencies
further requested comment on the proposed eligibility criteria of QRMs, such as the LTV,
DTI, and borrower credit history standards.
The scope of the QRM definition generated a significant number of comments.
Some commenters expressed support for the overall proposed approach to QRM,
including the 20 percent down payment requirement of the QRM definition. These
commenters asserted that an LTV requirement would be clear, objective, and relatively
easy to implement, and represent an important determinant of a loan’s default probability.
However, the overwhelming majority of commenters, including individuals,
industry participants (e.g., real estate brokers, mortgage bankers, securitization sponsors),
insurance companies, public interest groups, state agencies, financial institutions and
trade organizations, opposed various aspects of the originally proposed approach to
defining QRM. In addition, many members of Congress commented that the proposed 20
percent down payment requirement was inconsistent with legislative intent, and strongly
urged the agencies to eliminate or modify the down payment requirement.
Many commenters argued that the proposed QRM definition was too narrow,
especially with respect to the LTV and DTI requirements. Many of these commenters
asserted that the proposed QRM definition would prevent recovery of the housing market
by restricting available credit, and as a result, the number of potential homebuyers.
underwriting process (e.g., TOTAL Scorecard instructions). See discussion in the
Original Proposal, 76 FR at 24119.
253
These commenters also argued that the proposed definition of QRM, especially when
combined with the complexities of the proposed risk retention requirement that would
have applied to non-QRMs, would make it difficult for private capital to compete with
the Enterprises and thus, impede the return of private capital to the mortgage market.
Many also asserted that the proposed LTV and DTI requirements favored wealthier
persons and disfavored creditworthy low- and moderate-income persons and first-time
homebuyers. A number of commenters believed that LTV and DTI elements of the
proposed QRM definition would not only affect mortgages originated for securitization,
but would likely also be adopted by portfolio lenders, magnifying the adverse effects
described above. Other commenters claimed that the proposed QRM definition and
proposed risk retention requirements would harm community banks and credit unions by
increasing costs to those who purchase loans originated by these smaller institutions.
Some commenters urged the agencies to implement a more qualitative QRM
standard with fewer numerical thresholds. Others argued for a matrix system that would
weigh compensating factors, instead of using an all-or-nothing approach to meeting the
threshold standards. Commenters stated that requiring borrowers to put down more cash
for a rate-and-term refinancing may prevent them from refinancing with safer and more
economically desirable terms. Commenters were also critical of the proposed credit
history requirements (in particular, the 30-day past due restriction), and the points and
fees component of the proposed QRM definition.
Although a few commenters supported the inclusion of servicing standards in the
QRM definition under the original proposal, the majority of those who submitted
comment on this subject opposed the proposed servicing standards for a variety of
254
reasons. For example, commenters asserted that servicing standards were not an
underwriting standard or product feature, and were not demonstrated to reduce the risk of
default. In addition, commenters stated that the proposed standards were too vague for
effective compliance, and that the proposed rule’s approach of requiring them to be terms
of the mortgage loan would prevent future improvements in servicing from being
implemented with respect to QRMs.
Many commenters urged the agencies to postpone finalizing the QRM definition
until after the QM definition was finalized. Many commenters also advocated for the
agencies to align the QRM definition to the QM definition.
B. Approach to Defining QRM
In determining the appropriate scope of the proposed QRM definition, the
agencies carefully weighed a number of factors, including commenters’ concerns, the
cost of risk retention, current and historical data on mortgage lending and performance,
and the recently finalized QM definition and other rules addressing mortgages. For the
reasons discussed more fully below, the agencies are proposing to broaden and simplify
the scope of the QRM exemption from the original proposal and define “qualified
residential mortgage” to mean “qualified mortgage” as defined in section 129C of
TILA 142 and implementing regulations, as may be amended from time to time. 143 The
agencies propose to cross-reference the definition of QM, as defined by the CFPB in its
142
15 U.S.C. 1639c.
143
See Final QM Rule.
255
regulations, to minimize potential for future conflicts between the QRM standards in the
proposed rule and the QM standards adopted under TILA.
The risk retention requirements are intended to address problems in the
securitization markets by requiring securitizers to generally retain some economic interest
in the credit risk of the assets they securitize (i.e., have “skin in the game”). Section 15G
of the Exchange Act requires the agencies to define a QRM exception from the credit risk
retention requirement, taking into consideration underwriting and product features that
historical loan performance data indicate result in a lower expected risk of default. The
requirements of the QM definition are designed to help ensure that borrowers are offered
and receive residential mortgage loans on terms that reasonably reflect their financial
capacity to meet the payment obligations associated with such loans. The QM definition
excludes many loans with riskier product features, such as negative amortization and
interest-only payments, and requires consideration and verification of a borrower’s
income or assets and debt. This approach both protects the consumer and should lead to
lower risk of default on loans that qualify as QM.
As discussed more fully below, the agencies believe a QRM definition that aligns
with the definition of a QM meets the statutory goals and directive of section 15G of the
Exchange Act to limit credit risk, preserves access to affordable credit, and facilitates
compliance.
1. Limiting Credit Risk
Section 129(C)(a) of TILA, as implemented by 12 CFR 1026.43(c), requires
lenders to make a “reasonable and good faith determination” that a borrower has the
ability to repay a residential mortgage loan. The QM rules provide lenders with a
256
presumption of compliance with the ability-to-repay requirement. Together, the QM
rules and the broader ability-to-repay rules restrict certain product features and lax
underwriting practices that contributed significantly to the extraordinary surge in
mortgage defaults that began in 2007. 144
The QM rule does this, in part, by requiring documentation and verification of
consumers’ debt and income. 145 To obtain the presumption of compliance with the
ability-to-repay requirement as a QM, the loan must have a loan term not exceeding 30
years; points and fees that generally do not exceed 3 percent; 146 and not have risky
product features, such as negative amortization, interest-only and balloon payments
(except for those loans that qualify for the definition of QM that is only available to
eligible small portfolio lenders). 147 Formal statistical models indicate that mortgages that
do not meet these aspects of the QM definition rule are associated with a higher
probability of default. 148
144
See Christopher Mayer, Karen Pence, and Shane M. Sherlund, “The Rise in Mortgage
Defaults, Journal of Economic Perspectives, 23(1), 27-50 (Winter 2009).
145
See generally 12 CFR 1026.43(c).
146
The QM definition provides a tiered-cap for points and fees for loan amounts less
than $100,000. See id. at 1026.43(e)(3).
147
See 78 FR 35430 (June 12, 2013). In addition, the loan must have consumer debt
payments that represent 43 percent or less of a borrower’s income, or the loan must be
eligible for purchase, guarantee or insurance by an Enterprise, HUD, the U.S. Department
of Veteran Affairs, the U.S. Department of Agriculture, or the Rural Housing Service.
See 12 CFR 1026.43(e)(2)(vi).
148
See Shane M. Sherlund, “The Past, Present, and Future of Subprime Mortgages,”
Finance and Economics Discussion Series, Paper 2008-63 available at
http://www.federalreserve.gov/pubs/feds/2008/200863/200863pap.pdf; Ronel Elul,
Nicholas S. Souleles, Souphala Chomsisengphet, Dennis Glennon, and Robert Hunt.
257
Consistent with these statistical models, historical data indicate that mortgages
that meet the QM criteria have a lower probability of default than mortgages that do not
meet the criteria. This pattern is most pronounced for loans originated near the peak of
the housing bubble, when non-traditional mortgage products and lax underwriting
proliferated. For example, of loans originated from 2005 to 2008, 23 percent of those
that met the QM criteria experienced a spell of 90-day or more delinquency or a
foreclosure by the end of 2012, compared with 44 percent of loans that did not meet the
QM criteria. 149
In citing these statistics, the agencies are not implying that they consider a 23
percent default rate to be an acceptable level of risk. The expansion in non-traditional
mortgages and the lax underwriting during this period facilitated the steep rise in house
prices and the subsequent sharp drop in house prices and surge in unemployment, and the
default rates reflect this extraordinary macroeconomic environment. This point is
“What ‘Triggers’ Mortgage Default?” American Economic Review 100(2), 490-494
(May 2010).
149
For purposes of this calculation, mortgages that do not meet the QM criteria are those
with negative amortization, balloon, or interest-only features; those with no
documentation; and those with DTI ratios in excess of 43 percent that were not
subsequently purchased or guaranteed by the Enterprises or the FHA. Because of data
limitations, loans with points and fees in excess of 3 percent and low-documentation
loans that do not comply with the QM documentation criteria may be erroneously
classified as QMs. The default estimates are based on data collected from mortgage
servicers by Lender Processing Services and from securitized pools by CoreLogic. These
data will under-represent mortgages originated and held by small depository institutions
and adjustable-rate mortgages guaranteed by the FHA. The difference between
delinquency statistics for QM and non-QM mortgages is consistent with a comparable
tabulation estimated on loans securitized or purchased by the Enterprises. In the
Enterprise analysis for loans originated from 2005 to 2008, 14 percent of those that met
the QM criteria, compared with 33 percent of loans that did not meet the QM criteria,
experienced a 90-day or more delinquency or a foreclosure by the end of 2012.
258
underscored by the superior performance of more recent mortgage vintages. For
example, of prime fixed-rate mortgages that comply with the QM definition, an estimated
1.4 percent of those originated from 2009 to 2010, compared with 16 percent of those
originated from 2005 to 2008, experienced a 90-day or more delinquency or a foreclosure
by the end of 2012. 150
In the original proposal, the criteria for a QRM included an LTV ratio of
80 percent or less for purchase mortgages and measures of solid credit history that
evidence low credit risk. Academic research and the agencies’ own analyses indicate that
credit history and the LTV ratio are significant factors in determining the probability of
mortgage default. 151 However, these additional credit overlays may have ramifications
for the availability of credit that many commenters argued were not outweighed by the
corresponding reductions in likelihood of default from including these determinants in
the QRM definition.
Moreover, the QM definition provides protections against mortgage default that
are consistent with the statutory requirements. As noted above, risk retention is intended
to align the interests of securitization sponsors and investors. Misalignment of these
interests is more likely to occur where there is information asymmetry, and is particularly
pronounced for mortgages with limited documentation and verification of income and
150
The higher default rate for the loans originated from 2005 to 2008 may reflect the
looser underwriting standards in place at that time and the greater seasoning of these
loans in addition to the changes in the macroeconomic environment. The estimates are
shown only for prime fixed-rate mortgages because these mortgages have made up
almost all originations since 2008.
151
See Original Proposal, 76 FR at 24120-24124.
259
debt. Academic studies suggest that securities collateralized by loans without full
documentation of income and debt performed significantly worse than expected in the
aftermath of the housing boom. 152
The QM definition limits the scope of this information asymmetry and
misalignment of interests by requiring improved verification of income and debt. An
originator that does not follow these verification requirements, in addition to other QM
criteria, may be subject under TILA to potential liability and a defense to foreclosure if
the consumer successfully claims he or she did not have the ability to repay the loan. 153
The potential risk arising from the consumer’s ability to raise a defense to foreclosure
extends to the creditor, assignee, or other holder of the loan for the life of the loan, and
thereby may provide originators and their assignees with an incentive to follow
verification and other QM requirements scrupulously. 154
Other proposed and finalized regulatory changes are also intended to improve the
quality and amount of information available to investors in QRM and non-QRM
residential mortgage securitizations and incentivize originators and servicers to better
manage mortgage delinquencies and potential foreclosures. These improvements may
help to lessen the importance of broad “skin in the game” requirements on sponsors as an
152
See Benjamin J. Keys, Amit Seru, and Vikrant Vig, “Lender Screening and the Role
of Securitization: Evidence from Prime and Subprime Mortgage Markets,” Review of
Financial Studies, 25(7) (July 2012); Adam Ashcraft, Paul Goldsmith-Pinkham, and
James Vickery, “MBS Ratings and the Mortgage Credit Boom,” Federal Reserve Bank of
New York Staff Report 449 (2010), available at
http://www.newyorkfed.org/research/staff_reports/sr449.html
153
See sections 130(a) and 130(k) of TILA, 15 USC 1640.
154
There are limits on the exposure to avoid unduly restricting market liquidity.
260
additional measure of protection to investors and the financial markets. For example, the
Commission has proposed rules that, if finalized, would require in registered RMBS
transactions disclosure of detailed loan-level information at the time of issuance and on
an ongoing basis. The proposal also would require that securitizers provide investors
with this information in sufficient time prior to the first sale of securities so that they can
analyze this information when making their investment decision. 155 In addition, the
CFPB has finalized loan originator compensation rules that help to reduce the incentives
for loan originators to steer borrowers to unaffordable mortgages 156 as well as mortgage
servicing rules that provide procedures and standards that servicers must follow when
working with troubled borrowers in an effort to avoid unnecessary foreclosures. 157 The
Enterprises and the mortgage industry also have improved standards for due diligence,
representations and warrants, appraisals, and loan delivery data quality and consistency.
2. Preserving Credit Access
Mortgage lending conditions have been tight since 2008, and to date have shown
little sign of easing. Lending conditions have been particularly restrictive for borrowers
with lower credit scores, limited equity in their homes, or with limited cash reserves. For
example, between 2007 and 2012, originations of prime purchase mortgages fell about 30
155
See Asset-Backed Securities, Release Nos. 33-9117, 34-61858 75 FR 23328 at
23335, 23355 (May 3, 2010).
156
See Loan Originator Compensation Requirements under the Truth in Lending Act
(Regulation Z); Final Rules, 78 FR 11280 (Feb. 15, 2013).
157
See Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z); Final
Rule, 78 FR 10902 (Feb. 14, 2013); Mortgage Servicing Rules Under the Truth in
Lending Act (Regulation Z); Final Rule, 78 FR 10696 (Feb. 14, 2013).
261
percent for borrowers with credit scores greater than 780, compared with a drop of about
90 percent for borrowers with credit scores between 620 and 680. 158 Originations are
virtually nonexistent for borrowers with credit scores below 620. These findings are also
evident in the results from the Senior Loan Officer Opinion Survey. In the April 2012
Survey, a large share of lenders indicated that they were less likely than in 2006 to
originate loans to borrowers with weaker credit profiles. In the April 2013 survey,
lenders indicated that their appetite for making such loans had not changed materially
over the previous year. 159
Market conditions reflect a variety of factors, including various supervisory,
regulatory, and legislative efforts such as the Enterprises’ representations and warrants
policies; mortgage servicing settlements reached with federal regulators and the state
attorney generals; revised capital requirements; and new rules addressing all aspects of
the mortgage lending process. These efforts are far-reaching and complex, and the
interactions and aggregate effect of them on the market and participants are difficult to
predict. Lenders may continue to be cautious in their lending decisions until they have
158
These calculations are based on data provided by McDash Analytics, LLC, a wholly
owned subsidiary of Lender Processing Services, Inc. The underlying data are provided
by mortgage servicers. These servicers classify loans as “prime,” “subprime,” or “FHA.”
Prime loans include those eligible for sale to the Enterprises as well as those with
favorable credit characteristics but loan sizes that exceed the Enterprises’ guidelines
(“jumbo loans”).
159
Data are from the Federal Reserve Board’s Senior Loan Officer Opinion Survey on
Bank Lending Practices. The April 2012 report is available at
http://www.federalreserve.gov/boarddocs/SnLoanSurvey/201205/default.htm and the
April 2013 report is available at
http://www.federalreserve.gov/boarddocs/SnLoanSurvey/201305/default.htm.
262
incorporated these regulatory and supervisory changes into their underwriting and
servicing systems and gained experience with the rules.
The agencies are therefore concerned about the prospect of imposing further
constraints on mortgage credit availability at this time, especially as such constraints
might disproportionately affect groups that have historically been disadvantaged in the
mortgage market, such as lower-income, minority, or first-time homebuyers.
The effects of the QRM definition on credit pricing and access can be separated
into the direct costs incurred in funding the retained risk portion and the indirect costs
stemming from the interaction of the QRM rule with existing regulations and current
market conditions. The agencies’ estimates suggest that the direct costs incurred by a
sponsor for funding the retained portion should be small. Plausible estimates by the
agencies range from zero to 30 basis points, depending on the amount and form of
incremental sponsor risk retention, and the amount and form of debt in sponsor funding
of incremental risk retention. The funding costs may be smaller if investors value the
protections associated with risk retention and are thereby willing to accept tighter spreads
on the securities.
However, the indirect costs stemming from the interaction of the QRM definition
with existing regulations and market conditions are more difficult to quantify and have
the potential to be large. The agencies judge that these costs are most likely to be
minimized by aligning the QM and QRM definitions. The QM definition could result in
some segmentation in the mortgage securitization market, as sponsors may be reluctant to
pool QMs and non-QMs because of the lack of presumption of compliance available to
assignees of non-QMs. As QRMs cannot be securitized with non-QRMs under the
263
proposed rule, 160 the QRM definition has the potential to compound this segmentation if
the QM and QRM definitions are not aligned. Such segmentation could also lead to an
increase in complexity, regulatory burden, and compliance costs, as lenders might need to
set up separate underwriting and securitization platforms beyond what is already
necessitated by the QM definition. These costs could be passed on to borrowers in the
form of higher interest rates or tighter credit standards. Finally, in addition to the costs
associated with further segmentation of the market, setting a QRM definition that is
distinct from the QM definition may interact with the raft of other regulatory changes in
ways that are near-impossible to predict. Cross-referencing to the QM definition should
facilitate compliance with QM and reduce these indirect costs.
The agencies recognize that aligning the QRM and QM definitions has the
potential to intensify any existing bifurcation in the mortgage market between QM and
non-QM loans, as securitizations collateralized by non-QMs could have higher funding
costs due to risk retention requirements in addition to potential risk of legal liability under
the ability-to-repay rule. The agencies acknowledge this risk but judge it to be smaller
than the risk associated with further segmentation of the market.
If adopted, the agencies intend to review the advantages and disadvantages of
aligning the QRM and QM definitions as the market evolves to ensure the rule best meets
the statutory objectives of section 15G of the Exchange Act.
Request for Comment
160
See 15 U.S.C. 78o-11(c)(1)(B).
264
89(a). Is the agencies’ approach to considering the QRM definition, as described
above, appropriate? 89(b). Why or why not? 89(c). What other factors or
circumstances should the agencies take into consideration in defining QRM?
C. Proposed Definition of QRM
As noted above, Section 15G of the Exchange Act requires, among other things,
that the definition of QRM be no broader than the definition of QM. The Final QM Rule
is effective January 10, 2014. 161 The external parameters of what may constitute a QRM
may continue to evolve as the CFPB clarifies, modifies or adjusts the QM rules. 162
Because the definition of QRM incorporates QM by reference, the proposed QRM
definition would expressly exclude home-equity lines of credit (HELOCs), reverse
mortgages, timeshares, and temporary loans or “bridge” loans of 12 months or less,
consistent with the original proposal of QRM. 163 It would also expand the types of loans
161
See Final QM Rule.
162
For example, the CFPB recently finalized rules to further clarify when a loan is
eligible for purchase, insurance or guarantee by an Enterprise or applicable federal
agency for purposes of determining whether a loan is a QM. See Amendments to the
2013 Mortgage Rules under the Real Estate Settlement Procedures Act (Regulation X)
and the Truth in Lending Act (Regulation Z), 78 FR 44686 (July 24, 2013). The CFPB
also recently proposed rules that further address what amounts should be included as loan
originator compensation in certain cases (i.e., manufactured home loans) for purposes of
calculating the 3 percent points and fees threshold under the QM rules. See Amendments
to the 2013 Mortgage Rules under the Equal Credit Opportunity Act (Regulation B), Real
Estate Settlement Procedures Act (Regulation X), and the Truth in Lending Act
(Regulation Z), 78 FR 39902 (July 2, 2013).
163
Also excluded would be most loan modifications, unless the transaction meets the
definition of refinancing set forth in section 1026.20(a) of the Final QM rule, and credit
extended by certain community based lending programs, down payment assistance
providers, certain non-profits, and Housing Finance Agencies, as defined under 24 CFR
266.5. For a complete list, see 12 CFR 1026.43(a).
265
eligible as QRMs. 164 Under the original proposal, a QRM was limited to closed-end,
first-lien mortgages used to purchase or refinance a one-to-four family property, at least
one unit of which is the principal dwelling of the borrower. By proposing to align the
QRM definition to the QM definition, the scope of loans eligible to qualify as a QRM
would be expanded to include any closed-end loan secured by any dwelling (e.g., home
purchase, refinances, home equity lines, and second or vacation homes). 165 Accordingly,
the proposed scope of the QRM definition would differ from the original proposal
because it would include loans secured by any dwelling (consistent with the definition of
QM), not only loans secured by principal dwellings. In addition, if a subordinate lien
meets the definition of a QM, then it would also be eligible to qualify as a QRM, whereas
under the original proposal QRM-eligibility was limited to first-liens. The agencies
believe the expansion to permit loans secured by any dwelling, as well as subordinate
liens, is appropriate to preserve credit access and simplicity in incorporating the QM
definition into QRM.
The CFPB regulations implementing the rules for a QM provide several
definitions of a QM. The agencies propose that a QRM would be a loan that meets any
of the QM definitions. 166
164
See 12 CFR 1026.43(e)(2), which provides that QM is a covered transaction that
meets the criteria set forth in §§ 1026.43(e)(2), (4), (5), (6) or (f). A “covered
transaction” is defined to mean “a consumer credit transaction that is secured by a
dwelling, as defined in § 1026.2(a)(19), including any real property attached to a
dwelling, other than a transaction exempt from coverage under [§ 1026.43(a)].”
165
See 12 CFR 1026.43(a).
166
See 12 CFR 1026.43(e)(2), (e)(4), (e)(5), or (e)(6) or (f).
266
These include the general QM definition, which provide that a loan must have:
•
Regular periodic payments that are substantially equal;
•
No negative amortization, interest only, or balloon features;
•
A maximum loan term of 30 years;
•
Total points and fees that do not exceed 3 percent of the total loan amount, or
the applicable amounts specified in the Final QM Rule, for small loans up to
$100,000;
•
Payments underwritten using the maximum interest rate that may apply during
the first five years after the date on which the first regular periodic payment is
due;
•
Consideration and verification of the consumer’s income and assets, including
employment status if relied upon, and current debt obligations, mortgagerelated obligations, alimony and child support; and
•
Total debt-to-income ratio that does not exceed 43 percent.
In recognition of the current mortgage market conditions and expressed concerns
over credit availability, the CFPB also finalized a second temporary QM definition. 167
The agencies propose that a QRM would also include a residential mortgage loan that
meets this second temporary QM definition. This temporary QM definition provides that
a loan must have:
167
12 CFR 1026.43(e)(4).
267
•
Regular periodic payments that are substantially equal;
•
No negative amortization, interest only, or balloon features;
•
A maximum loan term of 30 years;
•
Total points and fees, that do not exceed 3 percent of the total loan amount, or
the applicable amounts specified for small loans up to $100,000; and
•
Be eligible for purchase, guarantee or insurance by an Enterprise, HUD, the
Veterans Administration, U.S. Department of Agriculture, or Rural Housing
Service. 168
Lenders that make a QM have a presumption of compliance with the
ability-to-repay requirement under 129C(a) of TILA, as implemented by § 1026.43(c) of
Regulation Z, and therefore obtain some protection from such potential liability. 169
However, there are different levels of protection from TILA liability170 depending on
whether a QM is higher-priced or not. 171 QMs that are not higher-priced loans received a
legal safe harbor for compliance with the ability-to-repay requirement, whereas QMs that
168
See 12 CFR 1206.43(e)(4)(ii).
169
See section 129C(b)(1) of TILA, 15 U.S.C. 1639c(b)(1).
170
Lenders that violate the ability-to-repay requirement may be liable for actual and
statutory damages, plus court and attorney fees. Consumers can bring a claim for
damages within three years against a creditor. Consumers can also raise a claim for these
damages at any time in a foreclosure action taken by the creditor or an assignee. The
damages are capped to limit the lender’s liability. See sections 130(a), (e), and (k) of
TILA, 15 U.S.C. 1640. However, the level of protection afforded differs depending on
the loan’s price. For a detailed discussion of the safe harbor and presumption of
compliance, see 78 FR at 6510-6514.
171
For the definition of higher-priced covered transaction, see 12 CFR 1026.43(b)(4) and
accompanying commentary.
268
are higher-priced covered transactions received a rebuttable presumption of
compliance. 172 Both non-higher priced and higher-priced QMs would be eligible as
QRMs without distinction, and could be pooled together in the same securitization.
The temporary QM definition for loans eligible for purchase or guarantee by an
Enterprise expires once the Enterprise exits conservatorship. 173 In addition, the FHA, the
U.S. Department of Veteran Affairs, the U.S. Department of Agriculture, and the Rural
Housing Service each have authority under the Dodd-Frank Act to define QM for their
own loans. 174 The temporary QM definition for loans eligible to be insured or guaranteed
by one of these federal agencies expires once the relevant federal agency issues its own
QM rules. 175
Finally, the CFPB provided several additional QM definitions to facilitate credit
offered by certain small creditors. The agencies propose that a QRM would be a QM that
meets any of these three special QM definitions. 176 The Final QM Rule allows small
creditors to originate loans as QMs with greater underwriting flexibility (e.g., no
quantitative DTI threshold applies) than under the general QM definition. 177 However,
this third QM definition is available only to small creditors that meet certain asset and
172
For a detailed discussion of the safe harbor and presumption of compliance, see 78
FR at 6510-6514.
173
See 12 CFR 1026.43(e)(4)(iii).
174
See section 129C(b)(3)(B)(ii) of TILA; 15 USC 1639c.
175
See 12 CFR 1026.43(e)(4)(iii).
176
See 12 CFR 1026.43(e)(5), 12 CFR 1026.43(e)(6), and 12 CFR 1026.43(f).
177
See 12 CFR 1026.43(e)(5).
269
threshold criteria 178 and hold the QM loans in portfolio for at least three years, with
certain exceptions (e.g., transfer of a loan to another qualifying small creditor,
supervisory sales, and merger and acquisitions). 179 Accordingly, loans meeting this third
“small creditor” QM definition would generally be ineligible as QRMs for three years
following consummation because they could not be sold.
The Final QM Rule also provides these eligible small creditors with a two-year
transition period during which they can originate balloon loans that are generally held in
portfolio, and meet certain criteria, as QMs. 180 This two-year transition period expires
January 10, 2016. Again, loans meeting this fourth QM definition would generally be
ineligible as QRMs for three years following consummation. Last, the Final QM Rule
allows eligible small creditors that operate predominantly in rural or underserved areas to
originate balloon-payment loans as QMs if they are generally held in portfolio, and meet
certain other QM criteria. 181 Loans meeting this third QM definition would also
generally be ineligible for securitization for three years following consummation because
they cannot be sold.
For the reasons discussed above, the agencies are not proposing to incorporate
either an LTV ratio requirement or standards related to a borrower’s credit history into
178
An entity qualifies as a “small creditor” if it does not exceed $2 billion in total assets;
originates 500 or fewer first-lien covered transactions in the prior calendar year
(including all affiliates); and holds the QMs in portfolio for at least three years, with
certain exceptions. See 12 CFR 1026.43(e)(5)(i)(D), discussed in detail in 78 FR at
35480-88 (June 12, 2013).
179
See 12 CFR 1026.43(e)(5)(ii).
180
See 12 CFR 1026.43(e)(6), discussed in detail at 78 FR at 35488.
181
See 12 CFR 1026.43(f).
270
the definition of QRM. 182 Furthermore, the agencies are not proposing any written
appraisal requirement or assumability requirement as part of QRM. In response to
comments, and as part of the simplification of the QRM exemption from the original
proposal, the agencies are not proposing any servicing standards as part of QRM.
Request for Comment
The agencies invite comment on all aspects of the proposal to equate QRM with
QM. In particular,
90. Does the proposal reasonably balance the goals of helping ensure high quality
underwriting and appropriate risk management, on the one hand, and the public interest
in continuing access to credit by creditworthy borrowers, on the other?
91. Will the proposal, if adopted, likely have a significant effect on the
availability of credit? Please provide data supporting the proffered view.
92(a). Is the proposed scope of the definition of QRM, which would include
loans secured by subordinate liens, appropriate? 92(b). Why or why not? 92(c). To
what extent do concerns about the availability and cost of credit affect your answer?
93(a). Should the definition of QRM be limited to loans that qualify for certain
QM standards in the final QM Rule? 93(b). For example, should the agencies limit
QRMs to those QMs that could qualify for a safe harbor under 12 CFR 1026.43(e)(1)?
Provide justification for your answer.
182
The agencies continue to believe that both LTV and borrower credit history are
important aspects of prudent underwriting and safe and sound banking.
271
D. Exemption for QRMs
In order for a QRM to be exempted from the risk retention requirement, the
proposal includes evaluation and certification conditions related to QRM status,
consistent with statutory requirements. For a securitization transaction to qualify for the
QRM exemption, each QRM collateralizing the ABS would be required to be currently
performing (i.e., the borrower is not 30 days or more past due, in whole or in part, on the
mortgage) at the closing of the securitization transaction. Also, the depositor for the
securitization would be required to certify that it evaluated the effectiveness of its internal
supervisory controls to ensure that all of the assets that collateralize the securities issued
out of the transaction are QRMs, and that it has determined that its internal supervisory
controls are effective. This evaluation would be performed as of a date within 60 days
prior to the cut-off date (or similar date) for establishing the composition of the collateral
pool. The sponsor also would be required to provide, or cause to be provided, a copy of
this certification to potential investors a reasonable period of time prior to the sale of the
securities and, upon request, to the Commission and its appropriate Federal banking
agency, if any.
Request for comment
94(a). Are the proposed certification requirements appropriate? 94(b). Why or
why not?
E. Repurchase of Loans Subsequently Determined to Be Non-Qualified After
Closing
272
The original proposal provided that, if after the closing of a QRM securitization
transaction, it was discovered that a mortgage did not meet all of the criteria to be a QRM
due to inadvertent error, the sponsor would have to repurchase the mortgage. The
agencies received a few comments regarding this requirement. Some commenters were
supportive of the proposed requirement, while other commenters suggested that the
agencies allow substitution of mortgages failing to meet the QRM definition.
The agencies are again proposing a buyback requirement for mortgages that are
determined to not meet the QRM definition by inadvertent error after the closing of the
securitization transaction, provided that the conditions set forth in section 12 of the
proposed rules are met. 183 These conditions are intended to provide a sponsor with the
opportunity to correct inadvertent errors by promptly repurchasing any non-qualifying
mortgage loans from the pool. In addition, this proposed requirement would help ensure
that sponsors have a strong economic incentive to ensure that all mortgages backing a
QRM securitization satisfy all of the conditions applicable to QRMs prior to closing of
the transactions. Subsequent performance of the loan, absent any failure to meet the
QRM requirements at the closing of the securitization transaction, however, would not
trigger the proposed buyback requirement.
Request for Comment
183
Sponsors may choose to repurchase a loan from securitized pools even if there is no
determination that the loan is not a QRM. The agencies would not view such repurchases
as determinative of whether or not a loan meets the QRM standard.
273
95(a). What difficulties may occur with the proposed repurchase requirement
under the QRM exemption? 95(b). Are there alternative approaches that would be more
effective? 95(c). Provide details and supporting justification.
E. Request for Comment on Alternative QRM Approach
Although the agencies believe that the proposed approach of aligning QRM with
QM is soundly based, from both a policy and a legal standpoint, the agencies are seeking
public input on its merits. The agencies are also seeking input on an alternative
approach, described below, that was considered by the agencies, but ultimately not
selected as the preferred approach. The alternative approach would take the QM criteria
as a starting point for the QRM definition, and then incorporate additional standards that
were selected to reduce the risk of default. Under this approach, significantly fewer loans
likely would qualify as a QRM and, therefore, be exempt from risk retention.
1. Description of Alternative Approach
The alternative approach, referred to as “QM-plus” would begin with the core
QM criteria adopted by the CFPB, and then add four additional factors. Under this “QMplus” approach:
•
Core QM criteria. A QRM would be required to meet the CFPB’s core criteria for
QM, including the requirements for product type, 184 loan term, 185 points and
fees, 186 underwriting, 187 income and debt verification, 188 and DTI. 189 For loans
184
12 CFR 1026.43(e)(2)(i).
185
12 CFR 1026.43(e)(2)(ii).
186
12 CFR 1026.43(e)(2)(iii); 12 CFR 1026.43(e)(3).
187
12 CFR 1026.43(e)(2)(iv).
274
meeting these requirements, the QM-plus approach would draw no distinction
between those mortgages that fall within the CFPB’s “safe harbor” versus those
that fall within the CFPB’s “presumption of compliance for higher-priced”
mortgages. 190 Under QM-plus, either type of mortgage that meets the CFPB’s
core criteria for QM would pass this element of the QM-plus test. Loans that are
QM because they meet the CFPB’s provisions for GSE-eligible covered
transactions, small creditor exceptions, or balloon loan provisions would,
however, not be considered QRMs under the QM-plus approach.
•
One-to-four family principal dwelling. In addition, QRM treatment would only
be available for loans secured by one-to-four family real properties that constitute
the principal dwelling of the borrower. 191 Other types of loans eligible for QM
status, such as loans secured by a boat used as a residence, or loans secured by a
consumer’s vacation home, would not be eligible under the QM-plus approach.
•
Lien requirements. All QRMs would be required to be first-lien mortgages. For
purchase QRMs, the QM-plus approach excludes so-called “piggyback” loans; no
other recorded or perfected liens on the property could exist at closing to the
188
12 CFR 1026.43(e)(2)(v).
189
12 CFR 1026.43(e)(2)(vi).
190
Cf. 12 CFR 1026.43(e)(1)(i) with 12 CFR 1026.43(e)(1)(ii).
191
The scope of properties that fall within the meaning of “one-to-four family property”
and “principal dwelling” would be consistent with the definitions used in the agencies’
original QRM proposal in § __.15(a), including consistent application of the meaning of
the term “principal dwelling” as it is used in TILA (see 12 CFR 1026.2(a)(24) and
Official Staff Interpretations to the Bureau’s Regulation Z, comment 2(a)(24)-3).
275
knowledge of the originator. For refinance QRMs, junior liens would not be
prohibited, but would be included in the LTV calculations described below. 192
•
Credit history. To be eligible for QRM status, the originator would be required to
determine the borrower was not currently 30 or more days past due on any debt
obligation, and the borrower had not been 60 or more days past due on any debt
obligations within the preceding 24 months. Further, the borrower must not have,
within the preceding 36 months, been a debtor in a bankruptcy proceeding or been
subject to a judgment for collection of an unpaid debt; had personal property
repossessed; had any one-to-four family property foreclosed upon; or engaged in
a short sale or deed in lieu of foreclosure. 193
•
Loan to value ratio. To be eligible for QRM status, the LTV at closing could not
exceed 70 percent. Junior liens, which would only be permitted for non-purchase
QRMs as noted above, must be included in the LTV calculation if known to the
originator at the time of closing, and if the lien secures a HELOC or similar credit
plan, must be included as if fully drawn. 194 Property value would be determined
192
These requirements are similar to those in the agencies’ original QRM proposal in §
__.15. See § __.15(a) (definitions of “combined loan to value ratio” and “loan to value
ratio”) and § __.15(d)(2) (subordinate liens).
193
These credit history criteria would be the same as the one used in the agencies’
original QRM proposal in § __.15(d)(5), including the safe harbor allowing the originator
to make the required determination by reference to two credit reports.
194
These requirements would be consistent with the approach used in the agencies’
original QRM proposal in § __.15(a) and § __.15(d)(9), except the same LTV would be
used for purchases, refinancings, and cash-out refinancings. As the agencies discussed in
the original proposal, there is data to suggest that refinance loans are more sensitive to
LTV level. See Original Proposal at section IV.B.4. This single LTV approach in the
QM-plus is equivalent to the most conservative LTV level (for cash-out refinancings)
included in the original proposal.
276
by an appraisal, but for purchase QRMs, if the contract price at closing for the
property was lower than the appraised value, the contract price would be used as
the value. 195
As discussed elsewhere in this Supplementary Information, the agencies’ analysis
of mortgage market data led the agencies to conclude that an approach that aligns QRM
with QM covers most of the present mortgage market, and a significant portion of the
historical market, putting aside non-traditional mortgages related primarily to subprime
lending and lending with little documentation. This QM-plus approach would cover a
significantly smaller portion of the mortgage market. Securitizers would be required to
retain risk for QMs that do not meet the four factors above.
Request for Comment
96(a). As documented in the initial proposal, academic research and the agencies’
own analyses show that credit history and loan-to-value ratio are key determinants of
mortgage default, along with the product type factors that are included in the QM
definition. 196 If QRM criteria do not address credit history and loan-to-value, would
securitizers packaging QRM-eligible mortgages into RMBS have any financial incentive
to be concerned with these factors in selecting mortgages for inclusion in the RMBS
195
As in the agencies’ original proposal, the appraisal would be required to be a written
estimate of the property’s market value, and be performed not more than 90 days prior to
the closing of the mortgage transaction by an appropriately state-certified or statelicensed appraiser that conforms to generally accepted appraisal standards as evidenced
by the Uniform Standards of Professional Appraisal Practice promulgated by the
Appraisal Standards Board of the Appraisal Foundation, the appraisal requirements of the
Federal banking agencies, and applicable laws.
196
Original Proposal, section IV.B.2; section IV.B.3; section IV.B. 4; section IV.B.5;
Appendix A to the Supplementary Information.
277
pool? 96(b). Is the incentive that would be provided by risk retention unnecessary in
light of the securitizer incentives and investor disclosures under an approach that aligns
QRM with QM as described in the previous section of this Supplementary Information?
97(a). Does the QM-plus approach have benefits that exceed the benefits of the
approach discussed above that aligns QRM with QM? For example, would the QM-plus
approach favorably alter the balance of incentives for extending credit that may not be
met by the QM definition approach or the QRM approach previously proposed? 97(b).
Would the QM-plus approach have benefits for financial stability?
98. Would the QM-plus approach have greater costs, for example in decreased
access to mortgage credit, higher priced credit, or increased regulatory burden?
99. Other than the different incentives described above, what other benefits might
be obtained under the QM-plus approach?
2. Mortgage availability and cost
As discussed above, the overwhelming majority of commenters, including
securitization sponsors, housing industry groups, mortgage bankers, lenders, consumer
groups, and legislators opposed the agencies’ original QRM proposal, recommending
instead that almost all mortgages without features such as negative amortization, balloon
payments, or teaser rates should qualify for an exemption from risk retention. 197 The
basis for these commenters’ objections was a unified concern that the proposal would
result in a decrease in the availability of non-QRM mortgages and an increase in their
197
Some commenters expressed support for additional factors, such as less stringent
LTV restrictions, reliance on private mortgage insurance for loans with LTVs in excess
of such restrictions, and different approaches to the agencies’ proposed credit quality
restrictions.
278
cost. The other strong element of concern was that the original proposal’s 20 percent
purchase down payment requirement may have become a de facto market-wide standard,
with harsh consequences for borrowers in economic circumstances that make it extremely
difficult to save such sums.
In developing QRM criteria under section 15G, the agencies have balanced the
benefits, including the public interest, with the cost and the other considerations. To the
extent risk retention would impose any direct restriction on credit availability and price,
the agencies proposed an approach that aligns QRM with QM, which directly reflects this
concern.
There may be concerns, however, that the effect of aligning QRM with QM could
ultimately decrease credit availability as lenders, and consequently securitizers, would be
very reluctant to transact in non-QM loans. Since the QM criteria have been issued (and
even before), many lenders have indicated they would not make any non-QM mortgages,
expressing concern that they are uncertain of their potential liability under the TILA
ability-to-repay requirements.
Request for Comment
100(a). Would setting the QRM criteria to be the same as QM criteria give
originators additional reasons to have reservations about lending outside the QM criteria?
100(b). Would the QM-plus approach, which confers a distinction on a much smaller
share of the market than the approach that aligns QRM with QM, have a different effect?
Numerous commenters on the original QRM proposal asserted that lenders may
charge significantly higher interest rates on non-QRM loans, with estimates ranging from
75 to 300 basis points. A limited number of these commenters described or referred to an
279
underlying analysis of this cost estimate. The agencies take note that a significant portion
of the costs were typically ascribed to provisions of the risk retention requirements that
the agencies have eliminated from the proposal. As discussed in the previous section of
this Supplementary Information, the agencies are considering the factors that will drive
the incremental cost of risk retention. If the non-QRM market is small relative to the
QRM market, investors might demand a liquidity premium for holding securities
collateralized by non-QRMs. Investors might also demand a risk premium for holding
these securities if non-QRMs are perceived to be lower-quality mortgages. If the scope
of the non-QRM market is sufficiently broad to avoid these types of premiums, the
factors impacting cost will be the amount of additional risk retention that would be
required under the rule, above current market practice, and the cost to the securitizer of
funding and carrying that additional risk retention asset, reduced by the expected yield on
that asset. There are a significant number of financial institutions that possess
securitization expertise and infrastructure, and that also have management expertise in
carrying the same type of ABS interests they would be required to retain under the rule;
in fact, they have long carried large volumes of them as part of their business model.
They also compete for securitization business and compete on mortgage pricing.
Request for Comment
101. In light of these factors, the agencies seek comment on whether the QM-plus
approach would encourage a broader non-QRM market and thus mitigate concerns about
the types of costs associated with a narrow QRM approach described above. Considering
the number of institutions in the market with securitization capacity and expertise that
already hold RMBS interests presenting the same types of risks as the RMBS interests the
280
proposed rule now establishes as permissible forms of risk retention, would the
requirement to retain risk in a greater number of securitizations under the QM-plus
approach act as a restraint on the amount and cost of mortgage credit available in the
market?
3. Private securitization activity
In structuring the risk retention rules, the agencies have sought to minimize
impediments to private securitization activity as a source of market liquidity for lending
activity, and this principle has not been overlooked in the RMBS asset class. To the
extent risk retention would impose any impediment to private securitization activity, the
agencies proposed an approach that aligns QRM with QM to address that concern.
In response to the agencies’ original QRM proposal, comments from RMBS
investors generally supported the kinds of loan-to-value, credit history, and debt-toincome factors the agencies proposed. 198 While there were some investors who
expressed concern as to the exact calibration of the QRM requirements, on balance, these
commenters expressed support for an approach that made risk retention the rule, not the
exception.
Additionally, commenters recommended that the agencies examine data from the
private securitization market in addition to the GSE data that was considered in the
original proposal.
198
For example, one such investor stated that the proposed QRM criteria were
appropriate to maintain the proper balance between incentives for securitizers and
mortgage credit availability. SIFMA Asset Management. Another expressed concern
that broadening the QRM definition will give securitizers less “skin in the game” and
increase investors’ risk exposure, which is contrary to investors’ long-term interests.
Vanguard.
281
The agencies conducted two such analyses. 199 The first analysis was based on all
securitized subprime and Alt-A loans originated from 2005 to 2008. 200 That analysis
indicated that of such mortgages that did not meet the QM criteria, 52 percent
experienced a serious delinquency by the end of 2012, where serious delinquency is
defined as 90 or more days delinquent or in foreclosure. In contrast, 42 percent of such
mortgages that met the QM criteria experienced a serious delinquency by the end of
2012. 201 If the set of QM-eligible mortgages were limited to those with a loan-to-value
ratio of 70 percent or less, the serious delinquency rate falls to 27 percent. As discussed
earlier in this Supplementary Information, these extraordinarily high delinquency rates
reflect the sharp drop in house prices and surge in unemployment that occurred after the
loans were originated, as well as lax underwriting practices. In addition, Alt-A and
subprime loans are not reflective of the overall market and had many features that would
exclude them from the QM definition, but data regarding these features were not always
captured in the data sets.
199
The two analyses are not perfectly comparable. The first analysis included some
loans with less than full documentation and the second analysis excluded no
documentation loans. The second analysis used data with cumulative loan-to-value data
while the first did not, and the second analysis used a credit overlay while the first did
not.
200
These data are a subset of the same data referenced in Part VI.B.1 of this
Supplementary Information.
201
These data do not include information on points and fees or full information on
whether the loan met the QM documentation requirements. If these factors were taken
into account, the delinquency rate on QM-eligible loans might be lower.
282
The second analysis was based on all types of privately securitized loans
originated from 1997 to 2009. 202 Although these data cover a broader range of loan types
and years than the first analysis, subprime and Alt-A loans originated towards the end of
the housing boom represent the bulk of all issuance during this period. That analysis
indicated that 48 percent of mortgages that did not meet the QM criteria experienced a
serious delinquency by the end of 2012, compared with 34 percent of mortgages that met
the QM criteria. Limiting the set of QM-eligible mortgages to those with a loan-to-value
ratio of 70 percent or less and a minimum FICO score of 690 resulted in a 12 percent
serious delinquency rate, and when that set was further limited to a combined loan-tovalue ratio of 70 percent or less, it resulted in a 6.4 percent serious delinquency rate.
The agencies also analyzed GSE data to compare delinquency rates of loans that would
have met QM criteria with those of loans that would have met criteria approximating the
QM-plus criteria--those with loan-to-value ratios of 70 percent or less, minimum FICO
scores of 690, and debt-to-income ratios of no more than 43 percent. Those meeting the
tighter criteria and originated in 2001-2004 had ever 90-day delinquency rates of 1.1
percent, compared with 3.9 percent for all QM loans. For loans originated in 2005-2008,
the rates were 3.8 percent and 13.9 percent, respectively.
Request for Comment
102. How would the QM-plus approach influence investors’ decisions about
whether or not to invest in private RMBS transactions?
202
See Part VIII.C.7.c, infra (Commission’s Economic Analysis).
283
Another factor in investor willingness to invest in private label RMBS, as well as
the willingness of originators to sell mortgages to private securitizers, concerns the
presence of the Enterprises in the market, operating as they are under the conservatorship
of the FHFA and with capital support by the U.S. Treasury. 203 Currently, the vast
majority of residential mortgage securitization activity is performed by the Enterprises,
who retain 100 percent of the risk of the mortgages they securitize. 204
Request for Comment
103. How would the QM-plus approach affect or not affect investor appetite for
investing in private label RMBS as opposed to securitizations guaranteed by the
Enterprises?
The agencies note that the proposed requirements for risk retention have been
significantly revised in response to commenter concerns about the original proposal.
With respect to the costs of risk retention for sponsors and the possible effect that a QMplus approach could have on their willingness to participate in the securitization market,
the agencies request comment on whether risk retention could be unduly burdensome for
sponsors or whether it would provide meaningful alignment of incentives between
sponsors and investors.
Request for Comment
203
Groups representing securitizers and mortgage originators have recently expressed
the view that restarting the private securitization market for conforming mortgages is
dependent upon sweeping reform to the current role of the Enterprises. See, e.g.,
American Securitization Forum, White Paper: Policy Proposals to Increase Private
Capital in the U.S. Housing Finance System (April 23, 2013); Mortgage Bankers
Association, Key Steps on the Road to GSE Reform (August 8, 2013).
204
Ginnie Mae plays the next largest role.
284
104. Since more RMBS transactions would be subject to risk retention under the
QM-plus approach, how would the proposed forms of risk retention affect sponsors’
willingness to participate in the market?
4. Request for comment about the terms of the QM-plus approach
In addition, to the questions posed above, the agencies request public comment on
a few specific aspects of the QM-plus approach, as follows.
a. Core QM criteria
The QM-plus approach would only include mortgages that fall within the QM
safe harbor or presumption of compliance under the core QM requirements. If a
mortgage achieved QM status only by relying on the CFPB’s provisions for GSE-eligible
covered transactions, small creditors, or balloon loans, it would not be eligible for QRM
status. 205
Request for Comment
105. The agencies request comment whether the QM-plus approach should also
include mortgages that fall within QM status only in reliance on the CFPB’s provisions
for GSE-eligible covered transactions, small creditors, or balloon loans. For all but the
GSE-eligible covered transactions, the CFPB’s rules make the mortgages ineligible for
QM status if the originator sells them into the secondary market within three years of
origination. For GSE-eligible loans, it appears sale to the GSEs may remain the best
205
Specifically, the QRM would need to be eligible for the safe harbor or presumption of
compliance for a “qualified mortgage,” as defined in regulations codified at 12 CFR
1026.43(e) and the associated Official Interpretations published in Supplement I to Part
1026, without regard to the special rules at 12 CFR 1026.43(e)(4)-(6) or 12 CFR
1026.43(f).
285
execution alternative for small originators (although the agencies are seeking comment
on this point). The agencies request commenters advocating inclusion of these non-core
QMs under the QM-plus approach to address specifically how inclusion would improve
market liquidity for such loans.
b. Piggyback loans
For purchase QRMs, the QM-plus approach excludes so-called “piggyback”
loans; no other recorded or perfected liens on the property could exist at closing of the
purchase mortgage, to the knowledge of the originator at closing. The CFPB’s QM
requirements do not prohibit piggyback loans, but the creditor’s evaluation of the
borrower’s ability to repay must include consideration of the obligation on the junior lien
(similar to the treatment the QM-plus approach incorporates for junior liens on
refinancing transactions). As the agencies discussed in the original proposal, the
economic literature concludes that, controlling for other factors, including combined LTV
ratios, the use of junior liens at origination of purchase mortgages to reduce down
payments significantly increases the risk of default. 206
Request for Comment
106. The agencies request comment whether, notwithstanding the agencies’
concern about this additional risk of default, the agencies should remove the outright
prohibition on piggyback loans from the QM-plus approach.
107(a). Commenters, including one group representing RMBS investors,
expressed concern that excluding loans to a borrower that is 30 days past due on any
206
See Original Proposal at note 132 and accompanying text.
286
obligation at the time of closing from the definition of QRM would be too
conservative. 207 The QM-plus approach is based on the view that these 30-day credit
derogatories are typically errors, or oversights by borrowers, that are identified to
borrowers and eliminated during the underwriting process. Thus a 30-day derogatory
that cannot be resolved before closing is an indication of a borrower who, as he or she
approaches closing, is not meeting his or her obligations in a timely way. The agencies
request comments from originators as to this premise. 107(b). The agencies also request
comment on whether the QM-plus approach should permit a borrower to have a single
60-day plus past-due at the time of closing, but not two. 107(c). The agencies further
request comment on whether this approach should be included if the borrower’s single
60-day past-due is on a mortgage obligation.
In connection with the agencies’ discussion elsewhere in this Supplementary
Information notice of underwriting criteria for commercial loans, commercial mortgages,
and auto loans, the agencies have requested comment about permitting blended pools of
qualifying and non-qualifying assets, with proportional reductions in risk retention. 208
Commenters are referred to an invitation to comment on blended pools with respect to
residential mortgage securitizations that appears at the end of that discussion.
VII. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Pub. L. 106-102, sec. 722, 113 Stat.
1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies to use plain language
in all proposed and final rules published after January 1, 2000. The Federal banking
207
ASF Investors.
208
See Part V.D of this Supplementary Information.
287
agencies invite your comments on how to make this proposal easier to understand. For
example:
• Have the agencies organized the material to suit your needs? If not, how could
this material be better organized?
• Are the requirements in the proposed regulation clearly stated? If not, how could
the regulation be more clearly stated?
• Does the proposed regulation contain language or jargon that is not clear? If so,
which language requires clarification?
• Would a different format (grouping and order of sections, use of headings,
paragraphing) make the regulation easier to understand? If so, what changes to the
format would make the regulation easier to understand?
• What else could the agencies do to make the regulation easier to understand?
VIII. Administrative Law Matters
A.
Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a notice of proposed rulemaking, an agency prepare and make available
for public comment an initial regulatory flexibility analysis that describes the impact of a
proposed rule on small entities. 209 However, the regulatory flexibility analysis otherwise
required under the RFA is not required if an agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities (defined in
regulations promulgated by the Small Business Administration to include banking
209
See 5 U.S.C. 601 et seq.
288
organizations with total assets of less than or equal to $500 million) and publishes its
certification and a short, explanatory statement in the Federal Register together with the
rule.
As discussed in the “Supplementary Information” above, section 941 of the DoddFrank Act 210 generally requires the Federal banking agencies and the Commission, and,
in the case of the securitization of any residential mortgage asset, together with HUD and
FHFA, to jointly prescribe regulations, that (i) require a securitizer to retain not less than
5 percent of the credit risk of any asset that the securitizer, through the issuance of an
asset-backed security (ABS), transfers, sells, or conveys to a third party; and (ii) prohibit
a securitizer from directly or indirectly hedging or otherwise transferring the credit risk
that the securitizer is required to retain under section 15G. Although the proposed rule
would apply directly only to securitizers, subject to a certain considerations, section 15G
authorizes the agencies to permit securitizers to allocate at least a portion of the risk
retention requirement to the originator(s) of the securitized assets.
Section 15G provides a total exemption from the risk retention requirements for
securitizers of certain securitization transactions, such as an ABS issuance collateralized
exclusively by QRMs, and further authorizes the agencies to establish a lower risk
retention requirement for securitizers of ABS issuances collateralized by other asset
types, such as commercial, commercial real estate (CRE), and automobile loans, which
satisfy underwriting standards established by the Federal banking agencies.
210
Codified at section 15G of the Exchange Act, 17 U.S.C. 78o-11.
289
The risk retention requirements of section 15G apply generally to a “securitizer”
of ABS, where securitizer is defined to mean (i) an issuer of an ABS; or (ii) a person who
organizes and initiates an asset-backed transaction by selling or transferring assets, either
directly or indirectly, including through an affiliate, to the issuer. Section 15G also
defines an “originator” as a person who (i) through the extension of credit or otherwise,
creates a financial asset that collateralizes an asset-backed security; and (ii) sells an asset
directly or indirectly to a securitizer.
The proposed rule implements the credit risk retention requirements of section
15G. Section 15G requires the agencies to establish risk retention requirements for
“securitizers”. The proposal would, as a general matter, require that a “sponsor” of a
securitization transaction retain the credit risk of the securitized assets in the form and
amount required by the proposed rule. The agencies believe that imposing the risk
retention requirement on the sponsor of the ABS—as permitted by section 15G—is
appropriate in light of the active and direct role that a sponsor typically has in arranging a
securitization transaction and selecting the assets to be securitized. Under the proposed
rule a sponsor may offset the risk retention requirement by the amount of any eligible
vertical risk retention interest or eligible horizontal residual interest acquired by an
originator of one or more securitized assets if certain requirements are satisfied,
including, the originator must originate at least 20 percent of the securitized assets, as
measured by the aggregate unpaid principal balance of the asset pool.
In determining whether the allocation provisions of the proposal would have a
significant economic impact on a substantial number of small banking organizations, the
Federal banking agencies reviewed December 31, 2012 Call Report data to evaluate the
290
origination and securitization activity of small banking organizations that potentially
could retain credit risk directly through their own securitization activity or indirectly
under allocation provisions of the proposal. 211
As of December 31, 2012, there were approximately 1,291 small national banks
and Federal savings associations that would be subject to this rule. The Call Report data
indicates that approximately 140 small national banks and Federal savings associations,
originate loans to securitize themselves or sell to other entities for securitization,
predominately through ABS issuances collateralized by one-to-four family residential
mortgages. This number reflects conservative assumptions, as few small entities sponsor
securitizations, and few originate a sufficient number of loans for securitization to meet
the minimum 20 percent share for the allocation to originator provisions under the
proposed rule. As the OCC regulates approximately 1,291 small entities, and 140 of
those entities could be subject to this proposed rule, the proposed rule could impact a
substantial number of small national banks and Federal savings associations.
The vast majority of securitization activity by small entities is in the residential
mortgage sector. The majority of these originators sell their loans either to Fannie Mae or
Freddie Mac, which retain credit risk through agency guarantees and would not be able to
allocate credit risk to originators under this proposed rule. For those loans not sold to the
211
Call Report Schedule RC-S provides information on the servicing, securitization, and
asset sale activities of banking organizations. For purposes of the RFA analysis, the
agencies gathered and evaluated data regarding (1) net securitization income, (2) the
outstanding principal balance of assets sold and securitized by the reporting entity with
servicing retained or with recourse or other seller-provided credit enhancements, and (3)
assets sold with recourse or other seller-provided credit enhancements and not securitized
by the reporting bank.
291
Enterprises, most would likely meet the QRM exemption. The QM rule, on which the
QRM proposal is based, also includes exceptions for small creditors, which may be
utilized by many of these small entities to meet the requirements and thus not need to
hold risk retention on those assets. For these reasons, the OCC believes the proposed rule
would not have a substantial economic effect on small entities.
Therefore, the OCC concludes that the proposed rule would not have a significant
impact on a substantial number of small entities. The OCC seeks comments on whether
the proposed rule, if adopted in final form, would impose undue burdens, or have
unintended consequences for, small national banks and Federal savings associations and
whether there are ways such potential burdens or consequences could be minimized in a
manner consistent with section 15G of the Exchange Act.
Board: The Regulatory Flexibility Act (5 U.S.C. 603(b)) generally requires that,
in connection with a notice of proposed rulemaking, an agency prepare and make
available for public comment an initial regulatory flexibility analysis that describes the
impact of a proposed rule on small entities. 212 Under regulations promulgated by the
Small Business Administration, a small entity includes a commercial bank or bank
holding company with assets of $500 million or less (each, a small banking
organization). 213 The Board has considered the potential impact of the proposed rules on
small banking organizations supervised by the Board in accordance with the Regulatory
Flexibility Act.
212
See 5 U.S.C. 601 et seq.
213
13 CFR 121.201.
292
For the reasons discussed in Part II of this Supplementary Information, the
proposed rules define a securitizer as a “sponsor” in a manner consistent with the
definition of that term in the Commission’s Regulation AB and provide that the sponsor
of a securitization transaction is generally responsible for complying with the risk
retention requirements established under section 15G. The Board is unaware of any
small banking organization under the supervision of the Board that has acted as a sponsor
of a securitization transaction 214 (based on December 31, 2012 data). 215 As of December
31, 2012, there were approximately 5,135 small banking organizations supervised by the
Board, which includes 4,092 bank holding companies, 297 savings and loan holding
companies, 632 state member banks, 22 Edge and agreement corporations and 92 U.S.
offices of foreign banking organizations.
The proposed rules permit, but do not require, a sponsor to allocate a portion of its
risk retention requirement to one or more originators of the securitized assets, subject to
certain conditions being met. In particular, a sponsor may offset the risk retention
requirement by the amount of any eligible vertical risk retention interest or eligible
horizontal residual interest acquired by an originator of one or more securitized assets if
certain requirements are satisfied, including, the originator must originate at least 20
percent of the securitized assets, as measured by the aggregate unpaid principal balance
214
For purposes of the proposed rules, this would include a small bank holding
company; savings and loan holding company; state member bank; Edge corporation;
agreement corporation; foreign banking organization; and any subsidiary of the
foregoing.
215
Call Report Schedule RC-S; Data based on the Reporting Form FR 2866b; Structure
Data for the U.S. Offices of Foreign Banking Organizations; and Aggregate Data on
Assets and Liabilities of U.S. Branches and agencies of Foreign Banks based on the
quarterly form FFIEC 002.
293
of the asset pool. 216 A sponsor using this risk retention option remains responsible for
ensuring that the originator has satisfied the risk retention requirements. In light of this
option, the Board has considered the impact of the proposed rules on originators that are
small banking organizations.
The December 31, 2012 regulatory report data 217 indicates that approximately 723
small banking organizations, 87 of which are small banking organizations that are
supervised by the Board, originate loans for securitization, namely ABS issuances
collateralized by one-to-four family residential mortgages. The majority of these
originators sell their loans either to Fannie Mae or Freddie Mac, which retain credit risk
through agency guarantees and would not be able to allocate credit risk to originators
under this proposed rule. Additionally, based on publicly-available market data, it
appears that most residential mortgage-backed securities offerings are collateralized by a
pool of mortgages with an unpaid aggregate principal balance of at least $500 million. 218
216
With respect to an open market CLO transaction, the risk retention retained by the
originator must be at least 20 percent of the aggregate principal balance at origination of
a CLO-eligible loan tranche.
217
Call Report Schedule RC-S provides information on the servicing, securitization, and
asset sale activities of banking organizations. For purposes of the RFA analysis, the
agencies gathered and evaluated data regarding (1) the outstanding principal balance of
assets sold and securitized by the reporting entity with servicing retained or with recourse
or other seller-provided credit enhancements, and (2) assets sold with recourse or other
seller-provided credit enhancements and not securitized by the reporting bank.
218
Based on the data provided in Table 1, page 29 of the Board’s “Report to the
Congress on Risk Retention”, it appears that the average MBS issuance is collateralized
by a pool of approximately $620 million in mortgage loans (for prime MBS issuances) or
approximately $690 million in mortgage loans (for subprime MBS issuances). For
purposes of the RFA analysis, the agencies used an average asset pool size $500 million
to account for reductions in mortgage securitization activity following 2007, and to add
an element of conservatism to the analysis.
294
Accordingly, under the proposed rule a sponsor could potentially allocate a portion of the
risk retention requirement to a small banking organization only if such organization
originated at least 20 percent ($100 million) of the securitized mortgages. As of
December 31, 2012, only one small banking organization supervised by the Board
reported an outstanding principal balance of assets sold and securitized of $100 million or
more. 219
In light of the foregoing, the proposed rules would not appear to have a significant
economic impact on sponsors or originators supervised by the Board. The Board seeks
comment on whether the proposed rules would impose undue burdens on, or have
unintended consequences for, small banking organizations, and whether there are ways
such potential burdens or consequences could be minimized in a manner consistent with
section 15G of the Exchange Act.
FDIC: The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a notice of proposed rulemaking, an agency prepare and make available
for public comment an initial regulatory flexibility analysis that describes the impact of a
proposed rule on small entities. 220 However, a regulatory flexibility analysis is not
required if the agency certifies that the rule will not have a significant economic impact
on a substantial number of small entities (defined in regulations promulgated by the
Small Business Administration to include banking organizations with total assets of less
219
The FDIC notes that this finding assumes that no portion of the assets originated by
small banking organizations were sold to securitizations that qualify for an exemption
from the risk retention requirements under the proposed rule.
220
See 5 U.S.C. 601 et seq.
295
than or equal to $500 million) and publishes its certification and a short, explanatory
statement in the Federal Register together with the rule.
As of March 31, 2013, there were approximately 3,711 small FDIC-supervised
institutions, which include 3,398 state nonmember banks and 313 state-chartered savings
banks. For the reasons provided below, the FDIC certifies that the proposed rule, if
adopted in final form, would not have a significant economic impact on a substantial
number of small entities. Accordingly, a regulatory flexibility analysis is not required.
As discussed in the “Supplementary Information” above, section 941 of the DoddFrank Act 221 generally requires the Federal banking agencies and the Commission, and,
in the case of the securitization of any residential mortgage asset, together with HUD and
FHFA, to jointly prescribe regulations, that (i) require a securitizer to retain not less than
5 percent of the credit risk of any asset that the securitizer, through the issuance of an
asset-backed security (ABS), transfers, sells, or conveys to a third party; and (ii) prohibit
a securitizer from directly or indirectly hedging or otherwise transferring the credit risk
that the securitizer is required to retain under section 15G. Although the proposed rule
would apply directly only to securitizers, subject to a certain considerations, section 15G
authorizes the agencies to permit securitizers to allocate at least a portion of the risk
retention requirement to the originator(s) of the securitized assets.
Section 15G provides a total exemption from the risk retention requirements for
securitizers of certain securitization transactions, such as an ABS issuance collateralized
exclusively by QRMs, and further authorizes the agencies to establish a lower risk
221
Codified at section 15G of the Exchange Act, 17 U.S.C. 78o-11.
296
retention requirement for securitizers of ABS issuances collateralized by other asset
types, such as commercial, commercial real estate (CRE), and automobile loans, which
satisfy underwriting standards established by the Federal banking agencies.
The risk retention requirements of section 15G apply generally to a “securitizer”
of ABS, where securitizer is defined to mean (i) an issuer of an ABS; or (ii) a person who
organizes and initiates an asset-backed transaction by selling or transferring assets, either
directly or indirectly, including through an affiliate, to the issuer. Section 15G also
defines an “originator” as a person who (i) through the extension of credit or otherwise,
creates a financial asset that collateralizes an asset-backed security; and (ii) sells an asset
directly or indirectly to a securitizer.
The proposed rule implements the credit risk retention requirements of section
15G. The proposal would, as a general matter, require that a “sponsor” of a securitization
transaction retain the credit risk of the securitized assets in the form and amount required
by the proposed rule. The agencies believe that imposing the risk retention requirement
on the sponsor of the ABS—as permitted by section 15G—is appropriate in view of the
active and direct role that a sponsor typically has in arranging a securitization transaction
and selecting the assets to be securitized. The FDIC is aware of only 40 small banking
organizations that currently sponsor securitizations (two of which are national banks,
seven are state member banks, 23 are state nonmember banks, and eight are savings
associations, based on March 31, 2013 information) and, therefore, the risk retention
requirements of the proposed rule, as generally applicable to sponsors, would not have a
significant economic impact on a substantial number of small state nonmember banks.
297
Under the proposed rule a sponsor may offset the risk retention requirement by
the amount of any eligible vertical risk retention or eligible horizontal residual interest
acquired by an originator of one or more securitized assets if certain requirements are
satisfied, including, the originator must originate at least 20 percent of the securitized
assets, as measured by the aggregate unpaid principal balance of the asset pool. 222 In
determining whether the allocation provisions of the proposal would have a significant
economic impact on a substantial number of small banking organizations, the Federal
banking agencies reviewed March 31, 2013 Call Report data to evaluate the securitization
activity and approximate the number of small banking organizations that potentially
could retain credit risk under allocation provisions of the proposal. 223
The Call Report data indicates that approximately 703 small banking
organizations, 456 of which are state nonmember banks, originate loans for
securitization, namely ABS issuances collateralized by one-to-four family residential
mortgages. The majority of these originators sell their loans either to Fannie Mae or
Freddie Mac, which retain credit risk through agency guarantees, and therefore would not
be allocated credit risk under the proposed rule. Additionally, based on publiclyavailable market data, it appears that most residential mortgage-backed securities
222
With respect to an open market CLO transaction, the risk retention retained by the
originator must be at least 20 percent of the aggregate principal balance at origination of
a CLO-eligible loan tranche
223
Call Report Schedule RC-S provides information on the servicing, securitization, and
asset sale activities of banking organizations. For purposes of the RFA analysis, the
agencies gathered and evaluated data regarding (1) the outstanding principal balance of
assets sold and securitized by the reporting entity with servicing retained or with recourse
or other seller-provided credit enhancements, and (2) assets sold with recourse or other
seller-provided credit enhancements and not securitized by the reporting bank.
298
offerings are collateralized by a pool of mortgages with an unpaid aggregate principal
balance of at least $500 million.224 Accordingly, under the proposed rule a sponsor could
potentially allocate a portion of the risk retention requirement to a small banking
organization only if such organization originated at least 20 percent ($100 million) of the
securitized mortgages. As of March 31, 2013, only two small banking organizations
reported an outstanding principal balance of assets sold and securitized of $100 million or
more. 225
The FDIC seeks comment on whether the proposed rule, if adopted in final form,
would impose undue burdens, or have unintended consequences for, small state
nonmember banks and whether there are ways such potential burdens or consequences
could be minimized in a manner consistent with section 15G of the Exchange Act.
Commission: The Commission hereby certifies, pursuant to 5 U.S.C. 605(b), that
the proposed rule, if adopted, would not have a significant economic impact on a
substantial number of small entities. The proposed rule implements the risk retention
requirements of section 15G of the Exchange Act, which, in general, requires the
securitizer of asset-backed securities (ABS) to retain not less than 5 percent of the credit
224
Based on the data provided in Table 1, page 29 of the Board’s “Report to the
Congress on Risk Retention”, it appears that the average MBS issuance is collateralized
by a pool of approximately $620 million in mortgage loans (for prime MBS issuances) or
approximately $690 million in mortgage loans (for subprime MBS issuances). For
purposes of the RFA analysis, the agencies used an average asset pool size $500 million
to account for reductions in mortgage securitization activity following 2007, and to add
an element of conservatism to the analysis.
225
The FDIC notes that this finding assumes that no portion of the assets originated by
small banking organizations were sold to securitizations that qualify for an exemption
from the risk retention requirements under the proposed rule.
299
risk of the assets collateralizing the ABS. 226 Under the proposed rule, the risk retention
requirements would apply to “sponsors”, as defined in the proposed rule. Based on our
data, we found only one sponsor that would meet the definition of a small broker-dealer
for purposes of the Regulatory Flexibility Act. 227 Accordingly, the Commission does not
believe that the proposed rule, if adopted, would have a significant economic impact on a
substantial number of small entities.
A few commenters on the original proposal indicated that the proposed risk
retention requirements could indirectly affect the availability of credit to small businesses
and lead to contractions in the secondary mortgage market, with a corresponding
reduction in mortgage originations. The Regulatory Flexibility Act only requires an
agency to consider regulatory alternatives for those small entities subject to the proposed
rules. The Commission has considered the broader economic impact of the proposed
rules, including their potential effect on efficiency, competition and capital formation, in
the Commission’s Economic Analysis below.
The Commission encourages written comments regarding this certification. The
Commission requests, in particular, that commenters describe the nature of any direct
impact on small entities and provide empirical data to support the extent of the impact.
FHFA: Pursuant to section 605(b) of the Regulatory Flexibility Act, FHFA
hereby certifies that the proposed rule will not have a significant economic impact on a
substantial number of small entities.
B. Paperwork Reduction Act
226
See 17 U.S.C. 78o-11.
227
5 U.S.C. 601 et seq.
300
1. Request for Comment on Proposed Information Collection
Certain provisions of the proposed rule contain “collection of information”
requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”), 44
U.S.C. 3501-3521. In accordance with the requirements of the PRA, the agencies may
not conduct or sponsor, and the respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management and Budget (OMB)
control number. The information collection requirements contained in this joint notice of
proposed rulemaking have been submitted by the FDIC, OCC, and the Commission to
OMB for approval under section 3507(d) of the PRA and section 1320.11 of OMB’s
implementing regulations (5 CFR part 1320). The Board reviewed the proposed rule
under the authority delegated to the Board by OMB.
Comments are invited on:
(a) Whether the collections of information are necessary for the proper
performance of the agencies’ functions, including whether the information has practical
utility;
(b) The accuracy of the estimates of the burden of the information collections,
including the validity of the methodology and assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the information to be
collected;
(d) Ways to minimize the burden of the information collections on respondents,
including through the use of automated collection techniques or other forms of
information technology; and
301
(e) Estimates of capital or start-up costs and costs of operation, maintenance, and
purchase of services to provide information.
All comments will become a matter of public record. Commenters may submit
comments on aspects of this notice that may affect disclosure requirements and burden
estimates at the addresses listed in the ADDRESSES section of this Supplementary
Information. A copy of the comments may also be submitted to the OMB desk officer
for the agencies: By mail to U.S. Office of Management and Budget, 725 17th Street,
NW, #10235, Washington, DC 20503, by facsimile to 202-395-6974, or by email to:
oira_submission@omb.eop.gov. Attention, Commission and Federal Banking Agency
Desk Officer.
2. Proposed Information Collection
Title of Information Collection: Credit Risk Retention.
Frequency of response: Event generated; annual, monthly.
Affected Public: 228
FDIC: Insured state non-member banks, insured state branches of foreign banks,
state savings associations, and certain subsidiaries of these entities.
OCC: National banks, Federal savings associations, Federal branches or agencies
of foreign banks, or any operating subsidiary thereof.
Board: Insured state member banks, bank holding companies, savings and loan
holding companies, Edge and agreement corporations, foreign banking
228
The affected public of the FDIC, OCC, and Board is assigned generally in accordance
with the entities covered by the scope and authority section of their respective proposed
rule. The affected public of the Commission is based on those entities not already
accounted for by the FDIC, OCC, and Board.
302
organizations, nonbank financial companies supervised by the Board, and any
subsidiary thereof.
Commission: All entities other than those assigned to the FDIC, OCC, or Board.
Abstract: The notice sets forth permissible forms of risk retention for
securitizations that involve issuance of asset-backed securities. The proposed rule
contains requirements subject to the PRA. The information requirements in the joint
regulations proposed by the three Federal banking agencies and the Commission are
found in sections __.4, __.5, __.6, __.7, __.8, __.9, __.10, __.11, __.13, __.15, __.16,
__.17, and__.18. The agencies believe that the disclosure and recordkeeping
requirements associated with the various forms of risk retention will enhance market
discipline, help ensure the quality of the assets underlying a securitization transaction,
and assist investors in evaluating transactions. Compliance with the information
collections would be mandatory. Responses to the information collections would not be
kept confidential and, except for the recordkeeping requirements set forth in sections
__.4(e) and __.5(g)(2), there would be no mandatory retention period for the proposed
collections of information.
Section-by-Section Analysis
Section __.4 sets forth the conditions that must be met by sponsors electing to use
the standard risk retention option, which may consist of an eligible vertical interest or an
eligible horizontal residual interest, or any combination thereof. Sections __.4(d)(1) and
__.4(d)(2) specify the disclosures required with respect to eligible horizontal residual
interests and eligible vertical interests, respectively.
303
A sponsor retaining any eligible horizontal residual interest (or funding a
horizontal cash reserve account) is required to calculate the Closing Date Projected Cash
Flow Rate and Closing Date Projected Principal Repayment Rate for each payment date,
and certify to investors that it has performed such calculations and that the Closing Date
Projected Cash Flow Rate on any payment date does not exceed the Closing Date
Projected Principal Repayment Rate on such payment date (§__.4(b)(2)).
Additionally, the sponsor is required to disclose: the fair value of the eligible
horizontal residual interest retained by the sponsor and the fair value of the eligible
horizontal residual interest required to be retained (§__.4(d)(1)(i)); the material terms of
the eligible horizontal residual interest (§__.4(d)(1)(ii)); the methodology used to
calculate the fair value of all classes of ABS interests (§__.4(d)(1)(iii)); the key inputs
and assumptions used in measuring the total fair value of all classes of ABS interests, and
the fair value of the eligible horizontal residual interest retained by the sponsor
(§__.4(d)(1)(iv)); the reference data set or other historical information used to develop
the key inputs and assumptions (§__.4(d)(1)(v)); the number of securitization transactions
securitized by the sponsor during the previous five-year period in which the sponsor
retained an eligible horizontal residual interest pursuant to this section, and the number (if
any) of payment dates in each such securitization on which actual payments to the
sponsor with respect to the eligible horizontal residual interest exceeded the cash flow
projected to be paid to the sponsor on such payment date in determining the Closing Date
Projected Cash Flow Rate (§__.4(d)(1)(vi)); and the amount placed by the sponsor in the
horizontal cash reserve account at closing, the fair value of the eligible horizontal residual
304
interest that the sponsor is required to fund through such account, and a description of
such account (§__.4(d)(1)(vii)).
For eligible vertical interests, the sponsor is required to disclose: whether the
sponsor retains the eligible vertical interest as a single vertical security or as a separate
proportional interest in each class of ABS interests in the issuing entity issued as part of
the securitization transaction (§__.4(d)(2)(i)); for eligible vertical interests retained as a
single vertical security, the fair value amount of the single vertical security retained at the
closing of the securitization transaction and the fair value amount required to be retained,
and the percentage of each class of ABS interests in the issuing entity underlying the
single vertical security at the closing of the securitization transaction and the percentage
of each class of ABS interests in the issuing entity that would have been required to be
retained if the eligible vertical interest was held as a separate proportional interest
(§__.4(d)(2)(ii)); for eligible vertical interests retained as a separate proportional interest
in each class of ABS interests in the issuing entity, the percentage of each class of ABS
interests in the issuing entity retained at the closing of the securitization transaction and
the percentage of each class of ABS interests required to be retained (§__.4(d)(2)(iii));
and information with respect to the measurement of the fair value of the ABS interests in
the issuing entity (§__.4(d)(2)(iv)).
Section __.4(e) requires a sponsor to retain the certifications and disclosures
required in paragraphs (b) and (d) of this section in written form in its records and must
provide the disclosure upon request to the Commission and its appropriate Federal
banking agency, if any, until three years after all ABS interests are no longer outstanding.
305
Section __.5 requires sponsors relying on the revolving master trust risk retention
option to disclose: the value of the seller’s interest retained by the sponsor, the fair value
of any horizontal risk retention retained by the sponsor under §__.5(f), and the unpaid
principal balance value or fair value, as applicable, the sponsor is required to retain
(§__.5(g)(1)(i)); the material terms of the seller’s interest and of any horizontal risk
retention retained by the sponsor under §__.5(f) (§__.5(g)(1)(ii)); and if the sponsor
retains any horizontal risk retention under §__.5(f), the same information as is required to
be disclosed by sponsors retaining horizontal interests (§__.5(g)(1)(iii)). Additionally, a
sponsor must retain the disclosures required in §__.5(g)(1) in written form in its records
and must provide the disclosure upon request to the Commission and its appropriate
Federal banking agency, if any, until three years after all ABS interests are no longer
outstanding (§__.5(g)(2)).
Section __.6 addresses the requirements for sponsors utilizing the eligible ABCP
conduit risk retention option. The requirements for the eligible ABCP conduit risk
retention option include disclosure to each purchaser of ABCP and periodically to each
holder of commercial paper issued by the ABCP conduit of the name and form of
organization of the regulated liquidity provider that provides liquidity coverage to the
eligible ABCP conduit, including a description of the form, amount, and nature of such
liquidity coverage, and notice of any failure to fund; and with respect to each ABS
interest held by the ABCP conduit, the asset class or brief description of the underlying
receivables, the standard industrial category code for the originator-seller or majorityowned OS affiliate that retains an interest in the securitization transaction, and a
description of the form, fair value, and nature of such interest (§__.6(d)). An ABCP
306
conduit sponsor relying upon this section shall provide, upon request, to the Commission
and its appropriate Federal banking agency, if any, the information required under
§__.6(d), in addition to the name and form of organization of each originator-seller or
majority-owned OS affiliate that retains an interest in the securitization transaction
(§__.6(e)).
A sponsor relying on the eligible ABCP conduit risk retention option shall
maintain and adhere to policies and procedures to monitor compliance by each originatorseller or majority-owned OS affiliate (§__.6(f)(2)(i)). If the ABCP conduit sponsor
determines that an originator-seller or majority-owned OS affiliate is no longer in
compliance, the sponsor must promptly notify the holders of the ABCP, the Commission
and its appropriate Federal banking agency, in writing of the name and form of
organization of any originator-seller or majority-owned OS affiliate that fails to retain
and the amount of asset-backed securities issued by an intermediate SPV of such
originator-seller and held by the ABCP conduit, the name and form of organization of
any originator-seller or majority-owned OS affiliate that hedges, directly or indirectly
through an intermediate SPV, their risk retention in violation and the amount of assetbacked securities issued by an intermediate SPV of such originator-seller or majorityowned OS affiliate and held by the ABCP conduit, and any remedial actions taken by the
ABCP conduit sponsor or other party with respect to such asset-backed securities
(§__.6(f)(2)(ii)).
Section __.7 sets forth the requirements for sponsors relying on the commercial
mortgage-backed securities risk retention option, and includes disclosures of: the name
and form of organization of each third-party purchaser (§__.7(a)(7)(i)); each initial third-
307
party purchaser’s experience in investing in commercial mortgage-backed securities
(§__.7(a)(7)(ii)); other material information (§__.7(a)(7)(iii)); the fair value of the
eligible horizontal residual interest retained by each third-party purchaser, the purchase
price paid, and the fair value of the eligible horizontal residual interest that the sponsor
would have retained if the sponsor had relied on retaining an eligible horizontal residual
interest under the standard risk retention option (§__.7(a)(7)(iv) and (v)); a description of
the material terms of the eligible horizontal residual interest retained by each initial thirdparty purchaser, including the same information as is required to be disclosed by sponsors
retaining horizontal interests pursuant to §__.4 (§__.7(a)(7)(vi)); the material terms of the
applicable transaction documents with respect to the Operating Advisor (§__.7(a)(7)(vii);
and representations and warranties concerning the securitized assets, a schedule of any
securitized assets that are determined not to comply with such representations and
warranties, and the factors used to determine such securitized assets should be included in
the pool notwithstanding that they did not comply with the representations and warranties
(§__.7(a)(7)(viii)). A sponsor relying on the commercial mortgage-backed securities risk
retention option shall provide in the underlying securitization transaction documents
certain provisions related to the Operating Advisor (§__.7(a)(6)), maintain and adhere to
policies and procedures to monitor compliance by third-party purchasers with regulatory
requirements (§__.7(b)(2)(A)), and notify the holders of the ABS interests in the event of
noncompliance by a third-party purchaser with such regulatory requirements
(§__.7(b)(2)(B)).
Section __.8 requires that a sponsor relying on the Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation ABS risk retention option
308
must disclose a description of the manner in which it has met the credit risk retention
requirements (§__.8(c)).
Section __.9 sets forth the requirements for sponsors relying on the open market
CLO risk retention option, and includes disclosures of a complete list of, and certain
information related to, every asset held by an open market CLO (§__.9(d)(1)), and the
full legal name and form of organization of the CLO manager (§__.9(d)(2).
Section __.10 sets forth the requirements for sponsors relying on the qualified
tender option bond risk retention option, and includes disclosures of the name and form
of organization of the Qualified Tender Option Bond Entity, and a description of the
form, fair value (expressed as a percentage of the fair value of all of the ABS interests
issued in the securitization transaction and as a dollar amount), and nature of such interest
in accordance with the disclosure obligations in section __.4(d) (§__.10(e)).
Section __.11 sets forth the conditions that apply when the sponsor of a
securitization allocates to originators of securitized assets a portion of the credit risk it is
required to retain, including disclosure of the name and form of organization of any
originator that acquires and retains an interest in the transaction, a description of the
form, amount and nature of such interest, and the method of payment for such interest
(§__.11(a)(2)). A sponsor relying on this section shall maintain and adhere to policies
and procedures that are reasonably designed to monitor originator compliance with
retention amount and hedging, transferring and pledging requirements (§__.11(b)(2)(A))
and shall promptly notify the holders of the ABS interests in the transaction in the event
of originator noncompliance with such regulatory requirements (§__.11(b)(2)(B)).
309
Section __.13 provides an exemption from the risk retention requirements for
qualified residential mortgages that meet certain specified criteria, including that the
depositor of the asset-backed security certify that it has evaluated the effectiveness of its
internal supervisory controls and concluded that the controls are effective
(§__.13(b)(4)(i)), and that the sponsor provide a copy of the certification to potential
investors prior to sale of asset-backed securities (§__.13(b)(4)(iii)). In addition,
§__.13(c)(3) provides that a sponsor that has relied upon the exemption shall not lose the
exemption if it complies with certain specified requirements, including prompt notice to
the holders of the asset-backed securities of any loan repurchased by the sponsor.
Section __.15 provides exemptions from the risk retention requirements for
qualifying commercial loans that meet the criteria specified in Section __.16, qualifying
CRE loans that meet the criteria specified in Section __.17, and qualifying automobile
loans that meet the criteria specified in Section __.18. Section __.15 also requires the
sponsor to disclose a description of the manner in which the sponsor determined the
aggregate risk retention requirement for the securitization transaction after including
qualifying commercial loans, qualifying CRE loans, or qualifying automobile loans with
0 percent risk retention, and descriptions of the qualifying commercial loans, qualifying
CRE loans, and qualifying automobile loans (“qualifying assets”) and descriptions of the
assets that are not qualifying assets, and the material differences between the group of
qualifying assets and the group of assets that are not qualifying assets with respect to the
composition of each group’s loan balances, loan terms, interest rates, borrower credit
information, and characteristics of any loan collateral (§__.15(a)(4)).
310
Sections __.16, __.17 and __.18 each require that: the depositor of the assetbacked security certify that it has evaluated the effectiveness of its internal supervisory
controls and concluded that its internal supervisory controls are effective
(§§__.16(b)(8)(i), __.17(b)(10)(i), and __.18(b)(8)(i)); the sponsor provide a copy of the
certification to potential investors prior to the sale of asset-backed securities
(§§__.16(b)(8)(iii), __.17(b)(10)(iii), and __.18(b)(8)(iii)); and the sponsor promptly
notify the holders of the securities of any loan included in the transaction that is required
to be cured or repurchased by the sponsor, including the principal amount of such loan(s)
and the cause for such cure or repurchase (§§__.16(c)(3), __.17(c)(3), and __.18(c)(3)).
Estimated Paperwork Burden
Estimated Burden Per Response:
§__.4 - Standard risk retention: horizontal interests: recordkeeping – 0.5 hours,
disclosures – 3.0 hours, payment date disclosures – 1.0 hour with a monthly frequency;
vertical interests: recordkeeping – 0.5 hours, disclosures – 2.5 hours; combined
horizontal and vertical interests: recordkeeping – 0.5 hours, disclosures – 4.0 hours,
payment date disclosures – 1.0 hour with a monthly frequency.
§__.5 – Revolving master trusts: recordkeeping – 0.5 hours; disclosures – 4.0 hours.
§__.6 – Eligible ABCP conduits: recordkeeping – 20.0 hours; disclosures – 3.0 hours.
§__.7 – Commercial mortgage-backed securities: recordkeeping – 30.0 hours;
disclosures – 20.75 hours.
§__.8 – Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation ABS: disclosures - 1.5 hours.
§__.9 – Open market CLOs: disclosures – 20.25 hours.
311
§__.10 – Qualified tender option bonds: disclosures – 4.0 hours.
§__.11 – Allocation of risk retention to an originator: recordkeeping 20.0 hours;
disclosures 2.5 hours.
§__.13 – Exemption for qualified residential mortgages: recordkeeping – 40.0 hours;
disclosures 1.25 hours.
§__.15 – Exemption for qualifying commercial loans, commercial real estate loans, and
automobile loans: disclosure – 20.0 hours.
§__.16 – Underwriting standards for qualifying commercial loans: recordkeeping – 40.0
hours; disclosures – 1.25 hours.
§__.17– Underwriting standards for qualifying CRE loans: recordkeeping – 40.0 hours;
disclosures – 1.25 hours.
§__.18 – Underwriting standards for qualifying automobile loans: recordkeeping – 40.0
hours; disclosures – 1.25 hours.
FDIC
Estimated Number of Respondents: 92 sponsors; 494 annual offerings per year.
Total Estimated Annual Burden: 10,726 hours.
OCC
Estimated Number of Respondents: 30 sponsors; 160 annual offerings per year.
Total Estimated Annual Burden: 3,549 hours.
Board
Estimated Number of Respondents: 20 sponsors; 107 annual offerings per year.
Total Estimated Annual Burden: 2,361 hours.
Commission
312
Estimated Number of Respondents: 107 sponsors; 574 annual offerings per year.
Total Estimated Annual Burden: 12,355 hours.
Commission’s explanation of the calculation:
To determine the total paperwork burden for the requirements contained in this
proposed rule the agencies first estimated the universe of sponsors that would be required
to comply with the proposed disclosure and recordkeeping requirements. The agencies
estimate that approximately 249 unique sponsors conduct ABS offerings per year. This
estimate was based on the average number of ABS offerings from 2004 through 2012
reported by the ABS database AB Alert for all non-CMBS transactions and by Securities
Data Corporation for all CMBS transactions. Of the 249 sponsors, the agencies have
assigned 8 percent of these sponsors to the Board, 12 percent to the OCC, 37 percent to
the FDIC, and 43 percent to the Commission.
Next, the agencies estimated the burden per response that would be associated
with each disclosure and recordkeeping requirement, and then estimated how frequently
the entities would make the required disclosure by estimating the proportionate amount of
offerings per year for each agency. In making this determination, the estimate was based
on the average number of ABS offerings from 2004 through 2012, and therefore, we
estimate the total number of annual offerings per year to be 1,334. 229 We also made the
following additional estimates:
229
We use the ABS issuance data from Asset-Backed Alert on the initial terms of
offerings, and we supplement that data with information from Securities Data
Corporation (SDC). This estimate includes registered offerings, offerings made under
Securities Act Rule 144A, and traditional private placements. We also note that this
estimate is for offerings that are not exempted under §§ _.19 and _.20 of the proposed
rule.
313
•
12 offerings per year will be subject to disclosure and recordkeeping
requirements under section §__.11, which are divided equally among the
four agencies (i.e., 3 offerings per year per agency);
•
100 offerings per year will be subject to disclosure and recordkeeping
requirements under section §__.13, which are divided proportionately
among the agencies based on the entity percentages described above (i.e.,
8 offerings per year subject to §__.13 for the Board; 12 offerings per year
subject to §__.13 for the OCC; 37 offerings per year subject to §__.13 for
the FDIC; and 43 offerings per year subject to §__.13 for the
Commission); and
•
120 offerings per year will be subject to the disclosure requirements under
§__.15, which are divided proportionately among the agencies based on
the entity percentages described above (i.e., 10 offerings per year subject
to §__.15 for the Board, 14 offerings per year subject to §__.15 for the
OCC; 44 offerings per year subject to §__.15 for the FDIC, and 52
offerings per year subject to §__.15 for the Commission. Of these 120
offerings per year, 40 offerings per year will be subject to disclosure and
recordkeeping requirements under §__.16, §__.17, and §__.18,
respectively, which are divided proportionately among the agencies based
on the entity percentages described above (i.e., 3 offerings per year subject
to each section for the Board, 5 offerings per year subject to each section
for the OCC; 15 offerings per year subject to each section for the FDIC,
and 17 offerings per year subject to each section for the Commission).
314
To obtain the estimated number of responses (equal to the number of offerings)
for each option in Subpart B of the proposed rule, the agencies multiplied the number of
offerings estimated to be subject to the base risk retention requirements (i.e., 1,114) 230 by
the sponsor percentages described above. The result was the number of base risk
retention offerings per year per agency. For the Commission, this was calculated by
multiplying 1,114 offerings per year by 43 percent, which equals 479 offerings per year.
This number was then divided by the number of base risk retention options under Subpart
B of the proposed rule (i.e., nine) 231 to arrive at the estimate of the number of offerings
per year per agency per base risk retention option. For the Commission, this was
calculated by dividing 479 offerings per year by nine options, resulting in 53 offerings
per year per base risk retention option.
The total estimated annual burden for each agency was then calculated by
multiplying the number of offerings per year per section for such agency by the number
of burden hours estimated for the respective section, then adding these subtotals together.
For example, under §__.10, the Commission multiplied the estimated number of offerings
per year for §__.10 (i.e., 53 offerings per year) by the estimated annual frequency of the
response for §__.10 of one response, and then by the disclosure burden hour estimate for
§__.10 of 4.0 hours. Thus, the estimated annual burden hours for respondents to which
the Commission accounts for the burden hours under §__.10 is 212 hours (53 * 1 * 4.0
230
Estimate of 1,334 offerings per year minus the estimate of the number of offerings
qualifying for an exemption under §__.13 and §__.15 (220 total).
231
For purposes of this calculation, the horizontal, vertical, and combined horizontal and
vertical risk retention methods under the standard risk retention option are each counted
as a separate option under Subpart B of the proposed rule.
315
hours = 212 hours). The reason for this is that the agencies considered it possible that
sponsors may establish these policies and procedures during the year independent on
whether an offering was conducted, with a corresponding agreed upon procedures report
obtained from a public accounting firm each time such policies and procedures are
established.
For disclosures made at the time of the securitization transaction, 232 the
Commission allocates 25 percent of these hours (1,070 hours) to internal burden for all
sponsors. For the remaining 75 percent of these hours, (3,211 hours), the Commission
uses an estimate of $400 per hour for external costs for retaining outside professionals
totaling $1,284,400. For disclosures made after the time of sale in a securitization
transaction, 233 the Commission allocated 75 percent of the total estimated burden hours
(1,911 hours) to internal burden for all sponsors. For the remaining 25 percent of these
hours (637 hours), the Commission uses an estimate of $400 per hour for external costs
for retaining outside professionals totaling $254,800.
FHFA: The proposed regulation does not contain any FHFA information collection
requirement that requires the approval of OMB under the Paperwork Reduction Act.
HUD: The proposed regulation does not contain any HUD information collection
requirement that requires the approval of OMB under the Paperwork Reduction Act.
C. Commission Economic Analysis
232
These are the disclosures required by §§_.4 (d)(1)-(2) (as applicable to horizontal
interests, vertical interests, or any combination of horizontal and vertical interests);
_.5(g)(1)-(3); _.6(d) and (e); _.7(a)(7)(i)-(viii); _.8(c); _.9(d); 10(e); _.11(a)(2);
_.13(b)(4)(iii); _.15(a)(4); _.16(b)(8)(iii); _.17(b)(10)(iii); and _.18(b)(8)(iii).
233
These are the disclosures required by §§ _.4(b)(2); _.6(f)(2)(ii); _.7(b)(2)(B); _.9(d);
_.11(b)(2)(B); _13(c)(3); _.16(c)(3); _17(c)(3); and _.18(c)(3).
316
1. Introduction
As discussed above, Section 15G of the Exchange Act, as added by Section
941(b) of the Dodd-Frank Act, generally requires the agencies to jointly prescribe
regulations, that (i) require a sponsor to retain not less than 5 percent of the credit risk of
any asset that the sponsor, through the issuance of an asset-backed security (ABS),
transfers, sells, or conveys to a third party, and (ii) prohibit a sponsor from directly or
indirectly hedging or otherwise transferring the credit risk that the sponsor is required to
retain under Section 15G and the agencies’ implementing rules. 234
Section 15G of the Exchange Act exempts certain types of securitization
transactions from these risk retention requirements and authorizes the agencies to exempt
or establish a lower risk retention requirement for other types of securitization
transactions. For example, Section 15G specifically provides that a sponsor shall not be
required to retain any part of the credit risk for an asset that is transferred, sold, or
conveyed through the issuance of ABS by the sponsor, if all of the assets that
collateralize the ABS are qualified residential mortgages (QRMs), as that term is jointly
defined by the agencies. 235 In addition, Section 15G states that the agencies must permit
a sponsor to retain less than 5 percent of the credit risk of commercial mortgages,
commercial loans, and automobile loans that are transferred, sold, or conveyed through
the issuance of ABS by the sponsor if the loans meet underwriting standards established
by the Federal banking agencies. 236
234
See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B)(ii).
235
See id. at § 78o-11(c)(1)(C)(iii), (4)(A) and (B).
236
See id. at § 78o-11(c)(1)(B)(ii) and (2).
317
Section 15G requires the agencies to prescribe risk retention requirements for
“securitizers,” which the agencies interpret as depositors or sponsors of ABS. The
proposal would require that a “sponsor” of a securitization transaction retain the credit
risk of the securitized assets in the form and amount required by the proposed rule. The
agencies believe that imposing the risk retention requirement on the sponsor of the ABS
is appropriate in light of the active and direct role that a sponsor typically has in
arranging a securitization transaction and selecting the assets to be securitized.
In developing the proposed rules, the agencies have taken into account the
diversity of assets that are securitized, the structures historically used in securitizations,
and the manner in which sponsors may have retained exposure to the credit risk of the
assets they securitize. Moreover, the agencies have sought to ensure that the amount of
credit risk retained is meaningful—consistent with the purposes of Section 15G—while
reducing the potential for the proposed rules to negatively affect the availability and costs
of credit to consumers and businesses.
As required by Section 15G, the proposed rules provide a complete exemption
from the risk retention requirements for ABS collateralized solely by QRMs and establish
the terms and conditions under which a residential mortgage would qualify as a QRM. In
developing the proposed definition of a QRM, the agencies carefully considered the
terms and purposes of Section 15G, public input, and the potential impact of a broad or
narrow definition of QRM on the housing and housing finance markets.
The Commission is sensitive to the economic impacts, including the costs and
benefits, of its rules. The discussion below addresses the economic effects of the
proposed rules, including the likely benefits and costs of the rules as well as their effects
318
on efficiency, competition and capital formation. Some of the economic effects stem
from the statutory mandate of Section 15G, whereas others are affected by the discretion
the agencies have exercised in implementing this mandate. These two types of costs and
benefits may not be entirely separable to the extent that the agencies’ discretion is
exercised to realize the benefits that they believe were intended by Section 15G.
Section 23(a)(2) of the Exchange Act requires the Commission, when making
rules under the Exchange Act, to consider the impact on competition that the rules would
have, and prohibits the Commission from adopting any rule that would impose a burden
on competition not necessary or appropriate in furtherance of the Exchange Act. 237
Further, Section 3(f) of the Exchange Act requires the Commission, 238 when engaging in
rulemaking where it is required to consider or determine whether an action is necessary
or appropriate in the public interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition and capital formation.
2. Background
a. Historical Background
Asset-backed securitizations, or the pooling of consumer and business loans into
financial instruments that trade in the financial markets, play an important role in the
creation of credit for the US economy. Benefits of securitization may include reduced
cost of credit for borrowers, expanded availability of credit, and increased secondary
237
15 U.S.C. 78w(a).
238
17 U.S.C. 78c(f).
319
market liquidity for loans. 239 The securitization process generally involves the
participation of multiple parties, each of whom has varying amounts of information and
differing economic incentives. For example, the entity establishing and enforcing
underwriting standards and credit decisions (i.e., the originator) and the entity responsible
for structuring the securitization (i.e., the securitizer) are not required to bear any credit
risk. By contrast, the ultimate holders of the securitized assets (i.e., the investors) bear
considerable credit risk and yet typically have minimal influence over underwriting
standards and decisions and limited information about the characteristics of the borrower.
A considerable amount of literature has emerged that supports the view that,
during the early to mid-2000s, residential mortgage-backed securitizations (RMBSs)
contributed to a significant decline in underwriting standards for residential mortgage
loans. 240 Much of the initial securitization issuance focused primarily on mortgages,
which had guarantees from the Government National Mortgage Association (Ginnie
Mae) or the Government Sponsored Enterprises (Enterprises), which included the Federal
National Mortgage Association, also known as Fannie Mae, and the Federal Home Loan
Mortgage Corporation, also known as Freddie Mac. Based on the initial success of these
pass through securitizations 241 and investor demand and acceptance of these instruments,
239
See, e.g., Board of Governors of the Federal Reserve System, “Report to the Congress
on Risk Retention”, (October 2010) and Financial Stability Oversight Committee,
“Macroeconomic Effects of Risk Retention Requirements”, (January 2011).
240
Keys, Mukherjee, Seru and Vig, “Did Securitization Lead to Lax Screening?
Evidence from Subprime Loans” (February 2010) and Nadauld and Sherlund, “The
Impact of Securitization on the Expansion of Subprime Credit”, (2013).
241
Pass through securitization is considered the simplest and least complex way to
securitize an asset. In this structure, investors receive a direct participation in the cash
flows from a pool of assets. Payments on the securities are made in essentially the same
320
asset-backed securitizations subsequently expanded to include other asset classes (e.g.,
car loans, student loans, credit card receivables, corporate loans and commercial
mortgages). Over the years, securitizers began creating increasingly complex structures,
including credit tranching and resecuritizations. As a result, securitizations increased
over time in a variety of asset classes, providing investors with relatively attractive riskreturn investment choices.
In the early 2000s, as securitizers sought additional assets to securitize,
originators turned to a formerly lightly-tapped segment of the residential home market,
known as the sub-prime market. 242 This segment serves the mortgage needs of
individuals that are less credit worthy, generally for reasons related to income, assets
and/or employment. The securitization of subprime loans facilitated the extension of
credit to this segment of the market, which allowed securitizers to generate more
collateral for the securitization market and led to a significant increase in the availability
of low credit quality mortgage loans for purposes of meeting the relatively high demand
for securitized investment products. This high volume of lending contributed to higher
residential property prices. 243 A contributing factor to the increase in housing prices was
the unrealistically high ratings provided by credit rating agencies on residential
manner as payments on the underlying loans Principal and interest are collected on the
underlying assets and ‘passed through’ to investors without any tranching or structuring
or reprioritization of the cash flows.
242
Dell’Ariccia, Deniz and Laeven, “Credit Booms and lending Standards: Evidence
from the Subprime Mortgage Market”, (2008); Mian and Sufi, “The Consequences of
Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis”, (2008);
Puranandam, “Originate-to-Distribute Model and the Sub-Prime Mortgage Crisis”,
(2008).
243
Board of Governors of the Federal Reserve, “Report to the Congress on Risk
Retention”, (October 2010).
321
mortgage-backed securities. 244 Many investors may not have performed independent
credit assessments, either due to a lack of transparency into the characteristics of the
underlying assets or an undue reliance on credit rating agencies that provided third-party
credit evaluations. This situation persisted until a high number of defaults and an
increase in interest rates led to subsequent declines in housing prices. The “originate-todistribute” model was blamed by many for these events, as the originators and
securitizers were compensated on the basis of volume rather than quality of underwriting.
Because lenders often did not expect to bear the risk of borrower default in connection
with those loans that were securitized and sold to third-party investors, the lenders had
little ongoing economic interest in the performance of the securitization. 245
b. Broad Economic Considerations
While securitization can redistribute financial risks in ways that provide
significant economic benefits, certain market practices related to its implementation can
potentially undermine the efficiency of the market. In particular, securitization removes
key features of the classic borrower-lender relationship, which relies on borrower and
lender performance incentives generated from repeated interactions, as well as the
244
See, e.g., Benmelech and Dlugosz, 2010, The Credit Rating Crisis, Chapter 3 of
NBERMacroeconomics Annual 2009, Vol. 24, pp. 161–207, Acemoglu, Rogoff and
Woodford, eds., University of Chicago Press; Bolton, Freixas and Shapiro, “The Credit
Ratings Game” Journal of Finance (February 2012); Griffin and Tang, “Did Subjectivity
Play a Role in CDO Credit Ratings”, Working paper (2010).
245
Dell’Ariccia, Deniz and Laeven, “Credit Booms and lending Standards: Evidence
from the Subprime Mortgage Market”, (2008), Mian and Sufi, “The Consequences of
Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis”, (2008),
Puranandam, “Originate-to-Distribute Model and the Sub-Prime Mortgage Crisis”,
(2008), Keys, Mukherjee, Seru and Vig, “Did Securitization Lead to Lax Screening?
Evidence from Subprime Loans” (February 2010) and Nadauld and Sherlund, “The
Impact of Securitization on the Expansion of Subprime Credit”, (2013).
322
ongoing communication of proprietary information between the borrower and the lender.
The separation between the borrower and the ultimate provider of credit in securitization
markets can introduce significant informational asymmetries and misaligned incentives
between the originators and the ultimate investors. In particular, the originator has more
information about the credit quality and other relevant characteristics of the borrower
than the ultimate investors, which could introduce a moral hazard problem – the situation
where one party (e.g., the loan originator) may have a tendency to incur risks because
another party (e.g., investors) will bear the costs or burdens of these risks. Hence, when
there are inadequate processes in place to encourage (or require) sufficient transparency
to overcome concerns about informational differences, the securitization process could
lead certain participants to maximize their own welfare and interests at the expense of
other participants.
For example, in the RMBS market, mortgage originators generally have more
information regarding a borrower’s ability to repay a loan obligation than the investors
that ultimately own the economic interest, as the originator collects and evaluates
information to initiate the mortgage. In a securitization, since ABS investors typically do
not participate in this process, they likely have less information about expected loan
performance than the originators. Disclosures to investors may not be sufficiently
detailed regarding the quality of the underlying assets to adequately evaluate the assets
backing the security. In addition, in a securitization the underlying pool is comprised of
hundreds or thousands of loans, each requiring time to evaluate. Thus, such information
asymmetry may have an adverse impact on investors, especially in the case when the
originator and securitizer receive full compensation before the time when investors
323
ultimately learn about loan quality. Consequently, the originator may have incentive to
approve and fund a loan that they would not otherwise. In other words, the originator
may be less diligent in solving the adverse selection problem since the consequences are
transferred to the investors.
The securitization process removes (or lessens) the consequences of poor loan
performance from the loan originators, whose compensation depends primarily on the
fees generated during the origination process. This provides economic incentive to
produce as many loans as possible because loan origination, structuring, and underwriting
fees for securitizations reward transaction volume. Without the requirement by the
market to bear any of the risk associated with subsequent defaults, this can result in
potentially misaligned incentives between the originators and the ultimate investors. 246
Through the securitization process, risk is transferred from the originators to investors,
who in the absence of transparency into the composition of the underlying assets, may
rely too readily on credit rating agency assessments of the underlying loans and credit
enhancement supporting the securitization. In the years preceding the financial crisis,
these incentives may have motivated originators to structure mortgage securitizations
with little or no credit enhancement and extend credit to less creditworthy borrowers,
whose subsequent defaults ultimately helped to trigger the crisis.
Table 1 - Rating Performance of Prime RMBS (%)
246
As an example, Ashcraft and Schuermann (2008) identify at least seven different
frictions in the residential mortgage securitization chain that can cause agency and
adverse selection problems in a securitization transaction. The main point of their
analysis is that there are many different parties in a securitization transaction, each with
differing economic interests and incentives. Hence, there are multiple opportunities for
conflicts of interest to arise in such structures.
324
All
Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
AAA
Investment
Grade
Speculative
Grade
Likely to Default
Issues Up Down Share Up Down Share Up Down Share Up Down Share Up Down
15,512 3.5
0.0 80.9 0.0 0.0 14.3 23.3
0.0
4.4 4.6 0.1
0.2 0.0
0.0
14,474 4.6
0.1 72.1 0.0 0.0 18.6 20.9
0.1
8.9 7.4 0.7
0.2 0.0
0.0
16,859 3.1
0.1 71.0 0.0 0.0 18.7 13.8
0.1
9.9 5.8 0.8
0.2 0.0
14.3
18,452 1.8
0.2 72.1 0.0 0.0 17.9 8.5
0.3
9.7 2.6 1.1
0.2 0.0
21.4
20,924 0.5 12.4 73.7 0.0 9.9 16.8 2.5 13.0
9.3 1.4 31.1
0.2 0.0
45.0
20,475 0.0 46.4 65.6 0.0 32.0 21.2 0.0 69.0
9.5 0.0 81.7
3.7 0.0
91.2
19,700 0.1 29.0 42.5 0.0 12.8 16.3 0.2 44.8 12.9 0.0 64.4 28.3 0.1
34.3
18,338 0.3 36.7 36.9 0.0 14.4 14.2 0.6 62.3 10.8 0.9 81.3 38.1 0.5
49.4
16,886 0.2 16.3 27.4 0.0 3.6 10.7 0.0 31.3 10.8 0.6 24.7 51.1 0.4
27.8
Notes: The numbers in the table were calculated by Division of Economic and Risk Analysis (DERA)
staff using the Standard & Poor’s (S&P) RatingsXpress data. These statistics are for securities issued
by U.S. entities in U.S. dollars, carrying a local currency rating, and having a rating on the scale of
AAA to D. Each security is assigned to an asset class based on the collateral type information
provided by S&P. Securities backed by collateral that mixes multiple types of assets are not
included. “Issues” is the total number of RMBS issuances outstanding as of January 1 for each year.
“Share” is the share of each rating category among all rated RMBS. Upgrades and downgrades are
expressed as a percentage of all rated securitizations in a specified year and in a specified rating class.
“Investment Grade” (IG) are ratings from AA+ to BBB–, “Speculative” are from BB+ to B–, and
“Likely to Default” are CCC+ and below.
Evidence of the credit worthiness of borrowers during this period is illustrated in
Table 1, which shows that 9.9 percent of presumably low-risk securities, such as AAArated non-agency RMBS, outstanding in 2008 were downgraded during 2008. More
significantly 32.0 percent of these securities outstanding in 2009 were downgraded
during the year. Thus, almost one third of the outstanding RMBS securities with the
highest possible credit rating were downgraded during 2009, suggesting that the credit
quality of the underlying collateral and underlying credit enhancement for AAA notes
was far poorer than originally rated by the credit rating agencies.
325
The downgrades serve to illustrate the extent to which misaligned incentives
between originators/sponsors of ABS and the ultimate investors may have manifested in
the form of lax lending standards and relaxed credit enhancement standards during the
period before the financial crisis. Risk retention is one possible response to this problem.
Requiring securitizers to share the same risks as the investors that purchase these
products seeks to mitigate the problems caused by misaligned incentives. By retaining
loss exposure to the securitized assets, securitizers are considered to have “skin in the
game” and thus are economically motivated to be more judicious in their selection of the
underlying pool of assets, thereby helping to produce higher quality (i.e., lower
probability of default) securities.
Currently, sponsors who do not retain 5 percent of the securitization likely deploy
those funds to other uses, such as repaying lines of credit used to fund securitized loans,
holding other assets or making new loans, which may earn a different interest rate and
have a different risk exposure. Therefore, a risk retention requirement could impose
costs to those sponsors who do not currently hold risk, in the form of the opportunity
costs of those newly tied-up funds, or could limit the volume of securitizations that they
can perform. These costs will likely be passed onto borrowers, either in terms of
borrowing costs or access to capital. In particular, borrowers whose loans do not meet
the eligibility requirements or qualify for an exemption (i.e., those that require risk
retention when securitized by the ABS originator/sponsor) will face increased borrowing
costs, or be priced out of the loan market, thus restricting their access to capital. As a
result, there could be a negative impact on capital formation.
Hence, there are significant potential costs to the implementation of risk retention
326
requirements in the securitization market. The Commission notes that the costs will also
be impacted by any returns and timing of the returns of any retained interest. If the costs
are deemed by sponsors to be onerous enough that they would no longer be able to earn a
sufficiently high expected return by sponsoring securitizations, this form of supplying
capital to the underlying asset markets would decline. Fewer asset securitizations would
require other forms of funding to emerge in order to serve the needs of borrowers and
lenders. Given the historically large dollar volumes in the securitization markets, this
could reduce capital flows into the underlying asset markets, thereby reducing the amount
of capital available for lending and possibly adversely impacting efficiency.
The net impact of this outcome depends on the availability of alternative
arrangements for transferring capital to the underlying assets markets and the costs of
transferring capital to sponsors. For example, the impact of the potential decrease in the
use of securitizations in the residential home mortgage market would depend on the cost
and availability of alternative mortgage funding sources, and the willingness of these
originators to retain the full burden of the associated risks. To the extent there are
alternatives, and these alternatives can provide funding on terms similar to those
available in the securitization markets, the impact of the substitution of these alternatives
for securitizations would likely be minimal. To the extent that securitizers can find
sources of capital at costs similar to the returns paid on retained interests, the impact of
risk retention requirements would likely be minimal. Currently, however, there is little
available empirical evidence to reliably estimate the cost and consequence of either such
outcome.
To maintain a commensurate level of funding to underlying asset markets with the
327
risk retention requirement, the rates on the underlying assets would have to increase so
that sponsors could achieve their higher target returns by serving the securitization
market. Two recent studies by the Federal Reserve Bank of New York attempt to
estimate the impact of the higher risk retention on the underlying asset markets. 247 Their
analysis suggests that incremental sponsor return requirements for serving markets with
the higher levels of risk retention are relatively modest, somewhere on the order of 0-30
basis points. 248 If so, the higher levels of risk retention would increase residential
mortgage rates by approximately 0.25 percent. While this would increase the average
borrower cost for loans that would not otherwise be eligible for securitizations exempt
from risk retention, the increment may be sufficiently small such that securitizations
would be expected to remain a significant component of the capital formation process.
3. Economic Baseline
The baseline the Commission uses to analyze the economic effects of the risk
retention requirements added by Section 15G of the Exchange Act is the current set of
rules, regulations, and market practices that may determine the amount of credit exposure
retained by securitizers. To the extent not already followed by current market practices,
the proposed risk retention requirements will impose new costs. The risk retention
requirements will affect ABS market participants, including loan originators, securitizers
and investors in ABS, and consumers and businesses that seek access to credit. The costs
247
See appendix A.
248
This assessment assumes that the underlying loan pool characteristics are accurately
disclosed, and with sufficient detail for investors to properly assess the underlying risk.
Such a scenario would be reflective of the risk retention requirements solving the moral
hazard problem that might otherwise result in the obfuscation of intrinsic risks to the
ultimate investors.
328
and benefits of the risk retention requirements depend largely on the current market
practices specific to each securitization market – including current risk retention practices
– and corresponding asset characteristics. The economic significance or the magnitude of
the effects of the risk retention requirements will also depend on the overall size of the
securitization market and the extent to which the requirements could affect access to, and
cost of, capital. Below the Commission describes the Commission’s current
understanding of the securitization markets that are affected by this proposed rule.
a. Size of Securitization Markets
The ABS market is important for the U.S. economy and comprises a large fraction
of the U.S. debt market. During the four year period from 2009 to 2012, 31.1 percent of
the $26.8 trillion in public and private debt issued in the United States was in the form of
mortgage-backed securities (MBS) or other ABS, and 2.7 percent was in the form of nonU.S. agency backed (private label) MBS or ABS. For comparison, 32.8 percent of all
debt issued was U.S. Treasury debt, and 5.7 percent was municipal debt at the end of
2012. 249 Figure 1 shows the percentage breakdown of total non-Agency issuances from
2009 to 2012 for various asset classes excluding asset-backed commercial paper (ABCP)
and collateralized loan obligations (CLOs). 250 Consumer credit categories including
automobile and credit card backed ABS comprise 39 percent and 15 percent of the total
249
Source: SIFMA.
250
To estimate the size and composition of the private-label securitization market the
Commission uses the data from Securities Industry and Financial Markets Association
(SIFMA) and AB Alert. In the following analysis, the Commission excludes all
securities guaranteed by U.S. government agencies. ABCP is a short-term financing
instrument and is frequently rolled over, thus, its issuance volume is not directly
comparable to the issuance volume of long-term ABS of other sectors. The Commission
does not have CLO issuance data.
329
annual issuance volume, respectively. Non-agency RMBS and commercial mortgage
backed securities (CMBS) comprise 4 percent and 18 percent of the market, respectively,
while student loan backed ABS account for 11 percent of the market. Below the
Commission analyzes the variation in issuance among these five largest asset classes.
For several categories the Commission provides detailed information about issuance
volume and the number of active securitizers (Table 2).
FIGURE 1
Prior to the financial crisis of 2008, the number of non-agency RMBS issuances
was substantial. For example, new issuances totaled $503.9 billion in 2004 and peaked at
$724.1 billion in 2005. Non-agency RMBS issuances fell dramatically in 2008, to $28.6
billion, as did the total number of securitizers, from a high of 78 in 2007 to 31 in 2008.
In 2012, there was only $15.7 billion in new non-agency RMBS issuances by 13 separate
securitizers. Of this amount, however, only $3.6 billion was issued by 3 separate
330
securitizers backed by prime mortgages and were not resecuritizations.
331
Table 2 - Annual Issuance Volume and Number of Securitizers by Category
Credit Card ABS
Automobile ABS
Panel A - Annual Issuance Volume by Category ($ bn)
Year SEC 144A Private Total SEC 144A Private Total
2004 46.3 4.9
0.0 51.2 63.4 6.5
0.0 70.0
2005 61.2 1.8
0.0 62.9 85.1 8.7
0.0 93.9
2006 60.0 12.5
0.0 72.5 68.0 12.2
0.0 80.2
2007 88.1 6.4
0.0 94.5 55.8 6.8
0.0 62.6
2008 56.7 5.0
0.0 61.6 31.9 5.6
0.0 37.6
2009 34.1 12.5
0.0 46.6 33.9 15.4
0.0 49.2
2010 5.3 2.1
0.0 7.5 38.0 15.3
0.0 53.3
2011 10.0 4.8
1.5 16.3 41.9 14.4
0.0 56.3
2012 28.7 10.5
0.0 39.2 65.6 13.9
0.0 79.5
Student Loan ABS
SEC
38.3
54.1
54.9
41.7
25.8
8.3
2.8
2.5
6.6
Non-agency RMBS
144A Private Total SEC 144A Private Total
7.5
0.2 45.9 490.3 13.6
0.0 503.9
8.1
0.4 62.6 707.9 16.2
0.0 724.1
10.9
0.5 66.2 702.8 20.4
0.0 723.3
16.0
0.6 58.3 598.1 42.2
0.0 640.3
2.4
0.0 28.2 12.2 16.4
0.0 28.6
12.5
0.0 20.8 0.3 47.8
0.0 48.1
16.2
1.2 20.2 0.2 46.1
12.8 59.2
13.9
1.1 17.5 0.7 11.1
10.5 22.2
23.2
0.0 29.9 1.9 12.6
1.2 15.7
Panel B - Annual Number of Securitizers by Category
Year SEC 144A Private Total SEC 144A Private Total SEC 144A Private Total SEC 144A Private Total
2004 12
4
0
15 29
9
0
37 10
7
1
16
41
15
0
44
2005 13
5
0
17 30
9
0
38 13
7
1
19
46
18
0
51
2006 10
11
0
18 23
12
0
30
8
17
1
24
50
27
0
62
2007 12
8
0
16 23
9
0
28
7
17
1
22
46
32
0
59
2008
9
3
0
11 16
7
0
20
3
6
0
8
12
19
0
24
2009
9
6
0
11 13
13
0
22
3
6
0
6
1
16
0
17
2010
5
5
0
9 19
15
0
27
2
18
1
19
1
18
1
20
2011
5
7
1
12 14
16
0
25
1
19
1
20
1
12
2
14
2012
7
9
0
13 18
24
0
36
1
26
0
26
1
11
1
12
Notes: The numbers in the table were calculated by DERA staff using the AB Alert database. The deals are
categorized by offering year, underlying asset type, and offering type (SEC registered offerings, Rule 144A
offerings, or traditional private placement). Non-agency RMBS include residential, Alt-A, and subprime RMBS.
Automobile loan ABS include ABS backed by automobile loans, both prime and subprime, motorcycle loans, and
truck loans). Panel A shows the total issuance amount in billions of dollars. Panel B shows the number of unique
sponsors of ABS in each category (the number in the column “Total” may not be the sum of numbers in the
columns “SEC”, “144A” and “Private” because some securitizers may sponsor deals in several categories). Only
ABS deals sold in the U.S. and sponsors of such deals are counted.
Similar to the market for non-agency RMBS, the market for CMBS also
experienced a decline following the financial crisis. There were $229.2 billion in new
332
issuances at the market’s peak in 2007. 251 New issuances fell to $4.4 billion in 2008 and
to $8.9 billion in 2009. In 2012, there were $35.7 billion in new CMBS issuances.
Table 3 - CMBS Issuance ($bn)
Year
Issuance
2004
93.5
2005
156.7
2006
183.8
2007
229.2
2008
4.4
2009
8.9
2010
22.5
2011
34.3
2012
35.7
Notes: Source - SIFMA
While the ABS markets based on credit cards, automobile loans, and student loans
experienced a similar decline in issuances following the financial crisis, the issuance
trends in Table 2 indicate that they have rebounded substantially more than the nonagency RMBS and CMBS markets. The automobile loans sector currently has the largest
issuance volume and the largest number of active sponsors of ABS among all asset
classes. There were $79.5 billion in new automobile ABS issuances in 2012 from 42
securitizers. This amount of new issuances is approximately twice the amount of new
issuances in 2008 ($37.6 billion) and is similar to the amount of new issuances from 2004
to 2007.
Although the amount of new credit card ABS issuances has not fully rebounded
from pre-crisis levels, it is currently substantially larger than in recent years. There were
251
See Table 3. The estimates relating to the CMBS market are from SIFMA, and can
be found at http://www.sifma.org/research/statistics.aspx. The SIFMA dataset does not
include information relating to the number of CMBS securitizers and does not distinguish
issuances by type.
333
$39.2 billion in new credit card ABS issuances in 2012, a five-fold increase over the
amount of new issuances in 2010 ($7.5 billion). The number of credit card ABS
securitizers has remained steady over time, totaling 16 in 2012. The amount of new
student loan issuances has also not fully rebounded from pre-crisis levels. There were
$29.9 billion in new student loan ABS issuances in 2012, compared to a range from $45.9
billion to $58.3 billion between 2004 and 2007. However, the number of student loan
securitizers has returned to pre-crisis levels, totaling 27 in 2012. While risk retention
requirements will apply to the previous asset classes there are other asset classes not
listed here to which risk retention will also apply.
Information describing the amount of issuances and the number of securitizers in
the ABCP and CLO markets is not readily available, however, information on the total
amount of issuances outstanding indicates that the ABCP market has decreased since the
end of 2006, when the total amount outstanding was $1,081.4 billion, 55 percent of the
entire commercial paper market. 252 As of the end of 2012, there were $319.0 billion of
ABCP outstanding, accounting for 30 percent of the commercial paper market.
Table 4 - Commercial Paper (CP) Outstanding ($bn)
Year
2004
2005
2006
2007
2008
ABCP
688.9
860.3
1,081.4
774.5
734.0
All CP
Outstanding
1,401.5
1,637.5
1,974.7
1,785.9
1,681.5
252
ABCP
share
49.2%
52.5%
54.8%
43.4%
43.7%
Based on information from the Federal Reserve Bank of St. Louis FRED Economic
Data database.
334
2009
487.0
1,170.0
2010
348.1
971.5
2011
328.8
959.3
2012
319.0
1,065.6
Notes: Source - Federal Reserve
41.6%
35.8%
34.3%
29.9%
b. Current Risk Retention Market Practices
As noted earlier, the potential economic effects of the proposed risk retention
requirements will depend on current market practices. Currently, risk retention is not
mandated in any sector of the U.S. ABS market, although some sponsors of different
ABS classes do retain risk voluntarily – at least at initial issuance. The aggregate levels
of current risk retention vary across sponsors and ABS asset classes. Adopted practices
are different for different sectors (to the extent that they are applied at all) and there is no
uniform reporting of the types or amounts of retained ABS pieces. Because aggregated
quantitative information relating to the current risk retention practices of ABS
securitizers is currently unavailable, the Commission does not have sufficient information
to measure the extent to which risk is currently retained. Below the Commission
describes current risk retention practices for various asset classes based upon its
understanding of these markets and public comment received to date. The Commission
would benefit from additional public comment and data about historical and current risk
retention practices in all ABS sectors.
i. RMBS Risk Retention Practices
The Commission understands that securitizers of non-agency RMBS historically
335
did not generally retain a portion of credit risk. 253 Consequently, except in the case
where exemptions are applicable (e.g., the QRM exemption), the proposed risk retention
requirements likely will impose new constraints on these securitizers.
The Commission also understands that securitizers of other ABS market sectors
typically retain some portion of credit risk. For these securitizers, depending on the
amount and form of risk currently retained, the proposed risk retention requirements may
pose less of a constraint. Markets where securitizers typically retain some portion of risk
include the markets for CMBS, automobile loan ABS, ABS with a revolving master trust
structure, and CLOs. The markets for CMBS and ABCP include structures in which
parties involved in the securitization other than the securitizer retain risk.
ii. CMBS Risk Retention Practices
The current risk retention practice in the CMBS market is to retain at issuance the
“first loss piece” (riskiest tranche). This tranche is typically sold to a specialized
category of CMBS investors, known as a “B-piece buyer”. The B-piece investors in
CMBS often hold dual roles as bond investors, if the assets remain current on their
obligations, and as holders of controlling interests to appoint special servicers, if the
loans default and go into special servicing. As holders of the controlling interest, they
will typically appoint an affiliate as the special servicer. The B-piece CMBS investors
are typically real estate specialists who use their extensive knowledge about the
253
However, more recently, one of the largest sponsors of SEC-registered RMBS has
stated it currently retains some interest in the RMBS transactions that it sponsors. For
example, see Sequoia Mortgage Trust 2013-1, 424b5, File No. 333-179292-06 filed
January 16, 2013;
http://www.sec.gov/Archives/edgar/data/1176320/000114420413002646/v332142_424b5
.htm.
336
underlying assets and mortgages in the pools to conduct extensive due diligence on new
deals. 254 The B-pieces are often “buy-and-hold” investments, and secondary markets for
B-pieces are virtually non-existent at this time. 255 Currently, the B-piece (as defined by
Standard & Poor’s) typically makes up the lowest rated 3-4 percent of the outstanding
amount of interests issued in CMBS securitization at issuance. During the four year
period from 2009 to 2012, the non-rated and all speculative grade tranches typically
bought by B-piece buyers made up the lowest 4.4 percent 256. Thus, the prevailing market
practice for risk retention in the CMBS sector is less than the proposed 5 percent B-piece
risk retention option for CMBS sponsors.
iii. Master Trusts Risk Retention Practices
Securitizers of revolving master trusts often maintain risk exposures through the
use of a seller’s interest which, as discussed above, is intended to be equivalent to the
securitizer’s interest in the receivables underlying the ABS. The Commission does not
have sufficient aggregated data about revolving master trusts that would permit it to
254
CMBS have much smaller number of underlying loans in a pool (based on data from
ABS prospectuses filed on EDGAR, a typical CMBS has about 150 commercial
properties in a pool, whereas RMBS have about 3,000 assets in a pool and automobile
loan/lease ABS typically have 75,000 assets) and these loans are often not standardized.
Thus, direct management of individual underperforming loans is often necessary and is
much more viable for CMBS than for other asset classes.
255
An industry publication places the number of active B-piece buyers in 2007 at 12, and
the number of active B-piece buyers between 2010 and the first part of 2011 at 1. This
information was taken from S&P Credit Research. “CMBS: The Big ‘B’ Theory” Apr
11, 2011,
https://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=
1245302231520.
256
DERA staff calculated these numbers using data from Standard & Poor’s
RatingsXpress.
337
estimate the amount of risk currently retained. The Commission requests comment for
this below.
iv. Other ABS Risk Retention Practices
The current voluntary market practices for other categories of ABS that serve to
align the interests of the sponsor and investors vary across asset classes. The
Commission understands that securitizers of automobile loan ABS typically maintain
exposure to the quality of their underwriting by retaining ABS interests from their
securitization transactions; however, there is insufficient data available to the
Commission to estimate the equivalent amount of risk retained through this practice. The
Commission understands that securitizers of student loans do not typically retain credit
risk. However, Sallie Mae, the largest sponsor of student loan asset-backed securities,
does retain a residual interest in the securitizations that it sponsors.
vi. ABCP Risk Retention Practices
Commenting on the original proposal, ABCP conduit operators noted that there
are structural features in ABCP that align the interests of the ABCP conduit sponsor and
the ABCP investors. For instance, ABCP conduits usually have some mix of credit
support and liquidity support equal to 100 percent of the ABCP outstanding. This
liquidity and credit support exposes the ABCP conduit sponsor to the quality of the assets
in an amount that far exceeds 5 percent.
vi. CLO Risk Retention Practices
Some commenters noted that securitizers of CLOs often retain a small portion of
the residual interest and asserted that securitizers retain risk through subordinated
management and performance fees that have performance components that depend on the
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performance of the overall pool or junior tranches. The proposed rule does not allow for
fees to satisfy risk retention requirements. The Commission is requesting comment on
any recent developments in the CLO market whereby risk is retained as defined by the
proposed rule. 257
4. Analysis of Risk Retention Requirements
As discussed above, the agencies are proposing rules to implement Section 15G
of the Exchange Act requiring sponsors of asset backed securitizations to retain risk.
Each of the asset classes subject to these proposed rules have their own particular
structure and, as a result, the implementation and impact of risk retention will vary across
asset classes, although certain attributes of risk retention are common to all asset classes.
In this section, the Commission discusses those aspects of the proposed rules that apply
across asset classes: the requirement that securitizers hold 5 percent of the credit risk of a
securitization, the use of fair value (versus par value) of the securitization as the method
of measuring the amount of risk retained by the securitizer, and the length of time that a
securitizer would be required to hold its risk exposure.
257
In the Board of Governors of the Federal Reserve System’s “Report to the Congress
on Risk Retention” (October 2010), pp. 41-48, mechanisms intended to align incentives
and mitigate risk are described, including alternatives such as overcollateralization,
subordination, guarantees, representations and warranties, and conditional cash flows as
well as the retention of credit risk. The Report also contains a description of the most
common incentive alignment and credit enhancement mechanisms used in the various
securitization asset classes. The Report does not establish the extent to which these
alternatives might be substitutes for the retention of credit risk.
339
a. Level and Measurement of Risk Retention
i. Requirement to Hold Five Percent of Risk
Section 15G requires the agencies to jointly prescribe regulations that require a
securitizer to retain not less than 5 percent of the credit risk of any asset that the
securitizer, through the issuance of ABS, transfers, sells, or conveys to a third party,
unless an exemption from the risk retention requirements for the securities or transaction
is otherwise available. The agencies are proposing to apply a minimum 5 percent base
risk retention requirement to all ABS transactions that are within the scope of Section
15G.
As a threshold matter, the requirement to retain risk is intended to align the
incentives of the ABS sponsors and their investors. Sponsors of securitizations should be
motivated to securitize assets with probabilities of default that are accurately reflected in
the pricing of the corresponding tranches, because they will be required to hold some of
the risk of the assets being securitized. Risk retention may increase investor participation
rates because investors would have assurance that the sponsor is exposed to the same
credit risk and will suffer similar losses if default rates are higher than anticipated. This
may increase borrower access to capital, particularly if loan originators are otherwise
constrained in their ability to underwrite mortgages because more investors means more
available capital. In particular, the act of securitizing the loans allows the lenders to
replenish their capital and continue to make more loans, over and above what could be
made based solely on the initial capital of the lender. When the underlying risks are
disclosed properly, securitization should facilitate capital formation as more money will
340
flow to borrowers. Higher investment may also lead to improved price efficiency, as the
increase in securitization transactions will provide additional information to the market.
While risk retention is intended to result in better incentive alignment, it is
important to consider whether a 5 percent risk retention requirement will appropriately
align the incentives of the sponsors and investors. Establishing an appropriate risk
retention threshold requires a tradeoff between ensuring that the level of risk retained
provides adequate incentive alignment, while avoiding costs that are associated with
restricting capital resources to projects that may offer lower risk-adjusted returns. A risk
retention requirement that is set too high could lead to inefficient deployment of capital
as it would require the capital to be retained rather than further used in the market to
facilitate capital formation. On the other hand, a risk retention requirement that is too
low could provide insufficient alignment of incentives.
In certain cases the agencies have proposed to exempt asset classes from the risk
retention requirements because there already exists sufficient incentive alignment or other
features to conclude that further constraints are unnecessary. In particular, the
securitizations of these exempted asset classes have characteristics that ensure that the
quality of the assets is high. For example, if the pool of assets sponsors can securitize is
drawn from an asset class with a low probability of default, opportunities to exploit
potentially misaligned incentives are fewer and investors may have a correspondingly
lesser need for the protection accorded by risk retention requirements.
Another possibility is that excessive required risk retention levels may prevent
capital from being used in more valuable opportunities, leading to potentially higher
borrowing rates as capital is diverted to required risk retention. In this scenario the
341
reduction in capital formation would have a negative impact on competition due to the
extra cost of securitizing non-qualified assets, disadvantaging them relative to qualified
assets. However, the statute prescribes a 5 percent minimum amount of risk be retained.
ii. Measurement of Risk Retention Using Fair Value
The agencies have proposed to require sponsors to measure risk retention using a
fair value framework as described in U.S. GAAP (ASC 820). The Commission believes
that this would align the measurement more closely with the economics of a
securitization transaction because market valuations more precisely reflect the
securitizer’s underlying economic exposure to borrower default. Defining a fair value
framework also may enhance comparability across different securitizations and provide
greater clarity and transparency.
Use of fair value accounting as a method of valuing risk retention also will
provide a benefit to the extent that investors and sponsors can understand how much risk
is being held and that the valuation methodology accurately reflects intrinsic value. If
investors cannot understand the proposed measurement methodology, the value of
holding risk will be reduced as investors will be unable to determine the extent to which
risk retention aligns incentives. If investors cannot determine whether incentives are
properly aligned, they may invest less in the securitization market because there will be
uncertainty over the quality of assets being securitized.
One benefit of fair value is investors and sponsors generally have experience with
fair value accounting. In addition, the use of fair value is intended to prevent sponsors
from structuring around risk retention.
342
Fair value calculations are susceptible to a range of results depending on the key
variables selected by the sponsor in determining fair value. This could result in costs to
investors to the extent that securitizers use assumptions resulting in fair value estimates at
the outer edge of the range of potential values, and thereby potentially lowering their
relative amount of risk retention. In order to help mitigate this potential cost, the
agencies have proposed to require the sponsor to disclose specified information about
how it calculates fair value. While this requirement should discourage manipulation,
sponsors will incur additional costs to prepare the necessary disclosures. In addition,
because the proposed rule specifies that fair value must be determined by fair value
framework as described in US GAAP, sponsors will incur costs to ensure that the
reported valuations are compliant with the appropriate valuation standards.
Alternatively, the agencies could have proposed to require risk retention be
measured using the par value of the securitization, as in the original proposal. Par value
is easy to measure, transparent, and would not require any modeling or disclosure of
methodology. However, holding 5 percent of par value may cause sponsors to hold
significantly less than 5 percent of the risk because the risk is not spread evenly
throughout the securitization. In addition, not all securitizations have a par value. Another
alternative considered was premium capture cash reserve account (PCCRA) plus par
value. The agencies took into consideration the potential negative unintended
consequences the premium capture cash reserve account might cause for securitizations
and lending markets. The elimination of the premium capture cash reserve account
should reduce the potential for the proposed rule to negatively affect the availability and
cost of credit to consumers and businesses.
343
b. Duration of the Risk Retention Requirement
Another consideration is how long the sponsor is required to retain risk. For
example, most of the effects of poor underwriting practices likely would be evident in the
earlier stages of a loan’s life. If the risk is retained for longer than is optimal, there may
be a decrease in capital formation because capital cannot be redeployed to more efficient
uses, resulting in higher costs to securitizers than necessary. On the other hand, if the
risk is not retained long enough, risk retention will not mitigate the incentive
misalignment problem. The optimal duration of the risk retention requirement will in
large part depend on the amount of time required for investors to realize whether the risks
of the underlying loan pools were accurately captured, which may vary across asset
classes. For instance, short durations relative to maturity may be appropriate for asset
classes where a significant fraction of the defaults occur at the beginning of the loan life
cycle, such as in the case with RMBS, while longer durations are more appropriate for
asset classes where performance takes longer to evaluate, such as with CMBS, where
performance may not be assessed until the end of the loan.
To the extent that there exists a window where risk retention is needed but
dissipates once the securitization is sufficiently mature, requiring a sponsor to retain risk
beyond this window could be economically inefficient. Consequently, the proposal
includes a sunset provision whereby the sponsor is free to hedge or transfer the retained
risk after a specified period of time. Allowing the risk retention requirement to sunset
will eventually free up capital that can be redeployed elsewhere in the business, thereby
helping to promote capital formation.
344
In certain instances where the sponsor is the servicer of the loan pool, the sunset
provision may motivate the sponsor to delay the recognition of defaults and foreclosures
until after the sunset provision has lapsed. The sponsor’s incentive to delay arises from its
credit exposure to the pool and its control over the foreclosure process. Thus, the
sponsor/servicer may extend the terms of the loans until the expiration of the risk
retention provision. 258 To the extent that sponsors delay revealing borrowers’ nonperformance, this would decrease economic efficiency and impair pricing transparency.
For RMBS, the agencies have proposed to require securitizers to retain risk for the
later of five years or until the pool balance has been reduced to 25 percent (but no longer
than seven years). For all other asset classes, the agencies have proposed to require
securitizers to retain risk for the later of two years or until the pool balance has been
reduced to 33 percent. These methods were chosen to balance the tradeoff between
retaining risk long enough to align the sponsors and investors incentives and allowing the
redeployment of retained capital for other productive uses. A shorter duration was
chosen for non-mortgage asset classes, because these loans tend to have shorter
maturities than mortgages. Requiring a two year holding period recognizes that it may
not be necessary to retain risk for a longer period. The alternative component further
calibrates the required duration of risk retention based on the remaining balances. By the
time the loan pool balance decreases to 33 percent, the information about the loan
performance will be largely revealed, at which point the moral hazard problem between
the sponsor and the investor is likely to be significantly reduced. Although, in the case
258
Yingjin Hila Gan and Christopher Mayer. Agency Conflicts, Asset Substitution, and
Securitization. NBER Working Paper No. 12359, July 2006.
345
where the loan pool balance drops below the prescribed threshold (25 percent for RMBS
and 33 percent for other ABS) before the prescribed number of years (five years for
RMBS and two years for other ABS), the additional required duration might be costly to
the sponsor. In other words, requiring the securitizer to continue to retain exposure to the
securitization, once impact of the information asymmetry has been significantly reduced,
would impose unnecessary costs, potentially impeding allocation efficiency. Indeed, as
currently proposed, as loan balances are paid down the sponsor may hold more risk
relative to other investors because the size of the credit risk retention piece is based on
the initial size of the securitization, and does not change with the current market value.
This heightened level of risk retention may be unnecessary, because at that point, there is
nothing further the sponsor can do to adversely impact investors, so that economic
efficiency would be better served by allowing securitizers to withdraw their risk retention
investment to utilize in new securitizations or other credit forming activities. 259
5. Blended Pools and Buyback Provision
a. Blended Pools
Blended pools are pools that consist of assets of the same class, some of which
qualify for an exemption from the risk retention requirement, and some of which do not
qualify for an exemption from the risk retention requirement. The proposed rule permits
proportional reduction in required risk retention for blended pools that consist of both
259
See Hartman-Glaser, Piskorski and Tchistyi (2012). In order to achieve the economic
goals of the risk retention requirement, it should be the case that the moral hazard and
information asymmetry between the securitizer and the investors would be fully resolved
by the time that loan balances are reduced to 25 percent (in the case of RMBS) or 33
percent (in all other asset classes). The Commission is unaware of any empirical studies
or evidence that supports such a conclusion.
346
exempted and non-exempted assets. The proposed rule does not allow mixing asset
classes in the same pool for the purpose of reduction of the risk retention requirement and
has several other restrictions to reduce potential of structuring deals around the risk
retention requirement. Allowing blended pools with a reduced risk retention requirement
will improve efficiency, competition and capital formation by allowing sponsors to
securitize more loans when it is difficult to obtain a large enough pool of qualifying
assets to issue an ABS consisting entirely of exempted assets.
b. Buyback Requirement
The proposal requires that, if after issuance of a qualifying asset securitization, it
was discovered that a loan did not meet the qualifying underwriting criteria, the sponsor
would have to repurchase or cure the loan (the “buyback requirement”). The buyback
provision increases investors’ willingness to invest because it makes sponsors of an ABS
responsible for correcting discovered underwriting mistakes and ensures that the actual
characteristics of the underlying asset pool conform to the promised characteristics.
6. Forms of Risk Retention Menu of Options
Rather than prescribe a single form of risk retention, the proposal allows sponsors
to choose from a range of permissible options to satisfy their risk retention requirements.
As a standard form of risk retention available to all asset classes, sponsors may choose
vertical risk retention, horizontal risk retention, or any combination of those two forms.
All of these forms require the sponsor to share the risk of the underlying asset pool. The
proposal also includes options tailored to specific asset classes and structures such as
revolving master trusts, CMBS, ABCP and CLOs. Given the special characteristics of
347
certain asset classes, some of these options permit the sponsor to allocate a portion of the
shared risk to originators or specified third parties.
By proposing to allow sponsors flexibility to choose how they retain risk, the
agencies’ proposal seeks to enable sponsors to select the approach that is most effective.
Various factors are likely to impact the securitizers preferred method of retaining risk,
including size, funding costs, financial condition, riskiness of the underlying assets,
potential regulatory capital requirements, income requirements, risk tolerances and
accounting conventions. All else being equal, sponsors may prefer the option that
involves the least exposure to credit risk. For example, the horizontal form of standard
risk retention essentially creates a fully subordinated equity tranche and represents the
option that is most exposed to credit risk. By contrast, a vertical form of standard risk
retention is comparable to a stand-alone securitization that is held by the sponsor and,
among the available options, is the least exposed to credit risk. Some sponsors may
choose to utilize the horizontal method of risk retention or some combination of the
horizontal and vertical method in order to meet the risk retention requirement, while at
the same time signaling the market that the sponsor is securitizing better quality assets.
If investors believe that the sponsor’s choice of risk retention method results in
insufficient risk exposure to properly align incentives, the proposed optionality may
result in less effective risk retention. However, because investors can observe this choice
to help inform their investment decision, sponsors have incentive to choose the level of
risk exposure that encourages optimal investor participation. That is, investors may be
more likely to participate if the sponsor has more skin in the game, which may lead
sponsors to prefer an option with a higher level of risk retention. Alternatively if the
348
sponsor retains insufficient risk exposure investors may not perceive this as a sufficient
alignment of interest and may not invest (i.e., sponsors may securitize bad assets if they
do not have enough exposure).
As the Commission discusses below, a number of the options also correspond to
current market practices. By allowing sponsors to satisfy their risk retention requirement
while still maintaining current market practices the proposed menu of options approach
should help to reduce costs of the required regime. Moreover, the flexibility sponsors
have to design how they prefer to be exposed to credit risk will allow them to calibrate
and adjust their selections according to changing market conditions. It also will
accommodate evolving market practices as securitizers and investors update preferences
and beliefs.
a. Standard Risk Retention
The standard form of risk retention would permit sponsors to choose vertical risk
retention, horizontal risk retention, or any combination of these two forms.
i. Eligible Horizontal Residual Interest
One way that a sponsor may satisfy the standard risk retention option is by
retaining an “eligible horizontal residual interest” in the issuing entity in “an amount that
is equal to at least 5 percent of the fair value of all ABS interests in the issuing entity that
are issued as part of the securitization transaction.” 260 The proposed rules include a
number of terms and conditions governing the structure of an eligible horizontal residual
interest in order to ensure that the interest would be a “first-loss” position, and could not
260
Stated as an equation: the EHRI amount > 5% of the fair value of all ABS interests.
349
be reduced in principal amount (other than through the absorption of losses) more quickly
than more senior interests and, thus, would remain available to absorb losses on the
securitized assets.
This option may provide sponsors with an incentive to securitize safer assets
relative to other risk retention options because they hold the first loss piece. If sponsors
are restricted to only holding risk retention through the horizontal form, they may choose
to reduce their credit exposure by issuing relatively safe loans. This would possibly
restrict the amount of capital available for riskier but viable loans. Alternatively,
investors could require higher loan rates to compensate for this risk.
A number of commenters on the original proposal generally believed that the
retention of a subordinated interest effectively aligns the incentives of ABS sponsors with
ABS investors. Another commenter stated that in prime RMBS securitizations, where
there is no overcollateralization, a horizontal slice would be the best approach.
Horizontal risk retention may improve capital formation to the extent it makes investors
more willing to invest in the securitization markets.
It is not clear that horizontal risk retention will fully align sponsor incentives with
investor incentives. Investors who are investing in the most senior tranches will have
different incentives than the sponsor who is holding the equity tranche. This is similar to
debt/equity issues that exist in the corporate bond market. Several commentators
expressed concerns regarding the horizontal risk retention option. These commentators
noted that the retention of a subordinated tranche by the sponsor has the potential to
create substantial conflicts of interest between sponsors and investors. Another
commentator recommended that the final rules remove horizontal as an option in RMBS
350
transactions noting that history has already shown that retaining the equity tranche was
not enough to align the securitizer’s incentives with those of investors in the
securitization’s other tranches.
ii. Eligible Vertical Interest
Another way a sponsor may satisfy the standard risk retention option is by
retaining at least 5 percent piece of each class of interests issued in the transaction or a
single vertical security. The proposed rules also would require a sponsor that elects to
retain risk through the vertical form of standard risk retention to disclose to potential
investors and regulators certain information about the retained risks and the assumptions
and methodologies used to determine the aggregate dollar amount of ABS interests
issued. The vertical form of standard risk retention aligns incentives of the sponsor with
every tranche in the securitization by requiring the sponsor to hold a percentage of each
tranche. Several commentators on the original proposal noted that the vertical form of
standard risk retention was easy to calculate, more transparent and less subject to
manipulation. Commenters also noted that the vertical form of standard risk retention
would receive better accounting treatment than the horizontal form of standard risk
retention. In addition, one of these commenters noted that because managed structures,
including CDOs, have compensation structures that incentivize managers to select riskier,
higher yielding assets to maximize return and equity cash flows, the vertical form of
standard risk retention is the only option that incentivizes managers to act for the benefit
of all investors.
More generally, by allowing sponsors to choose a vertical form of risk retention,
there will be increased flexibility to choose higher yielding assets and provide greater
351
access to capital to viable but higher risk borrowers than what would otherwise be
possible through only a horizontal form of risk retention. While the single vertical
security will have similar costs and benefits to holding 5 percent of each tranche, there
are slight differences. The main difference is that the single vertical security trading costs
may be lower than the costs of buying 5 percent of each tranche.
Alternatively, the agencies considered allowing for loan participations as an
option that commenters raised that would satisfy the risk retention requirements.
Ultimately, it was determined that there would be little to no economic benefit for
allowing this option because the option is currently not used by the market and would
unlikely be used.
iii. L-shaped Risk Retention
As discussed above, the horizontal and vertical risk retention options each
present certain costs to securitizers. It is possible that potential sponsors of
securitizations would find both of these risk retention options costly. The original risk
retention proposal included an option of combining equal parts (2.5 percent) of vertical
and horizontal risk retention. While this combination of horizontal and vertical risk
retention may mitigate some of the costs related to the horizontal only or vertical only
risk retention options, it is possible that combinations other than equal parts would also
satisfy the objectives of the risk retention requirements. Hence, in an effort to provide
greater flexibility to sponsors, the agencies are proposing to permit sponsors to hold any
combination of vertical and horizontal risk retention. The benefit of this flexibility is that
the approach allows sponsors to minimize costs by selecting a customized risk retention
method that suits their individual situation and circumstance, including relative market
352
demand for the various types of interest that may be retained under the rule. To the
extent that the costs and benefits of credit risk retention vary across time, across asset
classes, or across sponsors, this approach would implement risk retention in the broadest
possible manner such that sponsors may choose the risk retention implementation that
they view as optimal. This approach may also permit sponsors some flexibility with
regard to structuring credit risk retention without having to consolidate assets.
The proposed set of risk retention alternatives would provide sponsors with a
much greater array of credit risk retention strategies to choose from. Because sponsors
are given the choice on how to retain risk, their chosen shape may not be as effective in
aligning interests and mitigating risks for investors. That is, it may create fewer benefits
or more costs for investors than other alternatives might. Thus, the standard risk
retention option, to the extent that different percentages of horizontal and vertical risk
retention create disparate benefits and costs for sponsors and investors, may perpetuate
some of the conflicts of interest that characterized prior securitizations. This approach,
may create flexibility, but may also increase the complexity of implementation of risk
retention and the measurement of compliance due to the wide choices sponsors would
enjoy.
Horizontal risk retention allows sponsors to communicate private information
about asset quality more efficiently, in some cases, than vertical risk retention, but only if
both forms of risk retention are an option. A sponsor choosing to retain risk in a
horizontal form over a vertical form may be able to signal to the market that the sponsor’s
incentives are better aligned with investors’. By choosing a costlier way of retaining risk,
such as the horizontal form, a sponsor can signal to the market the high quality of their
353
assets. This provides a benefit to sponsors who are able to signal the high quality of their
assets less costly than retaining risk in the vertical form and using another signaling
mechanism.
Alternatively, the agencies considered allowing sponsors to retain risk through
holding a representative sample of the loans being securitized as proposed in the original
proposal. The option was not included, among other reasons, because of, as noted by
commenters, its difficulty to implement.
b. Options for Specific Asset Classes and Structures
i. Master Trust
Securitizations of revolving lines of credit, such as credit card accounts or dealer
floor plan loans, are typically structured using a revolving master trust, which issues
more than one series of ABS backed by a single pool of revolving assets. The proposed
rule would allow a sponsor of a revolving master trust that is collateralized by loans or
other extensions of credit to meet its risk retention requirement by retaining a seller’s
interest in an amount not less than 5 percent of the unpaid principal balance of the pool
assets held by the sponsor.
The definitions of a seller’s interest and a revolving master trust are intended to be
consistent with current market practices and, with respect to seller’s interest, designed to
help ensure that any seller’s interest retained by a sponsor under the proposal would
expose the sponsor to the credit risk of the underlying assets. Commenters on the
original proposal supported permitting a sponsor to satisfy its risk retention requirement
through retention of the seller’s interest. In this regard, a trade association commented
that the seller’s interest, in essence, represents a vertical slice of the risks and rewards of
354
all the receivables in the master trust, and therefore operates to align the economic
interests of securitizers with those of investors. In contrast, many commenters raised
structural (or technical) concerns with the proposed master trust option.
The Commission preliminarily believes that aligning the requirements with
current market practice will balance implementation costs for sponsors utilizing the
master trust structure with the benefits that investors receive through improved selection
of underlying assets by the sponsors. Maintaining current practice will be transparent and
easy for the market to understand and will preserve current levels of efficiency and
maintain investor’s willingness to invest in the market. Codification of current practice
will also provide clarity to market participants and may encourage additional
participation given the removal of previous uncertainty about potential changes to current
practices, thereby increasing capital formation.
Under this option, there would be a cost to sponsors of measuring and disclosing
the seller’s interest amount on an ongoing basis, but since this is a current market
practice, the additional cost should be minimal. The agencies propose requiring the 5
percent seller’s interest to be measured in relation to the fair value of the outstanding
investors’ interests rather than the principal amount of assets of the issuing entity. As
discussed above this acts to make sure the sponsors’ incentives are aligned with the
borrower and to make sure the holdings of the sponsor are enough to economically
incentivize them.
ii. CMBS
The Commission understands that the current market practice regarding risk
retention in the CMBS market is largely in line with the agencies’ proposed rules. The
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proposed rules allow for the continuation of current risk retention market practice for
CMBS in the form of the B-piece retention with additional modifications to the current
practice. Under the agencies’ proposal, a sponsor could satisfy the risk retention
requirements by having up to two third-party purchasers (provided that each party’s
interest is pari passu with the other party’s interest) purchase an eligible horizontal
residual interest (B-piece) in the issuing entity if at least 95 percent of the total unpaid
principal balance is commercial real estate loans. The third-party purchaser(s) would be
required to acquire and retain an eligible horizontal residual interest in the issuing entity
in the same form, amount, and manner as the sponsor (with the same hedging, transfer
and other restrictions) except that after five years the third-party purchaser can sell the Bpiece to another eligible third-party purchaser. Giving the third-party purchaser the ability
to sell the B-piece to another qualified third-party purchaser should not affect the costs or
benefits as the transference of the B-piece keeps the structure of the ABS intact and
therefore the alignment of incentives will not change. The original third-party purchaser
benefits by being given more liquidity and making the purchase of the B-piece not as
costly, encouraging eligible B-piece purchasers to purchase the B-piece and increasing
competition among B-piece purchasers. The sponsor would be responsible for monitoring
the B-piece buyer’s compliance with the preceding restrictions, and an independent
operating advisor with the authority to call a vote to remove the special servicer would be
appointed.
The proposed option would not allow for B-pieces to be further packaged into
other securitizations such as CDOs. Due to the current limited state of the CDO market,
to the extent the proposal is codifying the current state of the market, there may be costs
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and benefits to market perception that the Commission cannot quantify but relative to the
current state there are no costs and benefits. However, to be consistent with the
motivation behind the proposed rule, prohibiting repackaging of B-pieces incentivizes
sponsors to exercise the oversight necessary to align interests.
Consistent with the current practice that the “B-piece” is the lowest rated
tranche(s) of CMBS (most junior tranche), it accepts the first losses in the case of
defaults, and, thus, it is equivalent to the horizontal (“first-loss”) option of the general
risk retention rule applied to CMBS. Consequently, the costs and benefits of the “Bpiece” are similar to the ones for the horizontal form of standard risk retention. To the
extent that sponsors would continue the current market practice that they voluntarily use,
the costs and benefits will be marginal (since the rule proposes mandating the size of a Bpiece at the level similar to, although slightly higher than, the currently used) with the
exception below.
Under current market practice, B-piece investors (who are often also special
servicers) have a conflict of interest with investment grade tranche investors. This
conflict could persist to the extent that CMBS sponsors choose to structure their risk
retention consistent with current practice. In theory, a (special) servicer must try to
maximize recovery for all tranche holders; however, if the servicer is also the subordinate
tranche holder, it may not look after the borrowers’ or senior tranche investors’ positions,
but rather may undertake actions (modification, foreclosure, etc.) that maximize the
position of the first-loss investors at the expense of borrowers or senior tranche
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investors. 261 While this potential conflict of interest may continue to exist, depending on
how the sponsor structures the risk retention, the proposed rules include requirements that
may lessen the impact of the conflict.
The proposed rule requires appointment of an independent operating advisor who,
among other obligations, has the authority to recommend and call a vote for removal of
the special servicer under certain conditions. This proposed requirement may serve to
limit the adverse effects of the potential conflict of interest, thus helping to ensure that the
benefits of the risk retention requirements are preserved. There would be costs, however,
related to the appointment of the independent operating advisor, including, but not
limited to, the payments to the advisor.
In comparison to the current lack of any statutorily mandated risk retention, the
primary benefit of allowing sponsors is to maintain their current market practices, which
effectively achieve the intended objectives of risk retention. In a manner analogous to
the discussion of horizontal risk retention, the B-piece sale may incentivize the sponsor
(through the intended B-piece buyer) to securitize safer assets relative to retaining an
eligible vertical interest under the standard risk retention option. To the extent that safer
assets are securitized, investors may be more willing to invest in CMBS, thus, increasing
the pool of available capital for lending on the commercial real estate market. If only the
safest commercial real estate loans are securitized, however, capital formation could
261
Yingjin Hila Gan and Christopher Mayer. “Agency Conflicts, Asset Substitution, and
Securitization”, NBER Working Paper No. 12359, July 2006, and Brent W. Ambrose,
Anthony B. Sanders, and Abdullah Yavas. “CMBS Special Servicers and Adverse
Selection in Commercial Mortgage Markets: Theory and Evidence”, 2008, Working
Paper.
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potentially be negatively impacted due to sponsors not issuing loans they cannot
securitize. Thus, riskier loans may not be extended to potentially viable borrowers.
Since sponsors can sell the B-piece to specialized investors who are willing to take risk
(and able to evaluate and manage it), sponsors can free up additional capital. Thus,
allowing the B-piece option may lead to increased capital formation and allocational
efficiency because the risk is transferred to those parties that are willing and able to bear
it. Both effects could lead to a decline in costs of borrowing for commercial real estate
buyers relative to a situation where the B-piece is not permitted.
To the extent that the proposed rule allows the current market practice to continue
with minor change in the size of the horizontal piece, and most market participants follow
it, both costs and benefits of the proposed rule are expected to be minimal with the
exception of the requirement of the appointment of the independent operating advisor
discussed above.
iii. ABCP
The original proposal included a risk retention option specifically designed for
ABCP structures. As explained in the original proposal, ABCP is a type of liability that
is typically issued by a special purpose vehicle (commonly referred to as a “conduit”)
sponsored by a financial institution or other sponsor. The commercial paper issued by
the conduit is collateralized by a pool of assets, which may change over the life of the
entity. Depending on the type of ABCP program being conducted, the securitized assets
collateralizing the ABS interests that support the ABCP may consist of a wide range of
assets including automobile loans, commercial loans, trade receivables, credit card
receivables, student loans, and other loans. Some ABCP conduits also purchase assets
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that are not ABS interests, including direct purchases of loans and receivables and
repurchase agreements. Like other types of commercial paper, the term of ABCP
typically is short, and the liabilities are ‘‘rolled,’’ or refinanced, at regular intervals.
Thus, ABCP conduits generally fund longer-term assets with shorter-term liabilities. In
the current market the sponsors of the ABS interests purchased by ABCP conduits often
retain credit risk and eventually all sponsors of ABS will be required to comply with the
credit risk retention rules.
Under the proposal, sponsors of ABCP conduits could either hold 5 percent of the
risk as discussed above using the standard risk retention option or could rely on the
ABCP option outlined below. To the extent that an ABCP conduit sponsor or its
majority-owned affiliate already holds over 5 percent of the outstanding ABCP and at
least 5 percent of the residual interest in the ABCP conduit, the costs will be minimal.
Under the current proposal, ABCP sponsors would be provided an ABCP conduit risk
retention option. As long as the assets held in the ABCP conduit are not purchased in the
secondary markets and the sponsor of every ABS interest held by the ABCP conduit
complies with the credit risk retention requirements then the ABCP conduit sponsor
would not be required to retain risk. Because the sponsor of the ABS interest held by the
ABCP conduit would need to comply with the credit risk retention requirements certain
assets such as receivables would not be eligible for purchase by an eligible ABCP conduit
which would incentivize ABCP conduits to hold other assets.
Another condition of the proposed conduit option is the requirement that the
ABCP conduit have 100 percent liquidity support and that all ABS held in the conduit are
not acquired in secondary market transactions. Limiting an eligible ABCP conduit to
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holding ABS interests acquired in initial issuances may allow the conduit to negotiate the
terms of the deal and have an effect on the riskiness of the ABS interests. This may
incentivize ABCP conduits to hold ABS interests acquired in initial issuances over ABS
interests acquired in secondary markets, possibly resulting in increased costs in the
secondary markets for ABS interests due to lower liquidity and potentially decreasing
efficiency in the secondary markets for ABS interests. At the same time, encouraging
primary market transactions may increase capital formation as new ABS interests will be
necessary for ABCP conduits to issue ABCP. The liquidity support may increase costs
for ABCP conduits that were previously unguaranteed or lacked liquidity support that
meets the requirements in the proposal.
iv. CLOs
Collateralized Loan Obligations (CLO) sponsors are required to retain the same 5
percent of risk as other asset classes. Collateralized loans have longer maturities,
implying that loan balances will not decrease much prior to the maturity of the CLO.
Under the proposed sunset provisions, this will require the manager to effectively retain
risk for the life of the CLO. Longer risk retention periods could help to mitigate concerns
that managers may alter the composition of the loan portfolio relative to a short sunset
provision. The agencies consider CLO managers to be the sponsors of CLOs and thus
they would be required to meet the credit risk retention requirements. The amount of
capital available to managers to hold risk can vary with the size and affiliations of the
manager. To the extent that the CLO market has different sized managers, the relative
capital costs for managers with a small balance sheet available to service the 5 percent of
risk retention will be greater than the capital costs for managers with larger balance
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sheets. This may induce smaller managers to borrow capital in order to cover holding 5
percent of the risk, which could result in different funding costs between smaller and
larger managers. As a result, the CLO option may impact competition by creating an
advantage for managers with lower funding costs, and potentially encourage banks to
start sponsoring mangers. The Commission lacks sufficient information on the
distribution of CLO manager characteristics, including their size, access to capital, and
funding costs, to be able to assess such an impact.
The agencies are proposing to allow certain types of CLO to satisfy the risk
retention requirement if the lead arranger for the underlying loan tranche has taken an
allocation of the syndicated credit facility under the terms of the transaction that includes
a tranche that is designated as a CLO-eligible loan tranche and such allocation is at least
equal to the greater of (a) 20 percent of the aggregate principal balance at origination and
(b) the largest allocation taken by any other member (or members affiliated with each
other) of the syndication group.
v. Enterprises
The proposed rules allow the guarantee of the Enterprises under conservatorship
or receivership to count as risk retention for purposes of the risk retention requirements.
Because of the capital support provided by the U.S. government for the Enterprises,
investors in Enterprise ABS are not exposed to credit loss, and there is no incremental
benefit to be gained by requiring the Enterprises to retain risk. This along with the
Enterprises’ capital support creates a competitive advantage for the Enterprises over
private-sector securitizers when purchasing loans.
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Reinforcing this competitive advantage will provide three significant
consequences. First, recognizing the guarantee of the Enterprises as fulfilling their risk
retention requirement will allow them to facilitate the availability of capital to segments
of the population that might not otherwise have access through private sector channels.
In particular, without Enterprise programs, borrowers that cannot qualify for loans that
are exempt from the risk retention requirements, but could otherwise support repayment
of a loan, might not be able to secure a loan if lenders are unwilling or unable to
underwrite and retain such loans on their own balance sheet. Second, the recognition of
the guarantee of the Enterprises as fulfilling their risk retention requirement will smooth
home financing in periods when banks curb their lending due to limited access to capital
and private-sector securitizers are unable or unwilling to meet excess demand. Finally,
recognizing the guarantee of the Enterprises as fulfilling their risk retention requirement
will preserve liquidity in the market for mortgages that are not QRMs.
The main cost of recognizing the Enterprises’ guarantee as fulfilling their risk
retention requirement is the increased probability that they will purchase riskier loans that
do not meet the QRM criteria. A riskier loan portfolio may increase the Enterprises’
likelihood of default, which has the potential of creating additional taxpayer burden.
Some commenters noted that by allowing the guarantee of the Enterprises as fulfilling
their risk-retention requirements and preserving their competitive advantage vis-à-vis
private securitizers, our rules may result in costs to private securitizers, including perhaps
exiting the market because of their inability to favorably compete with the Enterprises.
This will have the effect of reducing competition and may impede capital formation in
segments of the market not served by the Enterprises. However, analysis of loans
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originated between 1997 and 2009, a period that spans the onset of the financial crisis,
shows that private label loans had a much higher serious delinquency rate than Enterprise
purchased loans, even after accounting for different underlying loan characteristics. 262
Hence, this historical performance-based evidence suggest that Enterprise underwriting
standards offset any incentive to incur excess risk because of their capital support
relative, at least in relation the incentives and behaviors among private label securitizers
during the same period. Furthermore, as discussed below, the proposed rule includes a
proposal to define QRM, which would lessen the potential competitive harm to private
securitizers.
vi. Alternatives
In developing the proposed rules on the retention of risk required under Section
15G of the Exchange Act, as added by Section 941(b) of the Dodd-Frank Act, the
agencies considered a number of alternative approaches. Some of the alternatives were
suggested by commenters following the previous rule proposals.
For instance, commenters suggested other forms of risk retention such as: 5
percent participation interest in each securitized asset; for CLOs, a performance fee-based
option; loss-absorbing subordinate financing in CMBS (such as “rake bonds”);
“contractual” risk retention; private mortgage insurance as a permissible form;
overcollateralization; subordination; third-party credit enhancement; and conditional cash
flows. The agencies believed that the costs and benefits of these options were not an
262
See Joshua White and Scott Bauguess, Qualified Residential Mortgage: Background
Data Analysis on Credit Risk Retention, (August 2013), available at
http://www.sec.gov/divisions/riskfin/whitepapers/qrm-analysis-08-2013.pdf.
364
improvement over the now proposed standard risk retention option. The Commission
invites public comment regarding all aspects of the proposed approach and potential
alternative approaches.
Alternative amounts of risk retention include: requiring sponsors to retain a fixed
amount of more than 5 percent; Establishing the risk retention percentage depending on
asset class; and establishing the risk retention requirement on a sliding scale depending
on the (risk) characteristics of the underlying loans observable at origination (e.g., instead
of the two level structure of 0 percent for exempted assets and 5 percent for the rest, to
use 0 percent for exempted assets, 1 percent for assets with low expected credit risk, 2
percent with moderate risk, etc.). The Commission believes that these alternatives are
overly complicated and may create undue compliance and compliance monitoring burden
on market participants and regulators without providing material benefits over the
proposed approaches. The Commission requests information about costs and benefits of
these alternative risk retention parameters, in particular, the costs and benefits of
requiring fixed risk retention amount of more than 5 percent. Because there is no current
risk retention requirement or voluntary compliance at levels above 5 percent, the
Commission currently lacks sufficient data to quantitatively determine the optimal
amount of risk retention across each asset class. The Commission seeks, in particular,
data or other comment on the economic effects of the 5 percent requirement or of other
levels that the agencies have the discretion to implement. The Commission also requests
comment on methodologies and data that could be used to quantitatively analyze the
appropriate level of risk retention, both generally and for each asset class.
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Alternative sunset provisions include: requiring sponsors to hold retained pieces
until maturity of issued ABS; making the sunset period depend on average maturity of the
underlying loans; and making sunset gradual, i.e., to introduce gradual reduction in the
retained percentage. At this point, the Commission assumes that these alternatives create
additional costs, impose undue compliance and compliance monitoring burden on market
participants and regulators without adding benefits. The sunset provision could also be
implemented with cut off horizons different from the proposed five years for RMBS and
two years for other asset classes and with pool balance cut offs different from the
proposed 25 percent and 33 percent respectively. The agencies request information about
costs and benefits of these alternative risk retention structures, in particular, about the
currently proposed numerical parameters of the sunset provision. The Commission also
requests comment on methodologies and data that could be used to quantitatively analyze
the appropriate sunset horizons, both generally and for each asset class.
7. Exemptions
As discussed above, there are overarching economic impacts of a risk retention
requirement. Below the Commission describes the particular costs and benefits relevant
to each of the asset classes included within this rule that the agencies exempt from risk
retention.
a. Federally Insured or Guaranteed Residential, Multifamily, and Health
Care Mortgage Loan Assets
The agencies are proposing, without changes from the original proposal, the
exemption from the risk retention requirements for any securitization transaction that is
collateralized solely by residential, multifamily, or health care facility mortgage loan
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assets if the assets are insured or guaranteed in whole or in part as to the payment of
principal and interest by the United States or an agency of the United States. The
agencies are also proposing, without changes from the original proposal, the exemption
from the risk retention requirements for any securitization transaction that involves the
issuance of ABS if the ABS are insured or guaranteed as to the payment of principal and
interest by the United States or an agency of the United States and that are collateralized
solely by residential, multifamily, or health care facility mortgage loan assets, or interests
in such assets.
Relative to the baseline there is no cost or benefit associated with this exemption
because risk retention is not currently mandated. However, by providing this exemption it
will incentivize sponsors to use federally insured or guaranteed assets, which will have an
impact on competition with other assets that are not federally insured or guaranteed. The
agencies believe it is not necessary to require risk retention for these type of assets
because investors will be sufficiently protected from loss because of the government
guarantee and adding the cost of risk retention would create costs to sponsors where they
are not necessary as the incentive alignment problem is already being addressed.
b. Securitizations of Assets Issued, Insured or Guaranteed by the United
States or any Agency of the United States
The rules the agencies are proposing today contain full exemptions from risk
retention for any securitization transaction if the ABS issued in the transaction were (1)
collateralized solely (excluding servicing assets) by obligations issued by the United
States or an agency of the United States; (2) collateralized solely (excluding servicing
assets) by assets that are fully insured or guaranteed as to the payment of principal and
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interest by the United States or an agency of the United States (other than residential,
multifamily, or health care facility mortgage loan securitizations discussed above); or (3)
fully guaranteed as to the timely payment of principal and interest by the United States or
any agency of the United States.
Relative to the baseline there is no cost or benefit associated with this exemption
because risk retention is not currently mandated. However, by providing this exemption it
will incentivize sponsors to use federally insured or guaranteed assets, which will have an
impact on competition with other assets that are not federally insured or guaranteed. The
agencies believe it is not necessary to require risk retention for these type of assets
because investors will be sufficiently protected from loss because of the government
guarantee and adding the cost of risk retention would create costs to sponsors where they
are not necessary as the incentive alignment problem is already being addressed.
c. QRM
As discussed above, the rules the agencies are re-proposing today exempt from
required risk retention any securitization comprised of QRMs. Section 15G requires that
ABS that are collateralized solely by QRMs be completely exempted from risk retention
requirements, and allows the agencies to define the terms and conditions under which a
residential mortgage would qualify as a QRM. Section 15G mandates that the definition
of a QRM be “no broader than” the definition of a “qualified mortgage” (QM), as the
term is defined under Section 129C(b)(2) of the Truth in Lending Act.
Pursuant to the statutory mandate, the agencies have proposed to exempt ABS
collateralized by QRMs, and pursuant to the discretion permitted, have proposed defining
QRMs broadly as QMs. The Commission believes that this definition of QRM would
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achieve a number of important benefits. First, since the criteria used to define QMs focus
on underwriting standards, safer product features, and affordability, the Commission
preliminarily believes that equating QRMs with QMs is likely to promote more prudent
lending, protect consumers, and contribute to a sustainable, resilient and liquid mortgage
securitization market. Second, the Commission believes that a single mortgage quality
standard (as opposed to creating a second mortgage quality standard) would benefit
market participants by simplifying the requirements applicable to this market. Third, a
broader definition of QRMs avoids the potential effect of squeezing out certain lenders,
such as community banks and credit unions, which may not have sufficient resources to
hold the capital associated with non-QRM mortgages, thus enhancing competition within
this segment of the lending market. The Commission believes that this will increase
borrower access to capital and facilitate capital formation in securitization markets.
Finally, a broad definition of QRMs may help encourage the re-emergence of private
capital in securitization markets. Since Enterprises would have a competitive securitizing
advantage because of the proposed recognition of the guarantee of the Enterprises as
fulfilling their risk-retention requirement and taxpayer backing, less restrictive QRM
criteria would enhance the competitiveness of private securitizations and reduce the need
to rely on low down-payment programs offered by Enterprises.
Aligning QRM to QM would build into the provision certain loan product features
that data indicates results in a lower risk of default. The Commission acknowledges that
QM does not fully address the loan underwriting features that are most likely to result in
a lower risk of default. However, the agencies have considered the entire regulatory
environment, including regulatory consistency and the possible effects on the housing
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finance market. In addition, the agencies believe that other steps being considered may
provide investors with information that allows them to appropriately assess this risk. The
Commission has proposed rules that would require in registered RMBS transactions
disclosure of detailed loan-level information at the time of issuance and on an ongoing
basis. The proposal also would require that securitizers provide investors with this
information in sufficient time prior to the first sale of securities so that they can analyze
this information when making their investment decision. 263
The Commission is aware, however, that defining QRMs broadly to equate with
QMs may result in a number of economic costs. First, to the extent that risk retention
reduces the risk exposure of ABS investors, a broader definition of QRMs will leave a
larger number of ABS investors bearing more risk. Second, securitizers will not be
required to retain an economic interest in the credit risk of QRM loans, and thus, the
incentives between securitizers and those bearing the credit risk of a securitization will
remain misaligned. An analysis of historical performance among loans securitized into
private-label RMBS that originated between 1997 and 2009 shows that those that meeting
the QM standard sustained exceedingly high serious delinquency rates, greater than 30
percent during that period. 264 Third, the QRM exemption is based on the premise that
well-underwritten mortgages were not the cause of the financial crisis; however, the
criteria for QM loans do not account for all borrower characteristics that may provide
263
See Asset-Backed Securities, SEC Release No. 33-9117, 75 FR 23328 at 23335,
23355 (May 3, 2010).
264
See Joshua White and Scott Bauguess, Qualified Residential Mortgage: Background
Data Analysis on Credit Risk Retention, (August 2013), available at
http://www.sec.gov/divisions/riskfin/whitepapers/qrm-analysis-08-2013.pdf
370
additional information about default rates. For instance, borrowers’ credit history, their
down payment and their loan-to- value ratio have been shown to be significantly
associated with lower borrower default rates. 265 Fourth, allowing securitizers to bear less
risk in their securitizations avoids moderation of non-observable risk factors that could
substantially harm ABS investors during contractionary housing periods. That is,
investors would be better protected by a narrower QRM standard. Fifth, commenters
argued that not allowing blended pools of QRMs and non-QRMs to qualify for a riskretention exemption may limit securitizations, if lenders cannot originate enough QRMs.
Although broadening the definition of QRMs reduces this concern, since blended pools
will still require risk retention, mortgage liquidity may still be reduced.
d. Qualified Automobile Loans, Qualified Commercial Real Estate Loans
and Qualified Commercial Loans
Similar to RMBS discussed above, the agencies have proposed to exempt
securitizations containing certain qualified loans from the risk retention requirement.
Specifically, the agencies proposed an exemption for qualified automobile loans,
qualified commercial real estate loans and commercial loans. The benefit to exempted
qualified loans from risk retention is that sponsors will have more capital available to
deploy more efficiently. The economic consequences of exempting qualified loans are
analogous to the discussion associated with requiring stricter lending standards than QM
in the residential lending market. Also there will be fewer administrative, monitoring and
compliance costs to be met due to the lack of risk retention. Lower costs of securitizing
265
Id.
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loans may enhance competition in the market for qualified auto, commercial real estate
and commercial loans by allowing more firms to be profitable by exempting certain type
of loans, sponsors have an incentive to misrepresent qualifications of loans, similar to
what was observed in the financial crisis. One qualification surrounding whether or not a
loan is qualified is that the sponsor is required to purchase any loan that fails to meet the
underwriting criteria. The benefit of the previous qualification is that it helps to prevent
and disincentivize sponsors from trying to include unqualified loans in the securitization.
e. Resecuritizations
The agencies have identified certain resecuritizations where duplicative risk
retention requirements would not appear to provide any added benefit. Resecuritizations
collateralized only by existing 15G-compliant ABS and financed through the issuance of
a single class of securities so that all principal and interest payments received are evenly
distributed to all security holders, are a unique category of resecuritizations. For such
transactions, the resecuritization process would neither increase nor reallocate the credit
risk of the underlying ABS. Therefore, there would be no potential cost to investors from
possible incentive misalignment with the securitizing sponsor. Furthermore, because this
type of resecuritization may be used to aggregate 15G-compliant ABS backed by small
asset pools, the exemption for this type of resecuritization could improve access to credit
at reasonable terms to consumers and businesses by allowing for the creation of an
additional investment vehicle for these smaller asset pools. The exemption would allow
the creation of ABS that may be backed by more geographically diverse pools than those
that can be achieved by the pooling of individual assets as part of the issuance of the
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underlying 15G-compliant ABS. Again, this will likely improve access to credit on
reasonable terms.
Under the proposed rule, sponsors of resecuritizations that do not have the
structure described above would not be exempted from risk retention. Resecuritization
transactions, which re-tranche the credit risk of the underlying ABS, would be subject to
risk retention requirements in addition to the risk retention requirement imposed on the
underlying ABS. In such transactions, there is the possibility of incentive misalignment
between investors and sponsors just as when structuring the underlying ABS. For such
resecuritizations, the proposed rule seeks to ensure that this misalignment is addressed by
not granting these resecuritizations with an exemption from risk retention. The proposed
rules may have an adverse impact on capital formation and efficiency if they make
certain resecuritization transactions costlier or infeasible to conduct.
f. Other Exemptions
There are a few exemptions from risk retention included in the current proposal
that were not included in the original proposal. They include exemptions for utility
legislative securitizations, two options for municipal bond “repackaging” securitizations,
and seasoned loans.
With respect to utility legislative securitizations, the agencies believe the implicit
state guarantee in place for these securitizations addresses the moral hazard problem
discussed above and adding the cost of risk retention would create costs to sponsors
where they are not necessary as the incentive alignment problem is already being
addressed.
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For municipal bond repackaging securitizations, the agencies believe that the risk
retention mechanisms already in place for these securitizations already serve to address
the moral hazard problem discussed above and thus have proposed two options that
would reflect current market practice.
Seasoned loans have had a sufficient period of time to prove their performance
and the agencies believe that providing an exemption for these assets consistent with the
sunset in place for risk retention requirements addresses the moral hazard problem
discussed above and adding the cost of risk retention would create costs to sponsors
where they are not necessary as the incentive alignment problem is already being
addressed.
Relative to the baseline there is no cost or benefit associated with these
exemptions because risk retention is not currently mandated. However, providing these
exemptions would incentivize the creation of utility legislative securitizations, municipal
bond “repackaging” securitizations, and securitizations with seasoned loans, which will
have an impact on competition with other securitizations.
g. Alternatives
Commenters asked for exemptions for specific asset classes such as: rental car
securitization, tax lien-backed securities sponsored by a municipal entity, “non-conduit”
CMBS transactions, corporate debt repackagings, and legacy loan securitizations. The
agencies chose not to provide exemptions for these asset classes because the cost
associated with retaining risk provided a benefit for these asset classes by aligning the
incentive of the sponsor and the investor. These asset classes had either unfunded risk
retention already in practice or had loans created before the new underwriting
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qualifications were in place. In either case there exists a misalignment between the
sponsor and investors. In order to resolve this moral hazard risk retention is required.
8. Hedging, Transfer and Financing Restrictions
Under the proposal, a sponsor and its consolidated affiliates generally would be
prohibited from hedging or transferring the risk it is required to retain, except for
currency and interest rate hedges and some index hedging. Additionally, the sponsor
would be prohibited from financing the retained interest on a non-recourse basis.
The main purpose of the hedging/transfer restrictions is to enforce the economic
intent of the risk retention rule. Without the hedging/transfer restrictions, sponsors could
hedge/transfer their (credit) risk exposure to the retained ABS pieces, thereby eliminating
the “skin in the game” intent of the rule. Thus, the restriction is intended to prevent
evasion of the rule’s intent.
Costs related to the hedging/transfer restrictions include direct administrative
costs and compliance monitoring costs. Additionally, according to a few commenters,
there is uncertainty about the interpretation of the proposed rules, namely, what
constitutes permissible and impermissible hedges. Such uncertainty may induce strategic
responses that are designed to evade the without violating the letter of the rule. For
example, derivative or cash instrument positions can be used to hedge risk, but it may be
difficult to determine whether such a hedge is designed to evade the rule.
9. Foreign Safe Harbor
The proposal includes a safe harbor provision for certain, predominantly foreign,
transactions based on the limited nature of the transactions’ connections with the United
States and U.S. investors. The safe harbor is intended to exclude from the proposed risk
375
retention requirements transactions in which the effects on U.S. interests are sufficiently
remote so as not to significantly impact underwriting standards and risk management
practices in the United States or the interests of U.S. investors. The exclusion would
create compliance and monitoring cost savings compared to universally applying the risk
retention rules to all ABS issues.
The costs of foreign safe harbor exemptions would be small. ABS deals with a
share of U.S. assets slightly above the threshold of 25 percent and sold primarily to
foreign investors may be restructured by sponsors to move the share below the threshold
to avoid the need to satisfy the risk retention requirements. The number of such deals
will likely be small 266 and the resulting economic costs will be minimal.
There will be negligible effect of the exclusion on efficiency, competition and
capital formation (compared to the universal application of the risk retention rule)
because the affected ABS are foreign and not related to U.S. markets. In some instances,
allowed by the foreign safe harbor provision, the effect on capital formation in the United
States would be positive. For example, foreign sponsors which acquire less than 25
percent of assets in the pool in the United States and sell the ABS to foreign investors to
avoid risk retention requirement would create capital in the United States. The prevalence
of such situations would depend on relative strictness of the United States and foreign
risk retention rules, tax laws, and other relevant security regulations. (see also footnote
36). The effect of the same scenario on competition may be marginally negative for the
United States sponsors involved in similar transactions (securitizing U.S.-based assets for
266
Since 2009, only 0.26 percent of all ABS in AB Alert database had primary location
of collateral in the U.S., but were distributed outside of the U.S.
376
sale to foreign investors) because the U.S. sponsors have to retain risk pieces by the
virtue of being organized under the laws of the U.S.
The proposal may have negative effect on foreign sponsors that seek U.S.
investors because they may need to satisfy risk retention requirements of two countries
(their home country and the United States) and, thus, the rule may reduce competition
and investment opportunities for U.S. investors. The proposed rule is designed to provide
flexibility for sponsors with respect to forms of eligible risk retention to permit foreign
sponsors seeking a material U.S. investor base to retain risk in a format that satisfies both
home country and U.S. regulatory requirements, without jeopardizing protection to the
U.S. investors in the form of risk retention.
10. Request for Comment
The Commission requests comments on the following questions:
1. Are the descriptions of the current risk retention practices and structures or
practices that align the interests of investors and sponsors correct with
respect to all ABS asset classes, but, in particular, in the following: ABCP,
CLO, RMBS, automobile loan backed ABS, and master trusts with seller’s
interests?
2. With respect to current risk retention practices: what share of ABS interest
is currently retained (less/more than 5 percent)? What type of ABS interest
is currently retained (horizontal, vertical, L-shaped, seller’s interest)?
When was this practice or structure developed (before or after the crisis,
before or after the promulgation of Dodd-Frank Act)? Is information about
risk retention (size or shape) for specific transactions disclosed to
377
investors? To what extent is this practice or structure in response to
regulatory restrictions (e.g., EU risk retention regulations or the FDIC safe
harbor)?
3. Is there a difference in historical delinquency rates/performance of
securitizations in which the sponsor retained ABS interests and
securitizations in which the sponsor did not retain ABS interests? Is there
a difference in the timing of defaults of securitizations in which the
sponsor retained ABS interests and securitizations in which the sponsor
did not retain ABS interests?
4. What are the estimates of the potential costs of appointing the independent
operating advisors for the proposed CMBS B-piece option?
5. To what extent do the sponsor and/or its affiliates receive subordinated
performance fees with respect to a securitization transaction? Are the
subordinated performance fees received by the sponsor and its affiliates
equal to or greater than the economic exposure they would get from the 5
percent risk retention requirements? Because subordinated performance
fees only align incentives when the assets are performing above a certain
threshold, should there be any additional restrictions on the use of
performance fees to satisfy risk retention requirements?
6. To the extent not already provided, what are the estimates of the cost
(including opportunity cost) of 5 percent risk retention and how will 5
percent retention affect the interest rates paid by borrowers under
securitized loans?
378
7. What would be the costs of establishing the risk retention level above the
statutory 5 percent? What would be the benefits?
8. Are there any additional costs that the agencies should consider with
respect to the risk retention?
9. Are the sunset provision appropriate for RMBS (i.e., the latter of (x) 5
years and (y) the reduction of the asset pool to 25% of its original balance,
but (z) no longer than 7 years) and all other asset classes (i.e., the latter of
(x) 2 years and (y) the reduction of the asset pool balance to 33%)? What
data can be used to support these or alternative sunset bounds?
10. To what extent do the requirements and/or restrictions included in each of
the risk retention options limit the ability of sponsors to use the option?
11. To what extent are the deals funded by ABCP conduits included in the
deal volumes for other asset classes?
12. To the extent that a warehouse line is funded by the issuance of revolving
ABS, is that ABS included in the deal volume?
13. It would be helpful to receive additional information about the fees
charged by sponsors for setting up securitizations, sponsors interpretation
of their opportunity cost of capital, the interaction of regulatory capital
with cost of capital, and historical returns of tranches of different asset
classes in particular the residual interest.
14. The Commission requests data about master trusts that would permit it to
estimate the amount of risk currently retained.
379
15. The Commission currently lacks sufficient data to quantitatively assess the
potential impact of the proposed minimum 5 percent retention
requirement. In connection with the re-proposal, the Commission seeks
data or other comment on the economic effects of the proposed minimum
5 percent requirement.
The Commission also requests comment on methodologies and data that could be
used to quantitatively analyze the appropriate level of risk retention, both generally and
for each asset class.
Appendix: The impact of required risk retention on the cost of credit
In this section, we outline a framework for evaluating the impact of required risk
retention on the cost of credit, and apply it to a hypothetical securitization of prime
mortgages. While the ultimate impact of required risk retention depends in part on the
assumptions about how risk retention is funded by the sponsor, we conclude that
incremental risk retention by the sponsor is unlikely to have a significant impact on the
cost of credit. Our range of reasonable estimates of the cost of risk retention is between
zero and 30 basis points. The former estimate is relevant when incremental retention is
zero. The latter is relevant when the sponsor is currently retaining nothing, and
incremental retention is funded entirely with sponsor equity.
I.
Conceptual Framework
The analysis below focuses on the impact of risk retention on the cost of credit
through the cost of funding. If capital markets are efficient, the cost of funding an ABS
interest directly in capital markets should be no different than funding the same ABS
interest on the balance sheet of the sponsor. However, when capital markets are not
380
efficient, risk retention can be costly, as the cost of funding credit through securitization
is lower than funding on the sponsor’s balance sheet. Here, we focus on measuring how
much risk retention can increase the cost of credit to borrowers by forcing a sponsor to
increase the amount of retention it is funding on its balance sheet. 267
The analysis starts by identifying the marginal amount and form of retention. In a
typical securitization transaction, the sponsor is currently holding some risk retention
without being prompted by regulation, typically in a first-loss position. In some
circumstances, the proposed rule will increase the overall amount of retention by the
sponsor, and it is only this increase that will have an impact on the cost of credit. If the
sponsor’s risk retention is already adequate to meet the rule, the implication is that the
impact of the rule on the cost of credit is zero. In the analysis here, we focus first on the
marginal retention required by the sponsor to meet the rule. 268
(1)
Marginal Risk Retention = Required Risk Retention – Current Risk Retention
For the purposes of this example, assume the sponsor currently holds a first loss position
equal to 3 percent of the fair value of all ABS interests (Current Risk Retention), and
consequently needs to hold eligible interests with fair value of an additional 2 percent
(Marginal Risk Retention) in order to meet the 5 percent standard (Required Risk
Retention).
267
As this cost is driven by financial market inefficiency, it is worth noting that financial
innovation which reduces or eliminates this inefficiency over time will subsequently
reduce or eliminate these costs.
268
It is possible that restrictions proposed above on the timing of cash flow to an eligible
horizontal residual interest (EHRI) will also have an impact on the cost of credit. In
particular, an increase in the duration of first-loss cash flows may prompt the sponsor to
increase the required yield on the EHRI. As we have found reasonable changes in the
yield to have insignificant impact on the analysis here, it is ignored it for simplicity.
381
We assume that the sponsor has three options to fund this Marginal Risk
Retention of 2 percent. In the first option, the sponsor funds entirely with new equity. In
the second option, the sponsor funds part of the marginal risk retention with maturitymatched debt secured by the ABS interest and recourse to the sponsor, and the rest with
new equity. In the final option, the sponsor funds part of the marginal risk retention with
short-term bi-lateral repo secured by the ABS interest and recourse to the sponsor, and
the rest with new equity.
Regardless of the funding strategy, the framework outlined below is focused on
calculating the sponsor’s return on marginal equity. This calculation has three
components: the Amount of Incremental Equity by the sponsor, the Gross Yield on the
Retained ABS Interest, and the Cost of Debt Funding. We review each of these in turn.
The amount of incremental equity is simply the amount of incremental funding in the
form of sponsor equity, and it varies across sponsor funding strategy.
(2)
Amount of Incremental Equity = Percent of Equity in Incremental Funding x
Marginal Risk Retention (1)
Assuming the marginal risk retention requirement of 2 percent from the example above,
when the sponsor funds marginal risk retention only with equity, the Percent Equity in
Incremental Funding is 100 percent, and the Amount of Incremental Equity is 2 percent
(=1x0.02). However, if the sponsor funds with 80 percent term debt, the Percent of
Equity in Incremental Funding is 20 percent, and the Amount of Incremental Equity is
0.4 percent (=0.20x0.02). Finally, when the sponsor funds marginal risk retention with
bi-lateral repo of 90 percent, the Percent of Equity in Incremental Funding would be 10
percent, and the Amount of Incremental Equity is 0.2 percent (=0.10x0.02).
382
The Gross Yield at Issue on the Marginal Retained ABS interests by the sponsor is an
important input to the calculation below, as it measures the sponsor’s return from holding
risk retention. As the gross yield increases, all else equal, the cost of risk retention will
decrease, as the sponsor is being compensated more for its position.
(3)
Gross Yield = Yield at Issue on Marginal Retained ABS interest(s)
In the motivating example here, we assume the gross yield on marginal ABS interests
retained is 4 percent.
In order to calculate the return on marginal equity, it is necessary to measure the
difference between Gross Yield and the Cost of Debt Funding, where the latter is simply
the product of the cost of incremental debt funding times the amount of debt in the capital
structure.
(4)
Cost of Debt Funding = Percent of Debt in Incremental Funding x Cost of
Incremental Debt
When the sponsor only uses equity to fund incremental retention, the amount of
incremental debt is 0 percent and Cost of Debt Funding is zero. When the sponsor uses
term debt in 80 percent of the capital structure at a cost of 5 percent, the Cost of Debt
Funding is 4 percent (=0.8x0.05). Finally, when the sponsor uses bi-lateral repo in 90
percent of the capital structure at a cost of 4 percent, the Cost of Debt Funding is 3.6
percent (=0.9x0.04).
The next step in calculating the marginal return on equity is measurement of the
Net Yield on marginal retention, which is equal to the difference between the gross yield
and the cost of debt funding.
(5)
Net yield = Gross Yield (3) – Cost of Debt Funding (4)
383
In our examples from above, the Net Yield of the all equity funding strategy is 4
percent (=0.04-0), of the term debt funding strategy is 0 percent (= 0.04-0.04), and of the
bi-lateral repo funding strategy is 0.4 percent (=0.04-0.036) percent.
Finally, the Return on Marginal Equity is the ratio of the Net Yield to the Amount of
Incremental Equity. It is the actual return to marginal sponsor equity, taking the current
cost of credit as given.
(6)
Return on Marginal Equity = Net yield (5)/Percent of Equity in Incremental
Funding
In our examples from above, the Return on Marginal Equity of the all equity
funding strategy is 4 percent (=0.04/1), of the term debt funding strategy is 0 percent
(=0/0.2), and of the bi-lateral repo funding strategy is 4 percent (=0.004/0.1).
These Returns on Marginal Equity are likely to be too low to incent the sponsor to
go forward with the transaction. In order to remediate this problem, we measure the ROE
shortfall as the difference, if positive, between the sponsor’s target return on marginal
equity and the actual return on marginal equity. This number represents how much the
sponsor’s ROE on marginal equity needs to increase to meet the target return.
(7)
ROE shortfall = max (0,Target return on equity-Return on marginal equity (6))
While we will let the target Return on Marginal Equity vary with the funding strategy and
risk of the ABS interest retained in the detailed example below, for simplicity assume
now that the Target Return on Equity is 10 percent. Following our example, this leads to
an ROE shortfall of 6 percent (=0.10-0.04) for the all equity strategy, of 10 percent
(=0.10-0.0) for the term debt funding strategy, and of 6 percent (=0.10-0.04) for the bilateral repo funding strategy.
384
In order to eliminate the shortfall, it is necessary to increase the Return on
Marginal Equity, which is done by generating more cash flow for the sponsor. As all
cash flow has been exhausted through payments to ABS interests, this can only be done
by increasing the yield on the underlying assets, which is the measured increase in the
cost of credit. Note that the incremental cash flow from the higher mortgage coupon only
needs to flow to the sponsor. 269
While it is unclear how a sponsor might ultimately structure the transaction to
capture this incremental cash flow, we assume for illustrative purposes here that the
sponsor creates a senior IO strip in the amount of the incremental yield on the assets, and
holds that IO strip along with incremental retention. 270 As the sponsor receives 100
percent of the cash flow from the incremental cost of credit, small changes in the cost of
credit can have a large impact on the return on marginal equity. 271
In our example when the sponsor funds incremental risk retention entirely with
equity, an increase in the yield on assets by 12 basis points, when divided by the amount
269
In particular, since we have valued all of the other ABS interests at market prices, and
the rule does not affect investors in those interests, it is safe to assume those tranches can
continue to be sold at the same price. It is possible that risk retention could reduce the
yield demanded by investors on those interests, but for conservatism we ignore that
impact here.
270
It is possible that the sponsor would structure this cash flow to be an eligible form of
retention, and reduce the amount of incremental retention, but for conservatism we ignore
that impact here.
271
The impact of the higher coupon on the return on marginal equity is driven by two
factors. First, a one basis point increase in the mortgage coupon only has to be
distributed to the sponsor’s incremental ABS interest, which in this example is only 2
percent. Second, when the sponsor uses leverage through debt, the amount of marginal
equity is a fraction of the incremental ABS interest. These two levels of leverage permit
small changes in the mortgage coupon to have a relatively large impact on the return on
marginal equity.
385
of incremental equity of 2 percent, results in an additional return to marginal equity of 6
percent (=0.12/0.02). It follows that it would only take a 12 basis point increase in the
cost of credit to compensate the sponsor for the funding cost of incremental risk retention
entirely with equity when using a Target Return on Incremental Equity of 10 percent.
More generally, the potential impact of risk retention on the cost of credit is equal
to the product of the ROE shortfall and the amount of incremental equity.
(8)
Impact on Cost of Credit = ROE shortfall (7) x Amount of Incremental Equity (2)
Substituting earlier equations into (8) results in the simple following approximation to the
impact of risk retention on the cost of credit:
(9)
Impact on the Cost of Credit =
Max{0,Target Return on Marginal Equity-[Yield on Marginal Retained Interest-(Cost of
Incremental Debt x (1-Amount of Incremental Equity))]/Amount of Incremental Equity}
x Amount of Incremental Risk Retention x Amount of Incremental Equity
The equation above demonstrates that the impact of the proposed rule on the cost
of credit is increasing in the following variables: (i) target return on marginal equity, (ii)
cost of incremental debt, (iii) amount of incremental risk retention, and (iv) yield on
marginal retained interest. The impact of the amount of incremental equity is ambiguous,
as it depends on the cost of incremental debt.
II.
Application
In order to illustrate the framework, we will focus on the hypothetical
securitization of prime mortgage loans illustrated below. The first column documents
class name, the second column documents tranche NRSRO rating, the third column
documents tranche type, the fourth column face amount, the fifth column documents
386
tranche coupon, and the sixth column is the ratio of tranche face amount (4) to total face
amount (the sum of face amounts for all non-IO tranches). Using cash flow assumptions
consistent with prime mortgage loans as well as the yield assumption from (9), we
compute the price in column (7). 272 The value (8) is simply equal to the price (7)
multiplied by the balance (6) divided by 100.
Figure A1: Capital structure of hypothetical securitization of prime mortgage loans
Tranche
A1
A2
AIO1
AIO2
B1
B2
B3
B4
B5
Total Fair Value
Ratings
AAA
AAA
AAA
AAA
AA
A
BBB
BB
NR
Tranche Type
SEN_FIX_CAP
SEN_FIX_CAP
SEN_FLT_IO
SEN_FLT_IO
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC
Amount
130,000,000
267,343,000
130,000,000
397,343,000
7,649,000
7,012,000
6,374,000
2,125,000
4,463,577
Coupon
2.50%
3.00%
0.50%
0.54%
3.54%
3.54%
3.54%
3.54%
3.54%
Balance
30.6%
62.9%
30.6%
93.5%
1.8%
1.7%
1.5%
0.5%
1.1%
Price
99.52
101.67
2.13
2.18
100.85
97.27
90.55
69.01
28.00
Value
30.44%
63.96%
0.65%
2.04%
1.82%
1.60%
1.36%
0.35%
0.29%
102.51%
The amount and form of risk retention
There are three ways for the sponsor of this mortgage transaction to comply with
the proposed rule which we will evaluate here: an eligible horizontal retained interest, a
vertical interest, or an L-shaped interest. We review each of these in turn.
Figure A2: Illustrating Sponsor Compliance with the Proposed Rule
272
The analysis assumes 15 percent CPR (constant prepayment rate), 0 percent CDR
(constant default rate), 30 percent loss severity, 24-month recovery lag, and employs the
forward interest rate curve as of 22 May 2013.
387
Yield
2.59%
2.57%
1.61%
3.11%
3.41%
3.92%
4.95%
8.92%
18.98%
Retention Amounts
L-Shaped
Horizontal
Vertical
% Par
% Value
% Par
% Value
% Par
% Value
A1
0.00%
0.00%
4.40%
1.34%
5.00%
1.52%
A2
0.00%
0.00%
4.40%
2.82%
5.00%
3.20%
A101
0.00%
0.00%
4.40%
0.03%
5.00%
0.03%
A102
0.00%
0.00%
4.40%
0.09%
5.00%
0.10%
B1
83.92%
1.52%
4.40%
0.08%
5.00%
0.09%
B2
100.00%
1.60%
4.40%
0.07%
5.00%
0.08%
B3
100.00%
1.36%
4.40%
0.06%
5.00%
0.07%
B4
100.00%
0.35%
100.00%
0.35%
5.00%
0.02%
B5
100.00%
0.29%
100.00%
0.29%
5.00%
0.01%
5.13%
5.24%
Total
(3) Gross Yield
5.13%
4.01%
Under the horizontal risk retention option, the sponsor must hold ABS interests
from the bottom of the capital structure up until the value of those interests is no less than
5 percent of the fair value of ABS interests. As the value of all ABS interests is $102.5
from Figure A1, the value of the horizontal form must be 5.13 percent (=$102.5x 5%).
The table above illustrates that in order for the sponsor to comply with the rule, the
sponsor must hold 83.92 percent of the B1 tranche, as well as 100 percent of all junior
tranches, in order to meet required retention with horizontal. The value-weighted yield
on this interest is 5.24 percent.
Under the L-shaped risk retention option, the sponsor can hold any combination
of horizontal and vertical interests as long as the aggregate fair value is 5.13 percent. We
focus here on the sponsor holding the non-investment grade part of the capital structure
as horizontal and the rest vertical. The middle columns illustrate that the bottom two
tranches (B4 and B5), together represent about 0.64 percent of fair value, implying that
the sponsor needs to hold vertical interests with fair value of 4.49 percent. The table
illustrates that holding 4.4 percent of each of the remaining ABS interests accomplishes
this requirement, resulting in a value-weighted yield of 4.01 percent.
388
5.13%
2.71%
Finally, under the vertical risk retention option, the sponsor must hold 5 percent of each
ABS interest, which mechanically ensures that the fair value of those interests is equal to
5.13 percent, and has a yield of 2.71 percent.
The cost of all equity funding
In this section we take the conservative approach that eligible risk retention is
funded entirely with equity. As finance theory suggests that the required return on
sponsor equity should be determined largely by the risk of asset funded by equity, we
assume that equity has a required risk-adjusted rate of return which is increasing in the
risk of the marginal retained ABS interest. In particular, when equity is funding the
safest form of risk retention -- the vertical form -- we assume the required yield is only 7
percent. However, when equity is funding the L-shaped form, which is more risky than
the vertical form but not as risky as horizontal form, we assume the required yield
increases to 9 percent. Finally, when equity is funding the horizontal form, the most
risky of all eligible forms, we assume the required yield is 11 percent.
Figure A3
Repo Debt in incremental funding
Term Debt in incremental funding
Equity in incremental funding
(3) Gross Yield
Horizontal
Cost
4.25%
6.25%
11.00%
5.24%
Full Equity Funding
L-Shaped
Cost
Amount
Amount
0.00%
4.25%
0.00%
0.00%
6.25%
0.00%
100.00%
9.00%
100.00%
4.01%
Vertical
Cost
Amount
0.00%
4.25%
6.25%
0.00%
7.00%
100.00%
2.71%
(4) Cost of Debt
0.00%
0.00%
0.00%
(5) Net Yield
5.24%
4.01%
2.71%
(6) Return on marginal equity
5.24%
4.01%
2.71%
(7) ROE Shortfall
(2) Amount of incremental equity
5.76%
5.00%
4.99%
5.00%
4.29%
5.00%
(8) Impact on cost of credit
0.29%
0.25%
0.21%
In the “ROE from Retained” row, the table reports the actual return on equity
from the retained position, which in every circumstance is below the target return on
389
equity. This difference, measured in the next row as “ROE shortfall,” measures the
additional yield which must be generated in order compensate equity for its required
return. For example, when horizontal is funded by full equity, the ROE is 5.24 percent,
which is 5.76 percent below the target return of 11 percent.
For conservatism, we assume that the sponsor was not retaining anything without the
rule, so the “Marginal Equity” is 5 percent. The last row computes the coupon impact,
which is simply equal to the product of Marginal Equity and the ROE shortfall, as all
additional cash flow from a higher mortgage coupon can be directed to equity. Overall,
the table illustrates that in a conservative funding structure, where the sponsor had no
retention before the rule, the impact of the proposed rule on the mortgage coupon varies
between 21 and 29 basis points.
The cost of risk retention with term debt funding
In the example below, we focus on sponsor funding of incremental risk retention
using a capital structure which varies with the risk of the underlying incremental ABS
interest: 20 percent equity when incremental retention is horizontal, 10 percent equity
when incremental retention is L-shaped interest, and 5 percent equity incremental
retention is vertical. The cost of term debt is assumed to be 30-day LIBOR plus 6
percent, using the average for a BBB-rated sponsor at a maturity of 7-10 years. Given the
presence of leverage in the capital structure, we assume the cost of equity is 2 percentage
points higher to fund each type of ABS interest than when funded entirely with equity.
390
Using the conceptual framework outlined above, the measured impact of risk retention on
the cost of credit, illustrated in the last line, varies between 12 and 18 basis points. 273
Figure A4
Term Debt
L-Shaped
Horizontal
Cost
Amount
Cost
Vertical
Amount
Cost
Amount
Repo Debt in incremental funding
4.25%
0.00%
4.25%
0.00%
4.25%
0.00%
Term Debt in incremental funding
6.25%
80.00%
6.25%
90.00%
6.25%
95.00%
13.00%
20.00%
11.00%
10.00%
9.00%
5.00%
Equity in incremental funding
(3) Gross Yield
5.24%
(4) Cost of Debt
5.00%
5.63%
5.94%
(5) Net Yield
0.24%
-1.62%
-3.22%
(6) Return on marginal equity
1.22%
-16.19%
-64.47%
(7) ROE Shortfall
4.01%
2.71%
11.78%
27.19%
73.47%
(2) Amount of incremental equity
1.00%
0.50%
0.25%
Coupon Impact
0.12%
0.14%
0.18%
The cost of risk retention with bi-lateral repo funding
In the final approach, we permit the sponsor to follow a more aggressive strategy
where funding eligible risk retention is funded in part with bi-lateral repo. In particular,
we assume that only the investment-grade portion of the retained interest is funded by
repo, with a haircut of 10 percent and cost of 4.25 percent, and the rest is funded with
equity. The cost of repo funding includes a cost of 30-day LIBOR plus 2 percent to the
repo counterparty combined with a cost of 2 percent for a fixed-for-floating rate interest
rate swap, using a maturity of seven years. As repo involves maturity transformation and
creates unique risks to the sponsor beyond those created just by leverage, we further
increase the cost of equity funding by another 2 percentage points above and beyond the
equity yield used in the term leverage example above. Results suggest that the impact of
273
For simplicity, we do not vary the cost of debt across the risk of the asset portfolio, as
this has a second-order impact on the result.
391
the proposed rule on the cost of credit, when a sponsor funds the marginal retained
interest with bi-lateral repo, is between 6 and 12 basis points.
Figure A5
Repo Funding
Horizontal
L-Shaped
Vertical
Cost
Amount
Cost
Amount
Cost
Amount
Repo Debt in incremental funding
4.25%
Term Debt in incremental funding
Equity in incremental funding
6.25%
78.78%
0.00%
21.22%
4.25%
6.25%
13.00%
76.70%
0.00%
23.30%
4.25%
6.25%
11.00%
87.08%
0.00%
15.00%
(3) Gross Yield
5.24%
4.01%
2.71%
(4) Cost of Debt
(5) Net Yield
3.35%
1.90%
3.26%
0.75%
3.70%
-0.99%
(6) Return on marginal equity
8.93%
3.20%
-7.64%
(7) ROE Shortfall
6.07%
9.80%
18.64%
(2) Amount of incremental equity
Coupon Impact
1.06%
0.06%
1.17%
0.11%
0.65%
0.12%
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12.92%
D. OCC Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 104-4
(UMRA) requires that an agency prepare a budgetary impact statement before
promulgating a rule that includes a Federal mandate that may result in an expenditure by
State, local, and tribal governments, in the aggregate, or by the private sector, of $100
million, adjusted for inflation, ($150 million in 2013) or more in any one year. If a
budgetary impact statement is required, section 205 of the UMRA also requires an
agency to identify and consider a reasonable number of regulatory alternatives before
promulgating a rule.
Based on current and historical supervisory data on national bank and Federal
savings association securitization activity, the OCC estimates that as of December 31,
2012, there were 56 national banks and Federal savings associations that engaged in any
securitization activity during that year. These entities may be affected by the proposed
rule. Pursuant to the proposed rule, national banks and Federal savings associations
would be required to retain approximately $3.0 billion of credit risk, after taking into
consideration the proposed exemptions for QRMs and other qualified assets. This amount
reflects the marginal increase in risk retention required to be held based on the proposed
rule, that is, the total risk retention required by the rule less the amount of ABS interests
already held by securitizers that would meet the definitions for eligible risk retention.
The cost of retaining these interests has two components. The first is the loss of
origination and servicing fees on the reduced amount of origination activity necessitated
by the need to hold the $3.0 billion retention amount on the bank’s balance sheet. Typical
origination fees are 1 percent and typical servicing fees are another half of a percentage
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point. To capture any additional lost fees, the OCC conservatively estimated that the total
cost of lost fees to be 2 percent of the retained amount, or approximately $60 million. The
second component of the retention cost is the opportunity cost of earning the return on
these retained assets versus the return that the bank would earn if these funds were put to
other use. Because of the variety of assets and returns on the securitized assets, the OCC
assumes that this interest opportunity cost nets to zero.
In addition to the cost of retaining the assets under the proposed rule, the overall
cost of the proposed rule includes the administrative costs associated with implementing
the rule and providing the required disclosures. The OCC estimates that the
implementation and disclosure will require approximately 480 hours per institution, or at
$92 per hour, approximately $44,000 per institution. The OCC estimates that the rule will
apply to as many as 56 national banks and Federal savings associations. Thus, the
estimated total administrative cost of the proposed rule is approximately $2.5 million, and
the estimated total cost of the proposed rule applied to ABS is $62.5 million.
The OCC has determined that its portion of the final rules will not result in
expenditures by State, local, and tribal governments, or by the private sector, of $150.0
million or more. Accordingly, the OCC has not prepared a budgetary impact statement or
specifically addressed the regulatory alternatives considered.
E. Commission: Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness Act of
1996, or “SBREFA,” 274 the Commission solicits data to determine whether the proposal
274
Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5
U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 601).
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constitutes a “major” rule. Under SBREFA, a rule is considered “major” where, if
adopted, it results or is likely to result in:
•
An annual effect on the economy of $100 million or more (either in the form of an
increase or a decrease);
•
A major increase in costs or prices for consumers or individual industries; or
•
Significant adverse effects on competition, investment or innovation.
We request comment on the potential impact of the proposal on the U.S. economy
on an annual basis, any potential increase in costs or prices for consumers or individual
industries, and any potential effect on competition, investment or innovation.
Commenters are requested to provide empirical data and other factual support for their
views if possible.
F. FHFA: Considerations of Differences between the Federal Home Loan Banks
and the Enterprises
Section 1313 of the Federal Housing Enterprises Financial Safety and Soundness
Act of 1992 requires the Director of FHFA, when promulgating regulations relating to the
Federal Home Loan Banks (Banks), to consider the following differences between the
Banks and the Enterprises (Fannie Mae and Freddie Mac): cooperative ownership
structure; mission of providing liquidity to members; affordable housing and community
development mission; capital structure; and joint and several liability. 275 The Director
also may consider any other differences that are deemed appropriate. In preparing the
portions of this proposed rule over which FHFA has joint rulemaking authority, the
275
See 12 U.S.C. 4513.
395
Director considered the differences between the Banks and the Enterprises as they relate
to the above factors. FHFA requests comments from the public about whether
differences related to these factors should result in any revisions to the proposal.
Text of the Proposed Common Rules
(All Agencies)
The text of the proposed common rules appears below:
PART __—CREDIT RISK RETENTION
Subpart A
Subpart B
Authority, Purpose, Scope and Definitions
Section 1
[Reserved]
Section 2
Definitions
Credit Risk Retention
Section 3
Base risk retention requirement
Section 4
Standard risk retention
Section 5
Revolving master trusts
Section 6
Eligible ABCP conduits
Section 7
Commercial mortgage-backed securities
Section 8
Federal National Mortgage Association and Federal Home
Loan Mortgage Corporation ABS
Section 9
Open market CLOs
Section 10
Qualified tender option bonds
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Subpart C
Subpart D
Transfer of Risk Retention
Section 11
Allocation of risk retention to an originator
Section 12
Hedging, transfer and financing prohibitions
Exceptions and Exemptions
Section 13
Exemption for qualified residential mortgages
Section 14
Definitions applicable to qualifying commercial loans,
commercial real estate loans, and automobile loans
Section 15
Exceptions for qualifying commercial loans, commercial
real estate loans, and automobile loans
Section 16
Underwriting standards for qualifying commercial loans
Section 17
Underwriting standards for qualifying CRE loans
Section 18
Underwriting standards for qualifying automobile loans
Section 19
General exemptions
Section 20
Safe harbor for certain foreign-related transactions
Section 21
Additional exemptions
SUBPART A—AUTHORITY, PURPOSE, SCOPE AND DEFINITIONS
§ __.1 [Reserved]
§ __.2 Definitions.
For purposes of this part, the following definitions apply:
ABS interest means:
(1) Any type of interest or obligation issued by an issuing entity, whether or not in
certificated form, including a security, obligation, beneficial interest or residual interest,
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payments on which are primarily dependent on the cash flows of the collateral owned or
held by the issuing entity; and
(2) Does not include common or preferred stock, limited liability interests,
partnership interests, trust certificates, or similar interests that:
(i) Are issued primarily to evidence ownership of the issuing entity; and
(ii) The payments, if any, on which are not primarily dependent on the cash flows
of the collateral held by the issuing entity; and
(3) Does not include the right to receive payments for services provided by the
holder of such right, including servicing, trustee services and custodial services.
An affiliate of, or a person affiliated with, a specified person means a person that
directly, or indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, the person specified.
Asset means a self-liquidating financial asset (including but not limited to a loan,
lease, mortgage, or receivable).
Asset-backed security has the same meaning as in section 3(a)(79) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(79)).
Appropriate Federal banking agency has the same meaning as in section 3 of the
Federal Deposit Insurance Act (12 U.S.C. 1813).
Collateral with respect to any issuance of ABS interests means the assets or other
property that provide the cash flow (including cash flow from the foreclosure or sale of
the assets or property) for the ABS interests irrespective of the legal structure of issuance,
including security interests in assets or other property of the issuing entity, fractional
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undivided property interests in the assets or other property of the issuing entity, or any
other property interest in such assets or other property.
Assets or other property collateralize an issuance of ABS interests if the assets or
property serve as collateral for such issuance.
Commercial real estate loan has the same meaning as in § __.14 of this part.
Commission means the Securities and Exchange Commission.
Control including the terms “controlling,” “controlled by” and “under common
control with”
(1) Means the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through the ownership of
voting securities, by contract, or otherwise.
(2) Without limiting the foregoing, a person shall be considered to control another
person if the first person:
(i) Owns, controls or holds with power to vote 25 percent or more of any class of
voting securities of the other person; or
(ii) Controls in any manner the election of a majority of the directors, trustees or
persons performing similar functions of the other person.
Credit risk means:
(1) The risk of loss that could result from the failure of the borrower in the case of
a securitized asset, or the issuing entity in the case of an ABS interest in the issuing
entity, to make required payments of principal or interest on the asset or ABS interest on
a timely basis;
399
(2) The risk of loss that could result from bankruptcy, insolvency, or a similar
proceeding with respect to the borrower or issuing entity, as appropriate; or
(3) The effect that significant changes in the underlying credit quality of the asset
or ABS interest may have on the market value of the asset or ABS interest.
Creditor has the same meaning as in 15 U.S.C. 1602(g).
Depositor means:
(1) The person that receives or purchases and transfers or sells the securitized
assets to the issuing entity;
(2) The sponsor, in the case of a securitization transaction where there is not an
intermediate transfer of the assets from the sponsor to the issuing entity; or
(3) The person that receives or purchases and transfers or sells the securitized
assets to the issuing entity in the case of a securitization transaction where the person
transferring or selling the securitized assets directly to the issuing entity is itself a trust.
Eligible horizontal residual interest means, with respect to any securitization
transaction, an ABS interest in the issuing entity:
(1) That is an interest in a single class or multiple classes in the issuing entity,
provided that each interest meets, individually or in the aggregate, all of the requirements
of this definition;
(2) With respect to which, on any payment date on which the issuing entity has
insufficient funds to satisfy its obligation to pay all contractual interest or principal due,
any resulting shortfall will reduce amounts paid to the eligible horizontal residual interest
prior to any reduction in the amounts paid to any other ABS interest, whether through
400
loss allocation, operation of the priority of payments, or any other governing contractual
provision (until the amount of such ABS interest is reduced to zero); and
(3) That has the most subordinated claim to payments of both principal and
interest by the issuing entity.
Eligible vertical interest means, with respect to any securitization transaction, a
single vertical security or an interest in each class of ABS interests in the issuing entity
issued as part of the securitization transaction that constitutes the same portion of the fair
value of each such class.
Federal banking agencies means the Office of the Comptroller of the Currency,
the Board of Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation.
GAAP means generally accepted accounting principles as used in the United
States.
Issuing entity means, with respect to a securitization transaction, the trust or other
entity:
(1) That owns or holds the pool of assets to be securitized; and
(2) In whose name the asset-backed securities are issued.
Majority-owned affiliate of a sponsor means an entity that, directly or indirectly,
majority controls, is majority controlled by or is under common majority control with, the
sponsor. For purposes of this definition, majority control means ownership of more than
50 percent of the equity of an entity, or ownership of any other controlling financial
interest in the entity, as determined under GAAP.
Originator means a person who:
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(1) Through an extension of credit or otherwise, creates an asset that collateralizes
an asset-backed security; and
(2) Sells the asset directly or indirectly to a securitizer or issuing entity.
Residential mortgage means a transaction that is a covered transaction as defined
in section 1026.43(b) of Regulation Z (12 CFR 1026.43(b)(1)) and any transaction that is
exempt from the definition of “covered transaction” under section 1026.43(a) of
Regulation Z ((12 CFR 1026.43(a)).
Retaining sponsor means, with respect to a securitization transaction, the sponsor
that has retained or caused to be retained an economic interest in the credit risk of the
securitized assets pursuant to subpart B of this part.
Securitization transaction means a transaction involving the offer and sale of
asset-backed securities by an issuing entity.
Securitized asset means an asset that:
(1) Is transferred, sold, or conveyed to an issuing entity; and
(2) Collateralizes the ABS interests issued by the issuing entity.
Securitizer with respect to a securitization transaction shall mean either:
(1) The depositor of the asset-backed securities (if the depositor is not the
sponsor); or
(2) The sponsor of the asset-backed securities.
Servicer means any person responsible for the management or collection of the
securitized assets or making allocations or distributions to holders of the ABS interests,
but does not include a trustee for the issuing entity or the asset-backed securities that
makes allocations or distributions to holders of the ABS interests if the trustee receives
402
such allocations or distributions from a servicer and the trustee does not otherwise
perform the functions of a servicer.
Servicing assets means rights or other assets designed to assure the timely
distribution of proceeds to ABS interest holders and assets that are related or incidental to
purchasing or otherwise acquiring and holding the issuing entity’s securitized assets.
Servicing assets include amounts received by the issuing entity as proceeds of rights or
other assets, whether as remittances by obligors or as other recoveries.
Single vertical security means, with respect to any securitization transaction, an
ABS interest entitling the sponsor to specified percentages of the principal and interest
paid on each class of ABS interests in the issuing entity (other than such single vertical
security), which specified percentages result in the fair value of each interest in each such
class being identical.
Sponsor means a person who organizes and initiates a securitization transaction
by selling or transferring assets, either directly or indirectly, including through an
affiliate, to the issuing entity.
State has the same meaning as in Section 3(a)(16) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)(16)).
United States means the United States of America, its territories and possessions,
any State of the United States, and the District of Columbia.
Wholly-owned affiliate means an entity (other than the issuing entity) that,
directly or indirectly, wholly controls, is wholly controlled by, or is wholly under
common control with, a sponsor. For purposes of this definition, “wholly controls”
means ownership of 100 percent of the equity of an entity.
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SUBPART B—CREDIT RISK RETENTION
§ __.3 Base risk retention requirement.
(a) Base risk retention requirement. Except as otherwise provided in this part, the
sponsor of a securitization transaction (or majority-owned affiliate of the sponsor) shall
retain an economic interest in the credit risk of the securitized assets in accordance with
any one of § __.4 through § __.10 of this part.
(b) Multiple sponsors. If there is more than one sponsor of a securitization
transaction, it shall be the responsibility of each sponsor to ensure that at least one of the
sponsors of the securitization transaction (or at least one of their majority-owned
affiliates) retains an economic interest in the credit risk of the securitized assets in
accordance with any one of § __.4 through § __.10 of this part.
§ __.4 Standard risk retention.
(a) Definitions.
Closing Date Projected Cash Flow Rate for any payment date shall mean the
percentage obtained by dividing (1) the fair value of all cash flow projected, as of the
securitization closing date, to be paid to the holder of the eligible horizontal residual
interest (or, if a horizontal cash reserve account is established pursuant to this section,
released to the sponsor or other holder of such account), through such payment date
(including cash flow projected to be paid to such holder on such payment date) by (2) the
fair value of all cash flow projected, as of the securitization closing date, to be paid to the
holder the eligible horizontal residual interest (or, with respect to any horizontal cash
reserve account, released to the sponsor or other holder of such account), through the
maturity of the eligible horizontal residual interest (or the termination of the horizontal
404
cash reserve account). In calculating the fair value of cash flows and the amount of cash
flow so projected to be paid, the issuing entity shall use the same assumptions and
discount rates as were used in determining the fair value of the eligible horizontal
residual interest (or the amount that must be placed in an eligible horizontal cash reserve
account, equal to the fair value of an eligible horizontal residual interest).
Closing Date Projected Principal Repayment Rate for any payment date shall
mean the percentage obtained by dividing (1) the amount of principal projected, as of the
securitization closing date, to be paid on all ABS interests through such payment date (or
released from the horizontal cash reserve account to the sponsor or other holder of such
account), including principal payments projected to be paid on such payment date by (2)
the aggregate principal amount of all ABS interests issued in the transaction. In
calculating the projected principal repayments, the issuing entity shall use the same
assumptions as were used in determining the fair value of the ABS interests in the
transaction (or the amount that must be placed in an eligible horizontal cash reserve
account, equal to the fair value of an eligible horizontal residual interest).
(b) General requirement.
(1) Except as provided in §§__.5 through __.10, the sponsor of a securitization
transaction must retain an eligible vertical interest or eligible horizontal residual interest,
or any combination thereof, in accordance with the requirements of this section. The fair
value of the amount retained by the sponsor under this section must equal at least 5
percent of the fair value of all ABS interests in the issuing entity issued as part of the
securitization transaction, determined in accordance with GAAP. The fair value of the
ABS interests in the issuing entity (including any interests required to be retained in
405
accordance with this part) must be determined as of the day on which the price of the
ABS interests to be sold to third parties is determined.
(2) A sponsor retaining any eligible horizontal residual interest (or funding a
horizontal cash reserve account) pursuant to this section must prior to the issuance of the
eligible horizontal residual interest (or funding of a horizontal cash reserve account), or at
the time of any subsequent issuance of ABS interests, as applicable:
(i) Calculate the Closing Date Projected Cash Flow Rate and Closing Date
Projected Principal Repayment Rate for each payment date;
(ii) Certify to investors that it has performed the calculations required by
paragraph (b)(2)(i) of this section and that the Closing Date Projected Cash Flow Rate for
each payment date does not exceed the Closing Date Projected Principal Repayment Rate
for such payment date; and
(iii) Maintain record of the calculations and certification required under this
paragraph (b)(2) in accordance with paragraph (e) of this section.
(c) Option to hold base amount in horizontal cash reserve account. In lieu of
retaining all or any part of an eligible horizontal residual interest under paragraph (b) of
this section, the sponsor may, at closing of the securitization transaction, cause to be
established and funded, in cash, a horizontal cash reserve account in the amount equal to
the fair value of such eligible horizontal residual interest or part thereof, provided that the
account meets all of the following conditions:
(1) The account is held by the trustee (or person performing similar functions) in
the name and for the benefit of the issuing entity;
(2) Amounts in the account are invested only in:
406
(i) (A) United States Treasury securities with maturities of one year or less;
(B) Deposits in one or more insured depository institutions (as defined in section
3 of the Federal Deposit Insurance Act (12 U.S.C. 1813)) that are fully insured by federal
deposit insurance; or
(ii) With respect to securitization transactions in which the ABS interests or the
securitized assets are denominated in a currency other than U.S. dollars:
(A) Sovereign bonds denominated in such other currency with maturities of one
year or less; or
(B) Fully insured deposit accounts denominated, in such other foreign currency
and held in a foreign bank whose home country supervisor (as defined in section 211.21
of the Federal Reserve Board’s Regulation K (12 CFR 211.21)) has adopted capital
standards consistent with the Capital Accord of the Basel Committee on Banking
Supervision, as amended; and
(3) Until all ABS interests in the issuing entity are paid in full, or the issuing
entity is dissolved:
(i) Amounts in the account shall be released to satisfy payments on ABS interests
in the issuing entity on any payment date on which the issuing entity has insufficient
funds from any source to satisfy an amount due on any ABS interest;
(ii) No other amounts may be withdrawn or distributed from the account unless
the sponsor has complied with paragraphs (b)(2)(i) and (ii) of this section and the
amounts released to the sponsor or other holder of the horizontal cash reserve account do
not exceed, on any release date, the Closing Date Principal Repayment Rate as of that
release date; and
407
(iii) Interest on investments made in accordance with paragraph (c)(2) of this
section may be released once received by the account.
(d) Disclosures. A sponsor relying on this section shall provide, or cause to be
provided, to potential investors a reasonable period of time prior to the sale of the assetbacked securities in the securitization transaction the disclosures in written form set forth
in this paragraph (d) under the caption “Credit Risk Retention”:
(1) Horizontal interest. With respect to any eligible horizontal residual interest
held under paragraph (a) of this section, a sponsor must disclose:
(i) The fair value (expressed as a percentage of the fair value of all of the ABS
interests issued in the securitization transaction and dollar amount (or corresponding
amount in the foreign currency in which the ABS are issued, as applicable)) of the
eligible horizontal residual interest the sponsor will retain (or did retain) at the closing of
the securitization transaction, and the fair value (expressed as a percentage of the fair
value of all of the ABS interests issued in the securitization transaction and dollar amount
(or corresponding amount in the foreign currency in which the ABS are issued, as
applicable)) of the eligible horizontal residual interest that the sponsor is required to
retain under this section;
(ii) A description of the material terms of the eligible horizontal residual interest
to be retained by the sponsor;
(iii) A description of the methodology used to calculate the fair value of all
classes of ABS interests, including any portion of the eligible horizontal residual interest
retained by the sponsor;
408
(iv) The key inputs and assumptions used in measuring the total fair value of all
classes of ABS interests, and the fair value of the eligible horizontal residual interest
retained by the sponsor, including but not limited to quantitative information about each
of the following, as applicable:
(A) Discount rates;
(B) Loss given default (recovery);
(C) Prepayment rates;
(D) Defaults;
(E) Lag time between default and recovery; and
(F) The basis of forward interest rates used.
(v) The reference data set or other historical information used to develop the key
inputs and assumptions referenced in paragraph (d)(1)(iv) of this section, including loss
given default and actual defaults.
(vi) As of a disclosed date which is no more than sixty days prior to the closing
date of the securitization transaction, the number of securitization transactions securitized
by the sponsor during the previous five-year period in which the sponsor retained an
eligible horizontal residual interest pursuant to this section, and the number (if any) of
payment dates in each such securitization on which actual payments to the sponsor with
respect to the eligible horizontal residual interest exceeded the cash flow projected to be
paid to the sponsor on such payment date in determining the Closing Date Projected Cash
Flow Rate.
(vii) If the sponsor retains risk through the funding of a horizontal cash reserve
account:
409
(A) The amount to be placed (or that is placed) by the sponsor in the horizontal
cash reserve account at closing, and the fair value (expressed as a percentage of the fair
value of all of the ABS interests issued in the securitization transaction and dollar amount
(or corresponding amount in the foreign currency in which the ABS are issued, as
applicable)) of the eligible horizontal residual interest that the sponsor is required to fund
through the cash account under this section; and
(B) A description of the material terms of the horizontal cash reserve account; and
(C) The disclosures required in paragraph (d)(1)(iii)-(vi) of this section.
(2) Vertical interest. With respect to any eligible vertical interest retained under
paragraph (a) of this section:
(i) Whether the sponsor will retain (or did retain) the eligible vertical interest as a
single vertical security or as a separate proportional interest in each class of ABS interests
in the issuing entity issued as part of the securitization transaction;
(ii) With respect to an eligible vertical interest retained as a single vertical
security:
(A) The fair value amount of the single vertical security that the sponsor will
retain (or did retain) at the closing of the securitization transaction and the fair value
amount of the single vertical security that the sponsor is required to retain under this
section; and
(B) Each class of ABS interests in the issuing entity underlying the single vertical
security at the closing of the securitization transaction and the percentage of each class of
ABS interests in the issuing entity that the sponsor would have been required to retain
410
under this section if the sponsor held the eligible vertical interest as a separate
proportional interest in each class of ABS interest in the issuing entity; and
(iii) With respect to an eligible vertical interest retained as a separate proportional
interest in each class of ABS interests in the issuing entity, the percentage of each class of
ABS interests in the issuing entity that the sponsor will retain (or did retain) at the closing
of the securitization transaction and the percentage of each class of ABS interests in the
issuing entity that the sponsor is required to retain under this section; and
(iv) The information required under paragraphs (d)(1)(iii), (iv) and (v) of this
section with respect to the measurement of the fair value of the ABS interests in the
issuing entity, to the extent the sponsor is not already required to disclose the information
pursuant to paragraph (d)(1) of this section.
(e) Record maintenance. A sponsor must retain the certifications and disclosures
required in paragraphs (b) and (d) of this section in written form in its records and must
provide the disclosure upon request to the Commission and its appropriate Federal
banking agency, if any, until three years after all ABS interests are no longer outstanding.
§ __.5 Revolving master trusts.
(a) Definitions. For purposes of this §__.5, the following definitions apply:
Revolving master trust means an issuing entity that is:
(1) A master trust; and
(2) Established to issue on multiple issuance dates one or more series, classes,
subclasses, or tranches of asset-backed securities all of which are collateralized by a
common pool of securitized assets that will change in composition over time.
Seller’s interest means an ABS interest or ABS interests:
411
(1) Collateralized by all of the securitized assets and servicing assets owned or
held by the issuing entity other than assets that have been allocated as collateral only for a
specific series;
(2) That is pari passu to each series of investors’ ABS interests issued by the
issuing entity with respect to the allocation of all distributions and losses with respect to
the securitized assets prior to an early amortization event (as defined in the securitization
transaction documents); and
(3) That adjusts for fluctuations in the outstanding principal balance of the
securitized assets in the pool.
(b) General requirement. A sponsor satisfies the risk retention requirements of
§__.3 of this part with respect to a securitization transaction for which the issuing entity
is a revolving master trust if the sponsor retains a seller’s interest of not less than 5
percent of the unpaid principal balance of all outstanding investors’ ABS interests issued
by the issuing entity.
(c) Measuring and retaining the seller’s interest. The retention interest required
pursuant to paragraph (b) of this section:
(1) Must meet the 5 percent test at the closing of each issuance of ABS interests
by the issuing entity, and at every seller’s interest measurement date specified under the
securitization transaction documents, but no less than monthly, until no ABS interest in
the issuing entity is held by any person not affiliated with the sponsor;
(2) May be retained by one or more wholly-owned affiliates of the sponsor,
including one or more depositors of the revolving master trust.
412
(d) Multi-level trusts. (1) If one revolving master trust issues collateral
certificates representing a beneficial interest in all or a portion of the securitized assets
held by that trust to another revolving trust, which in turn issues ABS interests for which
the collateral certificates are all or a portion of the securitized assets, a sponsor may
satisfy the requirements of paragraphs (b) and (c) of this section by retaining the seller’s
interest for the assets represented by the collateral certificates through either revolving
master trust, so long as both revolving master trusts are maintained at the direction of the
same sponsor or its wholly-owned affiliates; and
(2) If the sponsor retains the seller’s interest associated with the collateral
certificates at the level of the revolving trust that issues those collateral certificates, the
proportion of the seller’s interest required by paragraph (b) of this section that shall be
retained at that level shall equal no less than the proportion that the securitized assets
represented by the collateral certificates bears to the total securitized assets in the
revolving master trust that issues the ABS interests, as of each measurement date required
by paragraph (c).
(e) Offset for pool-level excess funding account. The 5 percent seller’s interest
required on each measurement date by paragraph (c) of this section may be reduced on a
dollar-for-dollar basis by the balance, as of such date, of an excess funding account in
the form of a segregated account that:
(1) Is funded in the event of a failure to meet the minimum seller’s interest
requirements under the securitization transaction documents by distributions otherwise
payable to the holder of the seller’s interest;
413
(2) Is pari passu to each series of investors’ ABS interests issued by the issuing
entity with respect to the allocation of losses with respect to the securitized assets prior to
an early amortization event; and
(3) In the event of an early amortization, makes payments of amounts held in the
account to holders of investors’ ABS interests in the same manner as distributions on
securitized assets.
(f) Combined retention at trust and series level. The 5 percent seller’s interest
required on each measurement date by paragraph (c) of this section may be reduced to a
percentage lower than 5 percent to the extent that, for all series of ABS interests issued
by the revolving master trust, the sponsor or wholly-owned affiliate of the sponsor
retains, at a minimum, a corresponding percentage of the fair value of all ABS interests
issued in each series, in the form of an eligible horizontal residual interest that meets the
requirements of §__.4, or, for so long as the revolving master trust continues to operate
by issuing, on multiple issuance dates, one or more series, classes, subclasses, or tranches
of asset-backed securities, all of which are collateralized by pooled securitized assets that
change in composition over time, a horizontal interest meeting the following
requirements:
(1) Whether certificated or uncertificated, in a single or multiple classes,
subclasses, or tranches, the horizontal interest meets, individually or in the aggregate, the
requirements of this paragraph;
(2) Each series of the revolving master trust distinguishes between the series’
share of the interest and fee cash flows and the series’ share of the principal repayment
cash flows from the securitized assets collateralizing the revolving master trust, which
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may according to the terms of the securitization transaction documents, include not only
the series’ ratable share of such cash flows but also excess cash flows available from
other series;
(3) The horizontal interest’s claim to any part of the series’ share of the interest
and fee cash flows for any interest payment period is subordinated to all accrued and
payable interest and principal due on the payment date to more senior ABS interests in
the series for that period, and further reduced by the series’ share of losses, including
defaults on principal of the securitized assets collateralizing the revolving master trust for
that period, to the extent that such payments would have been included in amounts
payable to more senior interests in the series;
(4) The horizontal interest has the most subordinated claim to any part of the
series’ share of the principal repayment cash flows.
(g) Disclosure and record maintenance. (1) Disclosure. A sponsor relying on
this section shall provide, or cause to be provided, to potential investors a reasonable
period of time prior to the sale of the asset-backed securities in the securitization
transaction and, upon request, to the Commission and its appropriate Federal banking
agency, if any, the following disclosure in written form under the caption “Credit Risk
Retention”:
(i) The value (expressed as a percentage of the unpaid principal balance of all of
the investors’ ABS interests issued in the securitization transaction and dollar amount (or
corresponding amount in the foreign currency in which the ABS are issued, as
applicable)) of the seller’s interest that the sponsor will retain (or did retain) at the closing
of the securitization transaction, the fair value (expressed as a percentage of the fair value
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of all of the investors’ ABS interests issued in the securitization transaction and dollar
amount (or corresponding amount in the foreign currency in which the ABS are issued, as
applicable)) of any horizontal risk retention described in paragraph (f) of this section that
the sponsor will retain (or did retain) at the closing of the securitization transaction, and
the unpaid principal balance or fair value, as applicable (expressed as percentages of the
values of all of the ABS interests issued in the securitization transaction and dollar
amounts (or corresponding amounts in the foreign currency in which the ABS are issued,
as applicable)) that the sponsor is required to retain pursuant to this section;
(ii) A description of the material terms of the seller’s interest and of any
horizontal risk retention described in paragraph (f) of this section; and
(iii) If the sponsor will retain (or did retain) any horizontal risk retention
described in paragraph (f) of this section, the same information as is required to be
disclosed by sponsors retaining horizontal interests pursuant to § __.4(d)(i).
(2) Record maintenance. A sponsor must retain the disclosures required in
paragraph (g)(1) of this section in written form in its records and must provide the
disclosure upon request to the Commission and its appropriate Federal banking agency, if
any, until three years after all ABS interests are no longer outstanding.
(h) Early amortization of all outstanding series. A sponsor that organizes a
revolving master trust for which all securitized assets collateralizing the trust are
revolving assets, and that relies on this §__.5 to satisfy the risk retention requirements of
§__.3 of this part, does not violate the requirements of this part if its seller’s interest falls
below the level required by §__. 5 after an event of default triggers early amortization, as
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specified in the securitization transaction documents, of all series of ABS interests issued
by the trust to persons not affiliated with the sponsor, if:
(1) The sponsor was in full compliance with the requirements of this section on
all measurement dates specified in paragraph (c) of this section prior to the event of
default that triggered early amortization;
(2) The terms of the seller’s interest continue to make it pari passu or subordinate
to each series of investors’ ABS interests issued by the issuing entity with respect to the
allocation of all losses with respect to the securitized assets;
(3) The terms of any horizontal interest relied upon by the sponsor pursuant to
paragraph (f) to offset the minimum seller’s interest amount continue to require the
interests to absorb losses in accordance with the terms of paragraph (f) of this section;
and
(4) The revolving master trust issues no additional ABS interests after early
amortization is initiated to any person not affiliated with the sponsor, either during the
amortization period or at any time thereafter.
§ __.6 Eligible ABCP conduits.
(a) Definitions. For purposes of this section, the following additional definitions
apply:
100 percent liquidity coverage means an amount equal to the outstanding balance
of all ABCP issued by the conduit plus any accrued and unpaid interest without regard to
the performance of the ABS interests held by the ABCP conduit and without regard to
any credit enhancement.
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ABCP means asset-backed commercial paper that has a maturity at the time of
issuance not exceeding nine months, exclusive of days of grace, or any renewal thereof
the maturity of which is likewise limited.
ABCP conduit means an issuing entity with respect to ABCP.
Eligible ABCP conduit means an ABCP conduit, provided that:
(1) The ABCP conduit is bankruptcy remote or otherwise isolated for insolvency
purposes from the sponsor of the ABCP conduit and from any intermediate SPV;
(2) The asset-backed securities acquired by the ABCP conduit are:
(i) Collateralized solely by the following:
(A) Asset-backed securities collateralized solely by assets originated by an
originator-seller or one or more majority-owned OS affiliates of the originator seller, and
by servicing assets;
(B) Special units of beneficial interest or similar interests in a trust or special
purpose vehicle that retains legal title to leased property underlying leases that were
transferred to an intermediate SPV in connection with a securitization collateralized
solely by such leases originated by an originator-seller or majority-owned OS affiliate,
and by servicing assets; or
(C) Interests in a revolving master trust collateralized solely by assets originated
by an originator-seller or majority-owned OS affiliate and by servicing assets; and
(ii) Not collateralized by asset-backed securities (other than those described in
paragraphs (i)(A), (i)(B) and (i)(C) of this definition), otherwise purchased or acquired by
the intermediate SPV, the intermediate SPV’s originator-seller, or a majority-owned OS
affiliate of the originator seller; and
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(iii) Acquired by the ABCP conduit in an initial issuance by or on behalf of an
intermediate SPV (A) directly from the intermediate SPV, (B) from an underwriter of the
securities issued by the intermediate SPV, or (C) from another person who acquired the
securities directly from the intermediate SPV;
(3) The ABCP conduit is collateralized solely by asset-backed securities acquired
from intermediate SPVs as described in paragraph (2) of this definition and servicing
assets; and
(4) A regulated liquidity provider has entered into a legally binding commitment
to provide 100 percent liquidity coverage (in the form of a lending facility, an asset
purchase agreement, a repurchase agreement, or other similar arrangement) to all the
ABCP issued by the ABCP conduit by lending to, purchasing ABCP issued by, or
purchasing assets from, the ABCP conduit in the event that funds are required to repay
maturing ABCP issued by the ABCP conduit. With respect to the 100 percent liquidity
coverage, in the event that the ABCP conduit is unable for any reason to repay maturing
ABCP issued by the issuing entity, the liquidity provider shall be obligated to pay an
amount equal to any shortfall, and the total amount that may be due pursuant to the 100
percent liquidity coverage shall be equal to 100 percent of the amount of the ABCP
outstanding at any time plus accrued and unpaid interest (amounts due pursuant to the
required liquidity coverage may not be subject to credit performance of the ABS held by
the ABCP conduit or reduced by the amount of credit support provided to the ABCP
conduit and liquidity support that only funds performing receivables or performing ABS
interests does not meet the requirements of this section).
Intermediate SPV means a special purpose vehicle that:
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(1) Is a direct or indirect wholly-owned affiliate of the originator-seller;
(2) Is bankruptcy remote or otherwise isolated for insolvency purposes from the
eligible ABCP conduit, the originator-seller, and any majority-owned OS affiliate that,
directly or indirectly, sells or transfers assets to such intermediate SPV;
(3) Acquires assets that are originated by the originator-seller or its majorityowned OS affiliate from the originator-seller or majority-owned OS affiliate, or acquires
asset-backed securities issued by another intermediate SPV or the original seller that are
collateralized solely by such assets; and
(4) Issues asset-backed securities collateralized solely by such assets, as
applicable.
Majority-owned OS affiliate means an entity that, directly or indirectly, majority
controls, is majority controlled by or is under common majority control with, an
originator-seller participating in an eligible ABCP conduit. For purposes of this
definition, majority control means ownership of more than 50 percent of the equity of an
entity, or ownership of any other controlling financial interest in the entity, as determined
under GAAP.
Originator-seller means an entity that originates assets and sells or transfers those
assets directly, or through a majority-owned OS affiliate, to an intermediate SPV.
Regulated liquidity provider means:
(1) A depository institution (as defined in section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813));
(2) A bank holding company (as defined in 12 U.S.C. 1841), or a subsidiary
thereof;
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(3) A savings and loan holding company (as defined in 12 U.S.C. 1467a),
provided all or substantially all of the holding company’s activities are permissible for a
financial holding company under 12 U.S.C. 1843(k), or a subsidiary thereof; or
(4) A foreign bank whose home country supervisor (as defined in § 211.21 of the
Federal Reserve Board’s Regulation K (12 CFR 211.21)) has adopted capital standards
consistent with the Capital Accord of the Basel Committee on Banking Supervision, as
amended, and that is subject to such standards, or a subsidiary thereof.
(b) In general. An ABCP conduit sponsor satisfies the risk retention requirement
of §__.3 of this part with respect to the issuance of ABCP by an eligible ABCP conduit in
a securitization transaction if, for each ABS interest the ABCP conduit acquires from an
intermediate SPV:
(1) The intermediate SPV’s originator-seller retains an economic interest in the
credit risk of the assets collateralizing the ABS interest acquired by the eligible ABCP
conduit in accordance with paragraph (b)(2) of this section, in the same form, amount,
and manner as would be required under § __.4 or § __.5; and
(2) The ABCP conduit sponsor:
(i) Approves each originator-seller and any majority-owned OS affiliate permitted
to sell or transfer assets, directly or indirectly, to an intermediate SPV from which an
eligible ABCP conduit acquires ABS interests;
(ii) Approves each intermediate SPV from which an eligible ABCP conduit is
permitted to acquire ABS interests;
(iii) Establishes criteria governing the ABS interests, and the assets underlying the
ABS interests, acquired by the ABCP conduit;
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(iv) Administers the ABCP conduit by monitoring the ABS interests acquired by
the ABCP conduit and the assets supporting those ABS interests, arranging for debt
placement, compiling monthly reports, and ensuring compliance with the ABCP conduit
documents and with the ABCP conduit’s credit and investment policy; and
(v) Maintains and adheres to policies and procedures for ensuring that the
conditions in this paragraph (b) have been met.
(c) Originator-seller compliance with risk retention. The use of the risk retention
option provided in this section by an ABCP conduit sponsor does not relieve the
originator-seller that sponsors ABS interests acquired by an eligible ABCP conduit from
such originator-seller’s obligation, if any, to comply with its own risk retention
obligations under this part.
(d) Periodic disclosures to investors. An ABCP conduit sponsor relying upon this
section shall provide, or cause to be provided, to each purchaser of ABCP, before or
contemporaneously with the first sale of ABCP to such purchaser and at least monthly
thereafter, to each holder of commercial paper issued by the ABCP Conduit, in writing,
each of the following items of information:
(1) The name and form of organization of the regulated liquidity provider that
provides liquidity coverage to the eligible ABCP conduit, including a description of the
form, amount, and nature of such liquidity coverage, and notice of any failure to fund.
(2) With respect to each ABS interest held by the ABCP conduit:
(A) The asset class or brief description of the underlying receivables;
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(B) The standard industrial category code (SIC Code) for the originator-seller or
majority-owned OS affiliate that will retain (or has retained) pursuant to this section an
interest in the securitization transaction; and
(C) A description of the form, fair value (expressed as a percentage of the fair
value of all of the ABS interests issued in the securitization transaction and as a dollar
amount (or corresponding amount in the foreign currency in which the ABS are issued, as
applicable)), as applicable, and nature of such interest in accordance with the disclosure
obligations in § ___.4(d) of this part.
(e) Disclosures to regulators regarding originator-sellers and majority-owned OS
affiliates. An ABCP conduit sponsor relying upon this section shall provide, or cause to
be provided, upon request, to the Commission and its appropriate Federal banking
agency, if any, in writing, all of the information required to be provided to investors in
paragraph (d) of this section, and the name and form of organization of each originatorseller or majority-owned OS affiliate that will retain (or has retained) pursuant to this
section an interest in the securitization transaction.
(f) Duty to comply. (1) The ABCP conduit retaining sponsor shall be responsible
for compliance with this section.
(2) An ABCP conduit retaining sponsor relying on this section:
(i) Shall maintain and adhere to policies and procedures that are reasonably
designed to monitor compliance by each originator-seller and any majority-owned OS
affiliate which sells assets to the eligible ABCP conduit with the requirements of
paragraph (b)(1) of this section; and
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(ii) In the event that the ABCP conduit sponsor determines that an originatorseller or majority-owned OS affiliate no longer complies with the requirements of
paragraph (b)(1) of this section, shall:
(A) Promptly notify the holders of the ABCP, the Commission and its appropriate
Federal banking agency, if any, in writing of:
(1) The name and form of organization of any originator-seller that fails to retain
risk in accordance with paragraph (b)(2)(i) of this section and the amount of asset-backed
securities issued by an intermediate SPV of such originator-seller and held by the ABCP
conduit;
(2) The name and form of organization of any originator-seller or majority-owned
OS affiliate that hedges, directly or indirectly through an intermediate SPV, its risk
retention in violation of paragraph (b)(1) of this section and the amount of asset-backed
securities issued by an intermediate SPV of such originator-seller or majority-owned OS
affiliate and held by the ABCP conduit; and
(3) Any remedial actions taken by the ABCP conduit sponsor or other party with
respect to such asset-backed securities; and
(B) Take other appropriate steps pursuant to the requirements of paragraphs
(b)(2)(iv) and (b)(2)(v) of this section which may include, as appropriate, curing any
breach of the requirements in this section, or removing from the eligible ABCP conduit
any asset-backed security that does not comply with the requirements in this section.
§ ___.7 Commercial mortgage-backed securities.
(a) Definitions. For purposes of this §___.7, the following definitions shall apply:
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Special servicer means, with respect to any securitization of commercial real
estate loans, any servicer that, upon the occurrence of one or more specified conditions in
the servicing agreement, has the right to service one or more assets in the transaction.
(b) Third-Party Purchaser. A sponsor may satisfy some or all of its risk retention
requirements under § __.3 of this part with respect to a securitization transaction if a third
party purchases and holds for its own account an eligible horizontal residual interest in
the issuing entity in the same form, amount, and manner as would be held by the sponsor
under § __.4 of this part and all of the following conditions are met:
(1) Number of third-party purchasers. At any time, there are no more than two
third-party purchasers of an eligible horizontal residual interest. If there are two thirdparty purchasers, each third-party purchaser’s interest must be pari passu with the other
third-party purchaser’s interest.
(2) Composition of collateral. The securitization transaction is collateralized
solely by commercial real estate loans and servicing assets.
(3) Source of funds.
(i) Each third-party purchaser pays for the eligible horizontal residual interest in
cash at the closing of the securitization transaction.
(ii) No third-party purchaser obtains financing, directly or indirectly, for the
purchase of such interest from any other person that is a party to, or an affiliate of a party
to, the securitization transaction (including, but not limited to, the sponsor, depositor, or
servicer other than a special servicer affiliated with the third-party purchaser), other than
a person that is a party to the transaction solely by reason of being an investor.
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(4) Third-party review. Each third-party purchaser conducts an independent
review of the credit risk of each securitized asset prior to the sale of the asset-backed
securities in the securitization transaction that includes, at a minimum, a review of the
underwriting standards, collateral, and expected cash flows of each commercial real
estate loan that is collateral for the asset-backed securities.
(5) Affiliation and control rights.
(i) Except as provided in paragraph (b)(5)(ii) of this section, no third-party
purchaser is affiliated with any party to the securitization transaction (including, but not
limited to, the sponsor, depositor, or servicer) other than investors in the securitization
transaction.
(ii) Notwithstanding paragraph (b)(5)(i) of this section, a third-party purchaser
may be affiliated with:
(A) The special servicer for the securitization transaction; or
(B) One or more originators of the securitized assets, as long as the assets
originated by the affiliated originator or originators collectively comprise less than 10
percent of the unpaid principal balance of the securitized assets included in the
securitization transaction at closing of the securitization transaction.
(6) Operating Advisor. The underlying securitization transaction documents shall
provide for the following:
(i) The appointment of an operating advisor (the Operating Advisor) that:
(A) Is not affiliated with other parties to the securitization transaction;
(B) Does not directly or indirectly have any financial interest in the securitization
transaction other than in fees from its role as Operating Advisor; and
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(C) Is required to act in the best interest of, and for the benefit of, investors as a
collective whole;
(ii) Standards with respect to the Operating Advisor’s experience, expertise and
financial strength to fulfill its duties and responsibilities under the applicable transaction
documents over the life of the securitization transaction;
(iii) The terms of the Operating Advisor’s compensation with respect to the
securitization transaction;
(iv) When the eligible horizontal residual interest has a principal balance of 25
percent or less of its initial principal balance, the special servicer for the securitized assets
must consult with the Operating Advisor in connection with, and prior to, any material
decision in connection with its servicing of the securitized assets, including, without
limitation:
(A) Any material modification of, or waiver with respect to, any provision of a
loan agreement (including a mortgage, deed of trust, or other security agreement);
(B) Foreclosure upon or comparable conversion of the ownership of a property; or
(C) Any acquisition of a property.
(v) The Operating Advisor shall have adequate and timely access to information
and reports necessary to fulfill its duties under the transaction documents and shall be
responsible for:
(A) Reviewing the actions of the special servicer;
(B) Reviewing all reports made by the special servicer to the issuing entity;
(C) Reviewing for accuracy and consistency calculations made by the special
servicer with the transaction documents; and
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(D) Issuing a report to investors and the issuing entity on a periodic basis
concerning:
(1) Whether the Operating Advisor believes, in its sole discretion exercised in
good faith, that the special servicer is operating in compliance with any standard required
of the special servicer as provided in the applicable transaction documents; and
(2) With which, if any, standards the Operating Advisor believes, in its sole
discretion exercised in good faith, the special servicer has failed to comply.
(vi) (A) The Operating Advisor shall have the authority to recommend that the
special servicer be replaced by a successor special servicer if the Operating Advisor
determines, in its sole discretion exercised in good faith, that:
(1) The special servicer has failed to comply with a standard required of the
special servicer as provided in the applicable transaction documents; and
(2) Such replacement would be in the best interest of the investors as a collective
whole; and
(B) If a recommendation described in paragraph (b)(6)(vi)(A) of this section is
made, the special servicer shall be replaced upon the affirmative vote of a majority of the
outstanding principal balance of all ABS interests voting on the matter, with a minimum
of a quorum of ABS interests voting on the matter. For purposes of such vote, the
holders of 5 percent of the outstanding principal balance of all ABS interests in the
issuing entity shall constitute a quorum.
(7) Disclosures. The sponsor provides, or causes to be provided, to potential
investors a reasonable period of time prior to the sale of the asset-backed securities as
part of the securitization transaction and, upon request, to the Commission and its
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appropriate Federal banking agency, if any, the following disclosure in written form
under the caption “Credit Risk Retention”:
(i) The name and form of organization of each initial third-party purchaser that
acquired an eligible horizontal residual interest at the closing of a securitization
transaction;
(ii) A description of each initial third-party purchaser’s experience in investing in
commercial mortgage-backed securities;
(iii) Any other information regarding each initial third-party purchaser or each
initial third-party purchaser’s retention of the eligible horizontal residual interest that is
material to investors in light of the circumstances of the particular securitization
transaction;
(iv) A description of the fair value (expressed as a percentage of the fair value of
all of the ABS interests issued in the securitization transaction and dollar amount (or
corresponding amount in the foreign currency in which the ABS are issued, as
applicable)) of the eligible horizontal residual interest that will be retained (or was
retained) by each initial third-party purchaser, as well as the amount of the purchase price
paid by each initial third-party purchaser for such interest;
(v) The fair value (expressed as a percentage of the fair value of all of the ABS
interests issued in the securitization transaction and dollar amount (or corresponding
amount in the foreign currency in which the ABS are issued, as applicable)) of the
eligible horizontal residual interest in the securitization transaction that the sponsor
would have retained pursuant to § __.4 of this part if the sponsor had relied on retaining
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an eligible horizontal residual interest in that section to meet the requirements of § __.3
of this part with respect to the transaction;
(vi) A description of the material terms of the eligible horizontal residual interest
retained by each initial third-party purchaser, including the same information as is
required to be disclosed by sponsors retaining horizontal interests pursuant to §__.4 of
this part;
(vii) The material terms of the applicable transaction documents with respect to
the Operating Advisor, including without limitation:
(A) The name and form of organization of the Operating Advisor;
(B) The standards required by paragraph (a)(6)(ii) of this section and a description
of how the Operating Advisor satisfies each of the standards; and
(C) The terms of the Operating Advisor’s compensation under paragraph
(a)(6)(iii) of this section; and
(viii) The representations and warranties concerning the securitized assets, a
schedule of any securitized assets that are determined do not comply with such
representations and warranties, and what factors were used to make the determination
that such securitized assets should be included in the pool notwithstanding that the
securitized assets did not comply with such representations and warranties, such as
compensating factors or a determination that the exceptions were not material.
(8) Hedging, transfer and pledging.
(i) General rule. Except as set forth in paragraph (b)(8)(ii) of this section, each
third-party purchaser must comply with the hedging and other restrictions in § __.12 of
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this part as if it were the retaining sponsor with respect to the securitization transaction
and had acquired the eligible horizontal residual interest pursuant to § __.4 of this part.
(ii) Exceptions.
(A) Transfer by initial third-party purchaser or sponsor. An initial third-party
purchaser that acquired an eligible horizontal residual interest at the closing of a
securitization transaction in accordance with this section, or a sponsor that acquired an
eligible horizontal residual interest at the closing of a securitization transaction in
accordance with this section, may, on or after the date that is five years after the date of
the closing of a securitization transaction, transfer that interest to a subsequent third-party
purchaser that complies with paragraph (b)(8)(ii)(C) of this section. The initial thirdparty purchaser shall provide the sponsor with complete identifying information for the
subsequent third-party purchaser.
(B) Transfer by subsequent third-party purchaser. At any time, a subsequent thirdparty purchaser that acquired an eligible horizontal residual interest pursuant to this
paragraph (a)(8)(ii) may transfer its interest to a different third-party purchaser that
complies with paragraph (a)(8)(ii)(C) of this section. The transferring third-party
purchaser shall provide the sponsor with complete identifying information for the
acquiring third-party purchaser.
(C) Requirements applicable to subsequent third-party purchasers. A subsequent
third-party purchaser is subject to all of the requirements of paragraphs (b)(1), (b)(3)
through (b)(5), and (b)(8) of this section applicable to third-party purchasers, provided
that obligations under paragraphs (b)(1), (b)(3) through (b)(5), and (b)(8) of this section
that apply to initial third-party purchasers at or before the time of closing of the
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securitization transaction shall apply to successor third-party purchasers at or before the
time of the transfer of the eligible horizontal residual interest to the successor third-party
purchaser.
(c) Duty to comply.
(1) The retaining sponsor shall be responsible for compliance with this section by
itself and by each initial or subsequent third-party purchaser that acquired an eligible
horizontal residual interest in the securitization transaction.
(2) A sponsor relying on this section:
(A) Shall maintain and adhere to policies and procedures to monitor each thirdparty purchaser’s compliance with the requirements of paragraphs (b)(1), (b)(3) through
(b)(5), and (b)(8) of this section; and
(B) In the event that the sponsor determines that a third-party purchaser no longer
complies with any of the requirements of paragraphs (b)(1), (b)(3) through (b)(5), or
(b)(8) of this section, shall promptly notify, or cause to be notified, the holders of the
ABS interests issued in the securitization transaction of such noncompliance by such
third-party purchaser.
§ __.8 Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation ABS.
(a) In general. A sponsor satisfies its risk retention requirement under this part if
the sponsor fully guarantees the timely payment of principal and interest on all ABS
interests issued by the issuing entity in the securitization transaction and is:
(1) The Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation operating under the conservatorship or receivership of the Federal
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Housing Finance Agency pursuant to section 1367 of the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617) with capital support from
the United States; or
(2) Any limited-life regulated entity succeeding to the charter of either the Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation
pursuant to section 1367(i) of the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992 (12 U.S.C. 4617(i)), provided that the entity is operating with
capital support from the United States.
(b) Certain provisions not applicable. The provisions of §__.12(b), (c), and (d) of
this part shall not apply to a sponsor described in paragraph (a)(1) or (2) of this section,
its affiliates, or the issuing entity with respect to a securitization transaction for which the
sponsor has retained credit risk in accordance with the requirements of this section.
(c) Disclosure. A sponsor relying on this section shall provide to investors, in
written form under the caption “Credit Risk Retention” and, upon request, to the Federal
Housing Finance Agency and the Commission, a description of the manner in which it
has met the credit risk retention requirements of this part.
§ ___.9 Open market CLOs.
(a) Definitions. For purposes of this §__.9, the following definitions shall apply:
CLO means a special purpose entity that (1) issues debt and equity interests and
(2) whose assets consist primarily of loans that are securitized assets and servicing assets.
CLO-eligible loan tranche means a term loan of a syndicated facility that meets
the criteria set forth in paragraph (c) of this section.
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CLO Manager means an entity that manages a CLO, which entity is registered as
an investment adviser under the Investment Advisers Act of 1940, as amended (15 U.S.C.
80b-1 et seq.), or is an affiliate of such a registered investment adviser and itself is
managed by such registered investment adviser.
Commercial borrower means an obligor under a corporate credit obligation
(including a loan).
Initial loan syndication transaction means a transaction in which a loan is
syndicated to a group of lenders.
Lead arranger means, with respect to a CLO-eligible loan tranche, an institution
that:
(1) Is active in the origination, structuring and syndication of commercial loan
transactions (as defined in § __.14) and has played a primary role in the structuring,
underwriting and distribution on the primary market of the CLO-eligible loan tranche.
(2) Has taken an allocation of the syndicated credit facility under the terms of the
transaction that includes the CLO-eligible loan tranche of at least 20 percent of the
aggregate principal balance at origination, and no other member (or members affiliated
with each other) of the syndication group at origination has taken a greater allocation; and
(3) Is identified at the time of origination in the credit agreement and any
intercreditor or other applicable agreements governing the CLO-eligible loan tranche;
represents therein to the holders of the CLO-eligible loan tranche and to any holders of
participation interests in such CLO-eligible loan tranche that such lead arranger and the
CLO-eligible loan tranche satisfy the requirements of this section; and covenants therein
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to such holders that such lead arranger will fulfill the requirements of clause (i) of the
definition of CLO-eligible loan tranche.
Open market CLO means a CLO (1) whose assets consist of senior, secured
syndicated loans acquired by such CLO directly from the sellers thereof in open market
transactions and of servicing assets, (2) that is managed by a CLO manager, and (3) that
holds less than 50 percent of its assets, by aggregate outstanding principal amount, in
loans syndicated by lead arrangers that are affiliates of the CLO or originated by
originators that are affiliates of the CLO.
Open market transaction means (1) either an initial loan syndication transaction or
a secondary market transaction in which a seller offers senior, secured syndicated loans to
prospective purchasers in the loan market on market terms on an arm’s length basis,
which prospective purchasers include, but are not limited to, entities that are not affiliated
with the seller, or (2) a reverse inquiry from a prospective purchaser of a senior, secured
syndicated loan through a dealer in the loan market to purchase a senior, secured
syndicated loan to be sourced by the dealer in the loan market.
Secondary market transaction means a purchase of a senior, secured syndicated
loan not in connection with an initial loan syndication transaction but in the secondary
market.
Senior, secured syndicated loan means a loan made to a commercial borrower
that:
(1) Is not subordinate in right of payment to any other obligation for borrowed
money of the commercial borrower,
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(2) Is secured by a valid first priority security interest or lien in or on specified
collateral securing the commercial borrower’s obligations under the loan, and
(3) The value of the collateral subject to such first priority security interest or lien,
together with other attributes of the obligor (including, without limitation, its general
financial condition, ability to generate cash flow available for debt service and other
demands for that cash flow), is adequate (in the commercially reasonable judgment of the
CLO manager exercised at the time of investment) to repay the loan in accordance with
its terms and to repay all other indebtedness of equal seniority secured by such first
priority security interest or lien in or on the same collateral, and the CLO manager
certifies as to the adequacy of the collateral and attributes of the borrower under this
paragraph in regular periodic disclosures to investors.
(b) In general. A sponsor satisfies the risk retention requirements of §__.3 of this
part with respect to an open market CLO transaction if:
(1) The open market CLO does not acquire or hold any assets other than CLOeligible loan tranches that meet the requirements of paragraph (c) and servicing assets;
(2) The governing documents of such open market CLO require that, at all times,
the assets of the open market CLO consist of senior, secured syndicated loans that are
CLO-eligible loan tranches and servicing assets;
(3) The open market CLO does not invest in ABS interests or in credit derivatives
other than hedging transactions that are servicing assets to hedge risks of the open market
CLO;
(4) All purchases of CLO-eligible loan tranches and other assets by the open
market CLO issuing entity or through a warehouse facility used to accumulate the loans
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prior to the issuance of the CLO’s ABS interests are made in open market transactions on
an arms-length basis;
(5) The CLO Manager of the open market CLO is not entitled to receive any
management fee or gain on sale at the time the open market CLO issues its ABS interests.
(c) CLO-eligible loan tranche.
To qualify as a CLO-eligible loan tranche, a term loan of a syndicated credit
facility to a commercial borrower must have the following features:
(1) A minimum of 5 percent of the face amount of the CLO-eligible loan tranche
is retained by the lead arranger thereof until the earliest of the repayment, maturity,
involuntary and unscheduled acceleration, payment default, or bankruptcy default of such
CLO-eligible loan tranche, provided that such lead arranger complies with limitations on
hedging, transferring and pledging in § __.12 of this part with respect to the interest
retained by the lead arranger.
(2) Lender voting rights within the credit agreement and any intercreditor or other
applicable agreements governing such CLO-eligible loan tranche are defined so as to give
holders of the CLO-eligible loan tranche consent rights with respect to, at minimum, any
material waivers and amendments of such applicable documents, including but not
limited to, adverse changes to money terms, alterations to pro rata provisions, changes to
voting provisions, and waivers of conditions precedent; and
(3) The pro rata provisions, voting provisions, and similar provisions applicable
to the security associated with such CLO-eligible loan tranches under the CLO credit
agreement and any intercreditor or other applicable agreements governing documents
such CLO-eligible loan tranches are not materially less advantageous to the obligor than
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the terms of other tranches of comparable seniority in the broader syndicated credit
facility.
(d) Disclosures. A sponsor relying on this section shall provide, or cause to be
provided, to potential investors a reasonable period of time prior to the sale of the assetbacked securities in the securitization transaction and at least annually with respect to the
information required by paragraph (d)(1)) and, upon request, to the Commission and its
appropriate Federal banking agency, if any, the following disclosure in written form
under the caption “Credit Risk Retention”:
(1) Open market CLOs. A complete list of every asset held by an open market
CLO (or before the CLO’s closing, in a warehouse facility in anticipation of transfer into
the CLO at closing), including the following information:
(i) The full legal name and Standard Industrial Classification (SIC) category code
of the obligor of the loan or asset;
(ii) The full name of the specific loan tranche held by the CLO;
(iii) The face amount of the loan tranche held by the CLO;
(iv) The price at which the loan tranche was acquired by the CLO; and
(v) For each loan tranche, the full legal name of the lead arranger subject to the
sales and hedging restrictions of §__.12 and the; and
(2) CLO manager. The full legal name and form of organization of the CLO
manager.
§ __.10 Qualified tender option bonds.
(a) Definitions. For purposes of this §___.10, the following definitions shall
apply:
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Qualified tender option bond entity means an issuing entity with respect to tender
option bonds for which each of the following applies:
(1) Such entity is collateralized solely by servicing assets and municipal
securities that have the same municipal issuer and the same underlying obligor or source
of payment (determined without regard to any third-party credit enhancement), and such
municipal securities are not subject to substitution.
(2) Such entity issues no securities other than (i) a single class of tender option
bonds with a preferred variable return payable out of capital that meets the requirements
of paragraph (b) of this section and (ii) a single residual equity interest that is entitled to
all remaining income of the TOB issuing entity. Both of these types of securities must
constitute “asset-backed securities” as defined in Section 3(a)(79) of the Exchange Act
(15 U.S.C. 78c(a)(79)).
(3) The municipal securities held as assets by such entity are issued in
compliance with § 103 of the Internal Revenue Code of 1986, as amended (the “IRS
Code”, 26 U.S.C. 103), such that the interest payments made on those securities are
excludable from the gross income of the owners under § 103 of the IRS Code.
(4) The holders of all of the securities issued by such entity are eligible to receive
interest that is excludable from gross income pursuant to § 103 of the IRS Code or
“exempt-interest dividends” pursuant to § 852(b)(5) of the IRS Code (26 U.S.C.
852(b)(5)) in the case of regulated investment companies under the Investment Company
Act of 1940, as amended.
(5) Such entity has a legally binding commitment from a regulated liquidity
provider as defined in § ___.6(a) of this part, to provide a 100 percent guarantee or
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liquidity coverage with respect to all of the issuing entity’s outstanding tender option
bonds.
(6) Such entity qualifies for monthly closing elections pursuant to IRS Revenue
Procedure 2003-84, as amended or supplemented from time to time.
Tender option bond means a security which:
(1) Has features which entitle the holders to tender such bonds to the TOB
issuing entity for purchase at any time upon no more than 30 days’ notice, for a purchase
price equal to the approximate amortized cost of the security, plus accrued interest, if
any, at the time of tender; and
(2) Has all necessary features so such security qualifies for purchase by money
market funds under Rule 2a-7 under the Investment Company Act of 1940, as amended.
For purposes of this section, the term “municipal security” or “municipal
securities” shall have the same meaning as municipal securities in Section 3(a)(29) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(29)) and any rules promulgated
pursuant to such section.
(b) Standard risk retention. Notwithstanding anything in this section, the sponsor
with respect to an issuance of tender option bonds by a qualified tender option bond
entity may retain an eligible vertical interest or eligible horizontal residual interest, or any
combination thereof, in accordance with the requirements of §__.4.
(c) Tender option termination event. The sponsor with respect to an issuance of
tender option bonds by a qualified tender option bond entity may retain an interest that
upon issuance meets the requirements of an eligible horizontal residual interest but that
upon the occurrence of a “tender option termination event” as defined in Section 4.01(5)
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of IRS Revenue Procedure 2003-84, as amended or supplemented from time to time will
meet requirements of an eligible vertical interest.
(d) Retention of a municipal security outside of the qualified tender option bond
entity. The sponsor with respect to an issuance of tender option bonds by a qualified
tender option bond entity may satisfy their risk retention requirements under this Section
by holding municipal securities from the same issuance of municipal securities deposited
in the qualified tender option bond entity, the face value of which retained municipal
securities is equal to 5 percent of the face value of the municipal securities deposited in
the qualified tender option bond entity.
(e) Disclosures. The sponsor provides, or causes to be provided, to potential
investors a reasonable period of time prior to the sale of the asset-backed securities as
part of the securitization transaction and, upon request, to the Commission and its
appropriate Federal banking agency, if any, the following disclosure in written form
under the caption “Credit Risk Retention” the name and form of organization of the
qualified tender option bond entity, and a description of the form, fair value (expressed as
a percentage of the fair value of all of the ABS interests issued in the securitization
transaction and as a dollar amount), and nature of such interest in accordance with the
disclosure obligations in § ___.4(d) of this part.
(f) Prohibitions on Hedging and Transfer. The prohibitions on transfer and
hedging set forth in §__.12, apply to any municipal securities retained by the sponsor
with respect to an issuance of tender option bonds by a qualified tender option bond
entity pursuant to paragraph (d) of this section.
SUBPART C—TRANSFER OF RISK RETENTION
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§ __.11 Allocation of risk retention to an originator.
(a) In general. A sponsor choosing to retain an eligible vertical interest or an
eligible horizontal residual interest (including an eligible horizontal cash reserve
account), or combination thereof under § __.4 of this part, with respect to a securitization
transaction may offset the amount of its risk retention requirements under § __.4 of this
part by the amount of the eligible interests, respectively, acquired by an originator of one
or more of the securitized assets if:
(1) At the closing of the securitization transaction:
(i) The originator acquires the eligible interest from the sponsor and retains such
interest in the same manner as the sponsor under § __.4 of this part, as such interest was
held prior to the acquisition by the originator;
(ii) The ratio of the fair value of eligible interests acquired and retained by the
originator to the total fair value of eligible interests otherwise required to be retained by
the sponsor pursuant to § __.4 of this part, does not exceed the ratio of:
(A) The unpaid principal balance of all the securitized assets originated by the
originator; to
(B) The unpaid principal balance of all the securitized assets in the securitization
transaction;
(iii) The originator acquires and retains at least 20 percent of the aggregate risk
retention amount otherwise required to be retained by the sponsor pursuant to § __.4 of
this part; and
(iv) The originator purchases the eligible interests from the sponsor at a price that
is equal, on a dollar-for-dollar basis, to the amount by which the sponsor’s required risk
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retention is reduced in accordance with this section, by payment to the sponsor in the
form of:
(A) Cash; or
(B) A reduction in the price received by the originator from the sponsor or
depositor for the assets sold by the originator to the sponsor or depositor for inclusion in
the pool of securitized assets.
(2) Disclosures. In addition to the disclosures required pursuant to § __.4(d) of
this part, the sponsor provides, or causes to be provided, to potential investors a
reasonable period of time prior to the sale of the asset-backed securities as part of the
securitization transaction and, upon request, to the Commission and its appropriate
Federal banking agency, if any, in written form under the caption “Credit Risk
Retention”, the name and form of organization of any originator that will acquire and
retain (or has acquired and retained) an interest in the transaction pursuant to this section,
including a description of the form, amount (expressed as a percentage and dollar amount
(or corresponding amount in the foreign currency in which the ABS are issued, as
applicable)), and nature of the interest, as well as the method of payment for such interest
under paragraph (a)(1)(iv) of this section.
(3) Hedging, transferring and pledging. The originator complies with the hedging
and other restrictions in § __.12 of this part with respect to the interests retained by the
originator pursuant to this section as if it were the retaining sponsor and was required to
retain the interest under subpart B of this part.
(b) Duty to comply.
(1) The retaining sponsor shall be responsible for compliance with this section.
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(2) A retaining sponsor relying on this section:
(A) Shall maintain and adhere to policies and procedures that are reasonably
designed to monitor the compliance by each originator that is allocated a portion of the
sponsor’s risk retention obligations with the requirements in paragraphs (a)(1) and (a)(3)
of this section; and
(B) In the event the sponsor determines that any such originator no longer
complies with any of the requirements in paragraphs (a)(1) and (a)(3) of this section,
shall promptly notify, or cause to be notified, the holders of the ABS interests issued in
the securitization transaction of such noncompliance by such originator.
§ __.12 Hedging, transfer and financing prohibitions.
(a) Transfer. A retaining sponsor may not sell or otherwise transfer any interest
or assets that the sponsor is required to retain pursuant to subpart B of this part to any
person other than an entity that is and remains a majority-owned affiliate of the sponsor.
(b) Prohibited hedging by sponsor and affiliates. A retaining sponsor and its
affiliates may not purchase or sell a security, or other financial instrument, or enter into
an agreement, derivative or other position, with any other person if:
(1) Payments on the security or other financial instrument or under the agreement,
derivative, or position are materially related to the credit risk of one or more particular
ABS interests that the retaining sponsor is required to retain with respect to a
securitization transaction pursuant to subpart B of this part or one or more of the
particular securitized assets that collateralize the asset-backed securities issued in the
securitization transaction; and
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(2) The security, instrument, agreement, derivative, or position in any way
reduces or limits the financial exposure of the sponsor to the credit risk of one or more of
the particular ABS interests that the retaining sponsor is required to retain with respect to
a securitization transaction pursuant to subpart B of this part or one or more of the
particular securitized assets that collateralize the asset-backed securities issued in the
securitization transaction.
(c) Prohibited hedging by issuing entity. The issuing entity in a securitization
transaction may not purchase or sell a security or other financial instrument, or enter into
an agreement, derivative or position, with any other person if:
(1) Payments on the security or other financial instrument or under the agreement,
derivative or position are materially related to the credit risk of one or more particular
ABS interests that the retaining sponsor for the transaction is required to retain with
respect to the securitization transaction pursuant to subpart B of this part; and
(2) The security, instrument, agreement, derivative, or position in any way
reduces or limits the financial exposure of the retaining sponsor to the credit risk of one
or more of the particular ABS interests that the sponsor is required to retain pursuant to
subpart B of this part.
(d) Permitted hedging activities. The following activities shall not be considered
prohibited hedging activities under paragraph (b) or (c) of this section:
(1) Hedging the interest rate risk (which does not include the specific interest rate
risk, known as spread risk, associated with the ABS interest that is otherwise considered
part of the credit risk) or foreign exchange risk arising from one or more of the particular
ABS interests required to be retained by the sponsor under subpart B of this part or one or
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more of the particular securitized assets that underlie the asset-backed securities issued in
the securitization transaction; or
(2) Purchasing or selling a security or other financial instrument or entering into
an agreement, derivative, or other position with any third party where payments on the
security or other financial instrument or under the agreement, derivative, or position are
based, directly or indirectly, on an index of instruments that includes asset-backed
securities if:
(i) Any class of ABS interests in the issuing entity that were issued in connection
with the securitization transaction and that are included in the index represents no more
than 10 percent of the dollar-weighted average (or corresponding weighted average in the
currency in which the ABS is issued, as applicable) of all instruments included in the
index; and
(ii) All classes of ABS interests in all issuing entities that were issued in
connection with any securitization transaction in which the sponsor was required to retain
an interest pursuant to subpart B of this part and that are included in the index represent,
in the aggregate, no more than 20 percent of the dollar-weighted average (or
corresponding weighted average in the currency in which the ABS is issued, as
applicable) of all instruments included in the index.
(e) Prohibited non-recourse financing. Neither a retaining sponsor nor any of its
affiliates may pledge as collateral for any obligation (including a loan, repurchase
agreement, or other financing transaction) any ABS interest that the sponsor is required to
retain with respect to a securitization transaction pursuant to subpart B of this part unless
such obligation is with full recourse to the sponsor or affiliate, respectively.
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(f) Duration of the hedging and transfer restrictions.
(1) General rule. Except as provided in paragraph (f)(2) of this section, the
prohibitions on sale and hedging pursuant to paragraphs (a) and (b) of this section shall
expire on or after the date that is the latest of:
(i) The date on which the total unpaid principal balance of the securitized assets
that collateralize the securitization transaction has been reduced to 33 percent of the total
unpaid principal balance of the securitized assets as of the closing of the securitization
transaction;
(ii) The date on which the total unpaid principal obligations under the ABS
interests issued in the securitization transaction has been reduced to 33 percent of the
total unpaid principal obligations of the ABS interests at closing of the securitization
transaction; or
(iii) Two years after the date of the closing of the securitization transaction.
(2) Securitizations of residential mortgages.
(i) If all of the assets that collateralize a securitization transaction subject to risk
retention under this part are residential mortgages, the prohibitions on sale and hedging
pursuant to paragraphs (a) and (b) of this section shall expire on or after the date that is
the later of:
(A) Five years after the date of the closing of the securitization transaction; or
(B) The date on which the total unpaid principal balance of the residential
mortgages that collateralize the securitization transaction has been reduced to 25 percent
of the total unpaid principal balance of such residential mortgages at the closing of the
securitization transaction.
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(ii) Notwithstanding paragraph (f)(2)(i) of this section, the prohibitions on sale
and hedging pursuant to paragraphs (a) and (b) of this section shall expire with respect to
the sponsor of a securitization transaction described in paragraph (f)(2)(i) of this section
on or after the date that is seven years after the date of the closing of the securitization
transaction.
(3) Conservatorship or receivership of sponsor. A conservator or receiver of the
sponsor (or any other person holding risk retention pursuant to this part) of a
securitization transaction is permitted to sell or hedge any economic interest in the
securitization transaction if the conservator or receiver has been appointed pursuant to
any provision of federal or State law (or regulation promulgated thereunder) that provides
for the appointment of the Federal Deposit Insurance Corporation, or an agency or
instrumentality of the United States or of a State as conservator or receiver, including
without limitation any of the following authorities:
(i) 12 U.S.C. 1811;
(ii) 12 U.S.C. 1787;
(iii) 12 U.S.C. 4617; or
(iv) 12 U.S.C. 5382.
SUBPART D—EXCEPTIONS AND EXEMPTIONS
§ ___.13 Exemption for qualified residential mortgages.
(a) Definitions. For purposes of this section, the following definitions shall apply:
Qualified residential mortgage means a “qualified mortgage” as defined in section
129 C of the Truth in Lending Act (15 U.S.C.1639c) and regulations issued thereunder.
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Currently performing means the borrower in the mortgage transaction is not
currently thirty (30) days past due, in whole or in part, on the mortgage transaction.
(b) Exemption. A sponsor shall be exempt from the risk retention requirements in
subpart B of this part with respect to any securitization transaction, if:
(1) All of the assets that collateralize the asset-backed securities are qualified
residential mortgages or servicing assets;
(2) None of the assets that collateralize the asset-backed securities are other assetbacked securities;
(3) At the closing of the securitization transaction, each qualified residential
mortgage collateralizing the asset-backed securities is currently performing; and
(4)(i) The depositor of the asset-backed security certifies that it has evaluated the
effectiveness of its internal supervisory controls with respect to the process for ensuring
that all assets that collateralize the asset-backed security are qualified residential
mortgages or servicing assets and has concluded that its internal supervisory controls are
effective; and
(ii) The evaluation of the effectiveness of the depositor’s internal supervisory
controls must be performed, for each issuance of an asset-backed security in reliance on
this section, as of a date within 60 days of the cut-off date or similar date for establishing
the composition of the asset pool collateralizing such asset-backed security; and
(iii) The sponsor provides, or causes to be provided, a copy of the certification
described in paragraph (b)(4)(i) of this section to potential investors a reasonable period
of time prior to the sale of asset-backed securities in the issuing entity, and, upon request,
to the Commission and its appropriate Federal banking agency, if any.
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(c) Repurchase of loans subsequently determined to be non-qualified after
closing. A sponsor that has relied on the exemption provided in paragraph (b) of this
section with respect to a securitization transaction shall not lose such exemption with
respect to such transaction if, after closing of the securitization transaction, it is
determined that one or more of the residential mortgage loans collateralizing the assetbacked securities does not meet all of the criteria to be a qualified residential mortgage
provided that:
(1) The depositor complied with the certification requirement set forth in
paragraph (b)(4) of this section;
(2) The sponsor repurchases the loan(s) from the issuing entity at a price at least
equal to the remaining aggregate unpaid principal balance and accrued interest on the
loan(s) no later than 90 days after the determination that the loans do not satisfy the
requirements to be a qualified residential mortgage; and
(3) The sponsor promptly notifies, or causes to be notified, the holders of the
asset-backed securities issued in the securitization transaction of any loan(s) included in
such securitization transaction that is (or are) required to be repurchased by the sponsor
pursuant to paragraph (c)(2) of this section, including the amount of such repurchased
loan(s) and the cause for such repurchase.
§ __.14 Definitions applicable to qualifying commercial loans, qualifying commercial
real estate loans, and qualifying automobile loans.
The following definitions apply for purposes of §§ __.15 through __.18 of this
part:
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Appraisal Standards Board means the board of the Appraisal Foundation that
establishes generally accepted standards for the appraisal profession.
Automobile loan:
(1) Means any loan to an individual to finance the purchase of, and that is secured
by a first lien on, a passenger car or other passenger vehicle, such as a minivan, van,
sport-utility vehicle, pickup truck, or similar light truck for personal, family, or household
use; and
(2) Does not include any:
(i) Loan to finance fleet sales;
(ii) Personal cash loan secured by a previously purchased automobile;
(iii) Loan to finance the purchase of a commercial vehicle or farm equipment that
is not used for personal, family, or household purposes;
(iv) Lease financing
(v) Loan to finance the purchase of a vehicle with a salvage title; or
(vi) Loan to finance the purchase of a vehicle intended to be used for scrap or
parts.
Combined loan-to-value (CLTV) ratio means, at the time of origination, the sum
of the principal balance of a first-lien mortgage loan on the property, plus the principal
balance of any junior-lien mortgage loan that, to the creditor’s knowledge, would exist at
the closing of the transaction and that is secured by the same property, divided by:
(1) For acquisition funding, the lesser of the purchase price or the estimated
market value of the real property based on an appraisal that meets the requirements set
forth in §__.17(a)(2)(ii) of this part; or
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(2) For refinancing, the estimated market value of the real property based on an
appraisal that meets the requirements set forth in §__.17(a)(2)(ii) of this part.
Commercial loan means a secured or unsecured loan to a company or an
individual for business purposes, other than any:
(1) Loan to purchase or refinance a one-to-four family residential property;
(2) Commercial real estate loan.
Commercial real estate (CRE) loan:
(1) Means a loan secured by a property with five or more single family units, or
by nonfarm nonresidential real property, the primary source (50 percent or more) of
repayment for which is expected to be:
(i) The proceeds of the sale, refinancing, or permanent financing of the property;
or
(ii) Rental income associated with the property; and
(2) Does not include:
(i) A land development and construction loan (including 1- to 4-family residential
or commercial construction loans);
(ii) Any other land loan; or
(iii) An unsecured loan to a developer.
Debt service coverage (DSC) ratio means:
(1) For qualifying leased CRE loans, qualifying multi-family loans, and other
CRE loans:
(i) The annual NOI less the annual replacement reserve of the CRE property at the
time of origination of the CRE loans divided by
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(ii) The sum of the borrower’s annual payments for principal and interest on any
debt obligation.
(2) For commercial loans:
(i) The borrower’s EBITDA as of the most recently completed fiscal year divided
by
(ii) The sum of the borrower’s annual payments for principal and interest on all
debt obligations.
Debt to income (DTI) ratio means the borrower’s total debt, including the
monthly amount due on the automobile loan, divided by the borrower’s monthly income.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) means
the annual income of a business before expenses for interest, taxes, depreciation and
amortization are deducted, as determined in accordance with GAAP.
Environmental risk assessment means a process for determining whether a
property is contaminated or exposed to any condition or substance that could result in
contamination that has an adverse effect on the market value of the property or the
realization of the collateral value.
First lien means a lien or encumbrance on property that has priority over all other
liens or encumbrances on the property.
Junior lien means a lien or encumbrance on property that is lower in priority
relative to other liens or encumbrances on the property.
Leverage ratio means the borrower’s total debt divided by the borrower’s
EBITDA.
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Loan-to-value (LTV) ratio means, at the time of origination, the principal balance
of a first-lien mortgage loan on the property divided by:
(1) For acquisition funding, the lesser of the purchase price or the estimated
market value of the real property based on an appraisal that meets the requirements set
forth in §__.17(a)(2)(ii) of this part; or
(2) For refinancing, the estimated market value of the real property based on an
appraisal that meets the requirements set forth in §__.17(a)(2)(ii) of this part.
Model year means the year determined by the manufacturer and reflected on the
vehicle's Motor Vehicle Title as part of the vehicle description.
Net operating income (NOI) refers to the income a CRE property generates for
the borrower after all expenses have been deducted for federal income tax purposes,
except for depreciation, debt service expenses, and federal and State income taxes, and
excluding any unusual and nonrecurring items of income.
Operating affiliate means an affiliate of a borrower that is a lessor or similar party
with respect to the commercial real estate securing the loan.
Payments-in-kind means payments of principal or accrued interest that are not
paid in cash when due, and instead are paid by increasing the principal balance of the
loan or by providing equity in the borrowing company.
Purchase money security interest means a security interest in property that secures
the obligation of the obligor incurred as all or part of the price of the property.
Purchase price means the amount paid by the borrower for the vehicle net of any
incentive payments or manufacturer cash rebates.
Qualified tenant means
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(1) A tenant with a lease who has satisfied all obligations with respect to the
property in a timely manner; or
(2) A tenant who originally had a lease that subsequently expired and currently is
leasing the property on a month-to-month basis, has occupied the property for at least
three years prior to the date of origination, and has satisfied all obligations with respect to
the property in a timely manner.
Qualifying leased CRE loan means a CRE loan secured by commercial nonfarm
real property, other than a multi-family property or a hotel, inn, or similar property:
(1) That is occupied by one or more qualified tenants pursuant to a lease
agreement with a term of no less than one (1) month; and
(2) Where no more than 20 percent of the aggregate gross revenue of the property
is payable from one or more tenants who:
(i) Are subject to a lease that will terminate within six months following the date
of origination; or
(ii) Are not qualified tenants.
Qualifying multi-family loan means a CRE loan secured by any residential
property (other than a hotel, motel, inn, hospital, nursing home, or other similar facility
where dwellings are not leased to residents):
(1) That consists of five or more dwelling units (including apartment buildings,
condominiums, cooperatives and other similar structures) primarily for residential use;
and
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(2) Where at least 75 percent of the NOI is derived from residential rents and
tenant amenities (including income from parking garages, health or swim clubs, and dry
cleaning), and not from other commercial uses.
Rental income means:
(1) Income derived from a lease or other occupancy agreement between the
borrower or an operating affiliate of the borrower and a party which is not an affiliate of
the borrower for the use of real property or improvements serving as collateral for the
applicable loan, and
(2) Other income derived from hotel, motel, dormitory, nursing home, assisted
living, mini-storage warehouse or similar properties that are used primarily by parties that
are not affiliates or employees of the borrower or its affiliates.
Replacement reserve means the monthly capital replacement or maintenance
amount based on the property type, age, construction and condition of the property that is
adequate to maintain the physical condition and NOI of the property.
Salvage title means a form of vehicle title branding, which notes that the vehicle
has been severely damaged and/or deemed a total loss and uneconomical to repair by an
insurance company that paid a claim on the vehicle.
Total debt, with respect to a borrower, means:
(1) In the case of an automobile loan, the sum of:
(i) All monthly housing payments (rent- or mortgage-related, including property
taxes, insurance and home owners association fees); and
(ii) Any of the following that are dependent upon the borrower’s income for
payment:
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(A) Monthly payments on other debt and lease obligations, such as credit card
loans or installment loans, including the monthly amount due on the automobile loan;
(B) Estimated monthly amortizing payments for any term debt, debts with other
than monthly payments and debts not in repayment (such as deferred student loans,
interest-only loans); and
(C) Any required monthly alimony, child support or court-ordered payments; and
(2) In the case of a commercial loan, the outstanding balance of all long-term debt
(obligations that have a remaining maturity of more than one year) and the current
portion of all debt that matures in one year or less.
Total liabilities ratio means the borrower’s total liabilities, determined in
accordance with GAAP divided by the sum of the borrower’s total liabilities and equity,
less the borrower’s intangible assets, with each component determined in accordance
with GAAP.
Trade-in allowance means the amount a vehicle purchaser is given as a credit at
the purchase of a vehicle for the fair exchange of the borrower’s existing vehicle to
compensate the dealer for some portion of the vehicle purchase price, not to exceed the
highest trade-in value of the existing vehicle, as determined by a nationally recognized
automobile pricing agency and based on the manufacturer, year, model, features, mileage,
and condition of the vehicle, less the payoff balance of any outstanding debt
collateralized by the existing vehicle.
Uniform Standards of Professional Appraisal Practice means the standards issued
by the Appraisal Standards Board for the performance of an appraisal, an appraisal
review, or an appraisal consulting assignment.
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§ __.15 Qualifying commercial loans, commercial real estate loans, and automobile
loans.
(a) General exception for qualifying assets. Commercial loans, commercial real
estate loans, and automobile loans that are securitized through a securitization transaction
shall be subject to a 0 percent risk retention requirement under subpart B, provided that
the following conditions are met:
(1) The assets meet the underwriting standards set forth in §§ __.16 (qualifying
commercial loans), __.17 (qualifying CRE loans), or __.18 (qualifying automobile loans)
of this part, as applicable;
(2) The securitization transaction is collateralized solely by loans of the same
asset class and by servicing assets;
(3) The securitization transaction does not permit reinvestment periods; and
(4) The sponsor provides, or causes to be provided, to potential investors a
reasonable period of time prior to the sale of asset-backed securities of the issuing entity,
and, upon request, to the Commission, and to its appropriate Federal banking agency, if
any, in written form under the caption “Credit Risk Retention”:
(i) A description of the manner in which the sponsor determined the aggregate
risk retention requirement for the securitization transaction after including qualifying
commercial loans, qualifying CRE loans, or qualifying automobile loans with 0 percent
risk retention; and
(ii) Descriptions of the qualifying commercial loans, qualifying CRE loans, and
qualifying automobile loans (qualifying assets) and descriptions of the assets that are not
qualifying assets, and the material differences between the group of qualifying assets and
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the group of assets that are not qualifying assets with respect to the composition of each
group’s loan balances, loan terms, interest rates, borrower credit information, and
characteristics of any loan collateral.
(b) Risk retention requirement. For any securitization transaction described in
paragraph (a) of this section, the amount of risk retention required under §__.3(b)(1) is
reduced by the same amount as the ratio of the unpaid principal balance of the qualifying
commercial loans, qualifying CRE loans, or qualifying automobile loans (as applicable)
to the total unpaid principal balance of commercial loans, CRE loans, or automobile
loans (as applicable) that are included in the pool of assets collateralizing the assetbacked securities issued pursuant to the securitization transaction (the qualifying asset
ratio); provided that:
(1) The qualifying asset ratio is measured as of the cut-off date or similar date for
establishing the composition of the pool assets collateralizing the asset-backed securities
issued pursuant to the securitization transaction; and
(2) The qualifying asset ratio does not exceed 50 percent.
(c) Exception for securitizations of qualifying assets only. Notwithstanding other
provisions of this section, the risk retention requirements of subpart B of this part shall
not apply to securitization transactions where the transaction is collateralized solely by
servicing assets and either qualifying commercial loans, qualifying CRE loans, or
qualifying automobile loans.
§ __.16 Underwriting standards for qualifying commercial loans.
(a) Underwriting, product and other standards.
(1) Prior to origination of the commercial loan, the originator:
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(i) Verified and documented the financial condition of the borrower:
(A) As of the end of the borrower’s two most recently completed fiscal years; and
(B) During the period, if any, since the end of its most recently completed fiscal
year;
(ii) Conducted an analysis of the borrower’s ability to service its overall debt
obligations during the next two years, based on reasonable projections;
(iii) Determined that, based on the previous two years’ actual performance, the
borrower had:
(A) A total liabilities ratio of 50 percent or less;
(B) A leverage ratio of 3.0 or less; and
(C) A DSC ratio of 1.5 or greater;
(iv) Determined that, based on the two years of projections, which include the
new debt obligation, following the closing date of the loan, the borrower will have:
(A) A total liabilities ratio of 50 percent or less;
(B) A leverage ratio of 3.0 or less; and
(C) A DSC ratio of 1.5 or greater.
(2) Prior to, upon or promptly following the inception of the loan, the originator:
(i) If the loan is originated on a secured basis, obtains a perfected security interest
(by filing, title notation or otherwise) or, in the case of real property, a recorded lien, on
all of the property pledged to collateralize the loan; and
(ii) If the loan documents indicate the purpose of the loan is to finance the
purchase of tangible or intangible property, or to refinance such a loan, obtains a first lien
on the property.
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(3) The loan documentation for the commercial loan includes covenants that:
(i) Require the borrower to provide to the servicer of the commercial loan the
borrower’s financial statements and supporting schedules on an ongoing basis, but not
less frequently than quarterly;
(ii) Prohibit the borrower from retaining or entering into a debt arrangement that
permits payments-in-kind;
(iii) Impose limits on:
(A) The creation or existence of any other security interest or lien with respect to
any of the borrower’s property that serves as collateral for the loan;
(B) The transfer of any of the borrower’s assets that serve as collateral for the
loan; and
(C) Any change to the name, location or organizational structure of the borrower,
or any other party that pledges collateral for the loan;
(iv) Require the borrower and any other party that pledges collateral for the loan
to:
(A) Maintain insurance that protects against loss on the collateral for the
commercial loan at least up to the amount of the loan, and that names the originator or
any subsequent holder of the loan as an additional insured or loss payee;
(B) Pay taxes, charges, fees, and claims, where non-payment might give rise to a
lien on any collateral;
(C) Take any action required to perfect or protect the security interest and first
lien (as applicable) of the originator or any subsequent holder of the loan in any collateral
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for the commercial loan or the priority thereof, and to defend any collateral against
claims adverse to the lender’s interest;
(D) Permit the originator or any subsequent holder of the loan, and the servicer of
the loan, to inspect any collateral for the commercial loan and the books and records of
the borrower; and
(E) Maintain the physical condition of any collateral for the commercial loan.
(4) Loan payments required under the loan agreement are:
(i) Based on straight-line amortization of principal and interest that fully amortize
the debt over a term that does not exceed five years from the date of origination; and
(ii) To be made no less frequently than quarterly over a term that does not exceed
five years.
(5) The primary source of repayment for the loan is revenue from the business
operations of the borrower.
(6) The loan was funded within the six (6) months prior to the closing of the
securitization transaction.
(7) At the closing of the securitization transaction, all payments due on the loan
are contractually current.
(8)(i) The depositor of the asset-backed security certifies that it has evaluated the
effectiveness of its internal supervisory controls with respect to the process for ensuring
that all qualifying commercial loans that collateralize the asset-backed security and that
reduce the sponsor’s risk retention requirement under § __.15 meet all of the
requirements set forth in paragraphs (a)(1) through (a)(7) of this section and has
concluded that its internal supervisory controls are effective;
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(ii) The evaluation of the effectiveness of the depositor’s internal supervisory
controls referenced in paragraph (a)(8)(i) of this section shall be performed, for each
issuance of an asset-backed security, as of a date within 60 days of the cut-off date or
similar date for establishing the composition of the asset pool collateralizing such assetbacked security; and
(iii) The sponsor provides, or causes to be provided, a copy of the certification
described in paragraph (a)(8)(i) of this section to potential investors a reasonable period
of time prior to the sale of asset-backed securities in the issuing entity, and, upon request,
to its appropriate Federal banking agency, if any.
(b) Cure or buy-back requirement. If a sponsor has relied on the exception
provided in §___.15 with respect to a qualifying commercial loan and it is subsequently
determined that the loan did not meet all of the requirements set forth in paragraphs (a)(1)
through (a)(7) of this section, the sponsor shall not lose the benefit of the exception with
respect to the commercial loan if the depositor complied with the certification
requirement set forth in paragraph (a)(8) of this section and:
(1) The failure of the loan to meet any of the requirements set forth in paragraphs
(a)(1) through (a)(7) is not material; or
(2) No later than 90 days after the determination that the loan does not meet one
or more of the requirements of paragraphs (a)(1) through (a)(7) of this section, the
sponsor:
(i) Effectuates cure, establishing conformity of the loan to the unmet
requirements as of the date of cure; or
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(ii) Repurchases the loan(s) from the issuing entity at a price at least equal to the
remaining principal balance and accrued interest on the loan(s) as of the date of
repurchase.
(3) If the sponsor cures or repurchases pursuant to paragraph (b)(2) of this section,
the sponsor must promptly notify, or cause to be notified, the holders of the asset-backed
securities issued in the securitization transaction of any loan(s) included in such
securitization transaction that is required to be cured or repurchased by the sponsor
pursuant to paragraph (b)(2) of this section, including the principal amount of such
loan(s) and the cause for such cure or repurchase.
§ __.17 Underwriting standards for qualifying CRE loans.
(a) Underwriting, product and other standards. (1) The CRE loan must be
secured by the following:
(i) An enforceable first lien, documented and recorded appropriately pursuant to
applicable law, on the commercial real estate and improvements;
(ii)(A) An assignment of
(1) Leases and rents and other occupancy agreements related to the commercial
real estate or improvements or the operation thereof for which the borrower or an
operating affiliate is a lessor or similar party and all payments under such leases and
occupancy agreements; and
(2) All franchise, license and concession agreements related to the commercial
real estate or improvements or the operation thereof for which the borrower or an
operating affiliate is a lessor, licensor, concession granter or similar party and all
payments under such other agreements, whether the assignments described in this
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paragraph (a)(1)(ii)(A)(2) of this section are absolute or are stated to be made to the
extent permitted by the agreements governing the applicable franchise, license or
concession agreements;
(B) An assignment of all other payments due to the borrower or due to any
operating affiliate in connection with the operation of the property described in paragraph
(a)(1)(i) of this section; and
(C) The right to enforce the agreements described in paragraph (a)(1)(ii)(A) of
this section and the agreements under which payments under paragraph (a)(1)(ii)(B) of
this section are due against, and collect amounts due from, each lessee, occupant or other
obligor whose payments were assigned pursuant to paragraphs (a)(1)(ii)(A) or
(a)(1)(ii)(B) of this section upon a breach by the borrower of any of the terms of, or the
occurrence of any other event of default (however denominated) under, the loan
documents relating to such CRE loan; and
(iii) A security interest
(A) In all interests of the borrower and any applicable operating affiliate in all
tangible and intangible personal property of any kind, in or used in the operation of or in
connection with, pertaining to, arising from, or constituting, any of the collateral
described in paragraphs (a)(1)(i) or (a)(1)(ii) of this section; and
(B) In the form of a perfected security interest if the security interest in such
property can be perfected by the filing of a financing statement, fixture filing, or similar
document pursuant to the law governing the perfection of such security interest;
(2) Prior to origination of the CRE loan, the originator:
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(i) Verified and documented the current financial condition of the borrower and
each operating affiliate;
(ii) Obtained a written appraisal of the real property securing the loan that:
(A) Was performed not more than six months from the origination date of the loan
by an appropriately State-certified or State-licensed appraiser;
(B) Conforms to generally accepted appraisal standards as evidenced by the
Uniform Standards of Professional Appraisal Practice promulgated by the Appraisal
Standards Board and the appraisal requirements 276 of the Federal banking agencies; and
(C) Provides an “as is” opinion of the market value of the real property, which
includes an income valuation approach that uses a discounted cash flow analysis;
(iii) Qualified the borrower for the CRE loan based on a monthly payment amount
derived from a straight-line amortization of principal and interest over the term of the
loan, not exceeding 25 years, or 30 years for a qualifying multi-family property;
(iv) Conducted an environmental risk assessment to gain environmental
information about the property securing the loan and took appropriate steps to mitigate
any environmental liability determined to exist based on this assessment;
(v) Conducted an analysis of the borrower’s ability to service its overall debt
obligations during the next two years, based on reasonable projections;
(vi) Determined that, based on the previous two years’ actual performance, the
borrower had:
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12 CFR part 34, subpart C (OCC); 12 CFR part 208, subpart E, and 12 CFR part 225,
subpart G (Board); and 12 CFR part 323 (FDIC).
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(A) A DSC ratio of 1.5 or greater, if the loan is a qualifying leased CRE loan, net
of any income derived from a tenant(s) who is not a qualified tenant(s);
(B) A DSC ratio of 1.25 or greater, if the loan is a qualifying multi-family
property loan; or
(C) A DSC ratio of 1.7 or greater, if the loan is any other type of CRE loan;
(vii) Determined that, based on two years of projections, which include the new
debt obligation, following the origination date of the loan, the borrower will have:
(A) A DSC ratio of 1.5 or greater, if the loan is a qualifying leased CRE loan, net
of any income derived from a tenant(s) who is not a qualified tenant(s);
(B) A DSC ratio of 1.25 or greater, if the loan is a qualifying multi-family
property loan; or
(C) A DSC ratio of 1.7 or greater, if the loan is any other type of CRE loan.
(3) The loan documentation for the CRE loan includes covenants that:
(i) Require the borrower to provide the borrower’s financial statements and
supporting schedules to the servicer on an ongoing basis, but not less frequently than
quarterly, including information on existing, maturing and new leasing or rent-roll
activity for the property securing the loan, as appropriate; and
(ii) Impose prohibitions on:
(A) The creation or existence of any other security interest with respect to the
collateral for the CRE loan described in paragraphs (a)(1)(i) and (a)(1)(ii)(A) of this
section, except as provided in paragraph (a)(4) of this section;
(B) The transfer of any collateral for the CRE loan described in paragraph
(b)(1)(i) or (b)(1)(ii)(A) of this section or of any other collateral consisting of fixtures,
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furniture, furnishings, machinery or equipment other than any such fixture, furniture,
furnishings, machinery or equipment that is obsolete or surplus; and
(C) Any change to the name, location or organizational structure of any borrower,
operating affiliate or other pledgor unless such borrower, operating affiliate or other
pledgor shall have given the holder of the loan at least 30 days advance notice and,
pursuant to applicable law governing perfection and priority, the holder of the loan is able
to take all steps necessary to continue its perfection and priority during such 30-day
period.
(iii) Require each borrower and each operating affiliate to:
(A) Maintain insurance that protects against loss on collateral for the CRE loan
described in paragraph (a)(1)(i) of this section at least up to the amount of the loan, and
names the originator or any subsequent holder of the loan as an additional insured or loss
payee;
(B) Pay taxes, charges, fees, and claims, where non-payment might give rise to a
lien on collateral for the CRE loan described in paragraphs (a)(1)(i) and (a)(1)(ii) of this
section;
(C) Take any action required to (1) protect the security interest and the
enforceability and priority thereof in the collateral described in paragraph (a)(1)(i) and
(a)(1)(ii)(A) of this section and defend such collateral against claims adverse to the
originator’s or any subsequent holder’s interest; and (2) perfect the security interest of the
originator or any subsequent holder of the loan in any other collateral for the CRE loan to
the extent that such security interest is required by this section to be perfected;
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(D) Permit the originator or any subsequent holder of the loan, and the servicer, to
inspect any collateral for the CRE loan and the books and records of the borrower or
other party relating to any collateral for the CRE loan;
(E) Maintain the physical condition of collateral for the CRE loan described in
paragraph (a)(1)(i) of this section;
(F) Comply with all environmental, zoning, building code, licensing and other
laws, regulations, agreements, covenants, use restrictions, and proffers applicable to
collateral for the CRE loan described in paragraph (a)(1)(i) of this section;
(G) Comply with leases, franchise agreements, condominium declarations, and
other documents and agreements relating to the operation of collateral for the CRE loan
described in paragraph (a)(1)(i) of this section, and to not modify any material terms and
conditions of such agreements over the term of the loan without the consent of the
originator or any subsequent holder of the loan, or the servicer; and
(H) Not materially alter collateral for the CRE loan described in paragraph
(a)(1)(i) of this section without the consent of the originator or any subsequent holder of
the loan, or the servicer.
(4) The loan documentation for the CRE loan prohibits the borrower and each
operating affiliate from obtaining a loan secured by a junior lien on collateral for the CRE
loan described in paragraph (a)(1)(i) or (a)(1)(ii)(A) of this section, unless:
(i) The sum of the principal amount of such junior lien loan, plus the principal
amount of all other loans secured by collateral described in paragraph (a)(1)(i) or
(a)(1)(ii)(A) of this section, does not exceed the applicable CLTV ratio in paragraph
(a)(5) of this section, based on the appraisal at origination of such junior lien loan; or
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(ii) Such loan is a purchase money obligation that financed the acquisition of
machinery or equipment and the borrower or operating affiliate (as applicable) pledges
such machinery and equipment as additional collateral for the CRE loan.
(5) At origination, the applicable loan-to-value ratios for the loan are:
(i) LTV less than or equal to 65 percent and CLTV less than or equal to
70 percent or
(ii) LTV less than or equal to 60 percent and CLTV less than or equal to
65 percent, if the capitalization rate used in an appraisal that meets the requirements set
forth in paragraph (a)(2)(ii) of this section is less than or equal to the sum of:
(A) The 10-year swap rate, as reported in the Federal Reserve’s H.15 Report (or
any successor report) as of the date concurrent with the effective date of an appraisal that
meets the requirements set forth in paragraph (a)(2)(ii) of this section; and
(B) 300 basis points.
(iii) The capitalization rate used in an appraisal under paragraph (a)(2)(ii) of this
section must be disclosed to potential investors in the securitization.
(6) All loan payments required to be made under the loan agreement are:
(i) Based on straight-line amortization of principal and interest over a term that
does not exceed 25 years, or 30 years for a qualifying multifamily loan; and
(ii) To be made no less frequently than monthly over a term of at least ten years.
(7) Under the terms of the loan agreement:
(i) Any maturity of the note occurs no earlier than ten years following the date of
origination;
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(ii) The borrower is not permitted to defer repayment of principal or payment of
interest; and
(iii) The interest rate on the loan is:
(A) A fixed interest rate; or
(B) An adjustable interest rate and the borrower, prior to or concurrently with
origination of the CRE loan, obtained a derivative that effectively results in a fixed
interest rate.
(8) The originator does not establish an interest reserve at origination to fund all
or part of a payment on the loan.
(9) At the closing of the securitization transaction, all payments due on the loan
are contractually current.
(10)(i) The depositor of the asset-backed security certifies that it has evaluated the
effectiveness of its internal supervisory controls with respect to the process for ensuring
that all qualifying CRE loans that collateralize the asset-backed security and that reduce
the sponsor’s risk retention requirement under § __.15 meet all of the requirements set
forth in paragraphs (a)(1) through (9) of this section and has concluded that its internal
supervisory controls are effective;
(ii) The evaluation of the effectiveness of the depositor’s internal supervisory
controls referenced in paragraph (a)(10)(i) of this section shall be performed, for each
issuance of an asset-backed security, as of a date within 60 days of the cut-off date or
similar date for establishing the composition of the asset pool collateralizing such assetbacked security;
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(iii) The sponsor provides, or causes to be provided, a copy of the certification
described in paragraph (a)(10)(i) of this section to potential investors a reasonable period
of time prior to the sale of asset-backed securities in the issuing entity, and, upon request,
to its appropriate Federal banking agency, if any; and
(11) Within two weeks of the closing of the CRE loan by its originator or, if
sooner, prior to the transfer of such CRE loan to the issuing entity, the originator shall
have obtained a UCC lien search from the jurisdiction of organization of the borrower
and each operating affiliate, that does not report, as of the time that the security interest of
the originator in the property described in paragraph (a)(1)(iii) of this section was
perfected, other higher priority liens of record on any property described in paragraph
(a)(1)(iii) of this section, other than purchase money security interests.
(b) Cure or buy-back requirement. If a sponsor has relied on the exception
provided in §___.15 with respect to a qualifying CRE loan and it is subsequently
determined that the CRE loan did not meet all of the requirements set forth in paragraphs
(a)(1) through (a)(9) and (a)(11) of this section, the sponsor shall not lose the benefit of
the exception with respect to the CRE loan if the depositor complied with the certification
requirement set forth in paragraph (a)(10) of this section, and:
(1) The failure of the loan to meet any of the requirements set forth in paragraphs
(a)(1) through (a)(9) and (a)(11) of this section is not material; or;
(2) No later than 90 days after the determination that the loan does not meet one
or more of the requirements of paragraphs (a)(1) through (a)(9) or (a)(11) of this section,
the sponsor:
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(i) Effectuates cure, restoring conformity of the loan to the unmet requirements as
of the date of cure; or
(ii) Repurchases the loan(s) from the issuing entity at a price at least equal to the
remaining principal balance and accrued interest on the loan(s) as of the date of
repurchase.
(3) If the sponsor cures or repurchases pursuant to paragraph (b)(2) of this section,
the sponsor must promptly notify, or cause to be notified, the holders of the asset-backed
securities issued in the securitization transaction of any loan(s) included in such
securitization transaction that is required to be cured or repurchased by the sponsor
pursuant to paragraph (b)(2) of this section, including the principal amount of such
repurchased loan(s) and the cause for such cure or repurchase.
§ __.18 Underwriting standards for qualifying automobile loans.
(a) Underwriting, product and other standards. (1) Prior to origination of the
automobile loan, the originator:
(i) Verified and documented that within 30 days of the date of origination:
(A) The borrower was not currently 30 days or more past due, in whole or in part,
on any debt obligation;
(B) Within the previous 24 months, the borrower has not been 60 days or more
past due, in whole or in part, on any debt obligation;
(C) Within the previous 36 months, the borrower has not:
(1) Been a debtor in a proceeding commenced under Chapter 7 (Liquidation),
Chapter 11 (Reorganization), Chapter 12 (Family Farmer or Family Fisherman plan), or
Chapter 13 (Individual Debt Adjustment) of the U.S. Bankruptcy Code; or
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(2) Been the subject of any federal or State judicial judgment for the collection of
any unpaid debt;
(D) Within the previous 36 months, no one-to-four family property owned by the
borrower has been the subject of any foreclosure, deed in lieu of foreclosure, or short
sale; or
(E) Within the previous 36 months, the borrower has not had any personal
property repossessed;
(ii) Determined and documented that the borrower has at least 24 months of credit
history; and
(iii) Determined and documented that, upon the origination of the loan, the
borrower’s DTI ratio is less than or equal to 36 percent.
(A) For the purpose of making the determination under paragraph (a)(1)(iii) of
this section, the originator must:
(1) Verify and document all income of the borrower that the originator includes in
the borrower’s effective monthly income (using payroll stubs, tax returns, profit and loss
statements, or other similar documentation); and
(2) On or after the date of the borrower’s written application and prior to
origination, obtain a credit report regarding the borrower from a consumer reporting
agency that compiles and maintain files on consumers on a nationwide basis (within the
meaning of 15 U.S.C. 1681a(p)) and verify that all outstanding debts reported in the
borrower’s credit report are incorporated into the calculation of the borrower’s DTI ratio
under paragraph (a)(1)(ii) of this section;
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(2) An originator will be deemed to have met the requirements of paragraph
(a)(1)(i) of this section if:
(i) The originator, no more than 30 days before the closing of the loan, obtains a
credit report regarding the borrower from a consumer reporting agency that compiles and
maintains files on consumers on a nationwide basis (within the meaning of 15 U.S.C.
1681a(p));
(ii) Based on the information in such credit report, the borrower meets all of the
requirements of paragraph (a)(1)(i) of this section, and no information in a credit report
subsequently obtained by the originator before the closing of the loan contains contrary
information; and
(iii) The originator obtains electronic or hard copies of the credit report.
(3) At closing of the automobile loan, the borrower makes a down payment from
the borrower’s personal funds and trade-in allowance, if any, that is at least equal to the
sum of:
(i) The full cost of the vehicle title, tax, and registration fees;
(ii) Any dealer-imposed fees;
(iii) The full cost of any additional warranties, insurance or other products
purchased in connection with the purchase of the vehicle; and
(iv) 10 percent of the vehicle purchase price.
(4) The originator records a first lien securing the loan on the purchased vehicle in
accordance with State law.
(5) The terms of the loan agreement provide a maturity date for the loan that does
not exceed the lesser of:
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(i) Six years from the date of origination, or
(ii) 10 years minus the difference between the current model year and the
vehicle’s model year.
(6) The terms of the loan agreement:
(i) Specify a fixed rate of interest for the life of the loan;
(ii) Provide for a level monthly payment amount that fully amortizes the amount
financed over the loan term;
(iii) Do not permit the borrower to defer repayment of principal or payment of
interest; and
(iv) Require the borrower to make the first payment on the automobile loan within
45 days of the loan’s contract date.
(7) At the closing of the securitization transaction, all payments due on the loan
are contractually current; and
(8)(i) The depositor of the asset-backed security certifies that it has evaluated the
effectiveness of its internal supervisory controls with respect to the process for ensuring
that all qualifying automobile loans that collateralize the asset-backed security and that
reduce the sponsor’s risk retention requirement under § __.15 meet all of the
requirements set forth in paragraphs (a)(1) through (a)(7) of this section and has
concluded that its internal supervisory controls are effective;
(ii) The evaluation of the effectiveness of the depositor’s internal supervisory
controls referenced in paragraph (a)(8)(i) of this section shall be performed, for each
issuance of an asset-backed security, as of a date within 60 days of the cut-off date or
476
similar date for establishing the composition of the asset pool collateralizing such assetbacked security; and
(iii) The sponsor provides, or causes to be provided, a copy of the certification
described in paragraph (a)(8)(i) of this section to potential investors a reasonable period
of time prior to the sale of asset-backed securities in the issuing entity, and, upon request,
to its appropriate Federal banking agency, if any.
(b) Cure or buy-back requirement. If a sponsor has relied on the exception
provided in §___.15 with respect to a qualifying automobile loan and it is subsequently
determined that the loan did not meet all of the requirements set forth in paragraphs (a)(1)
through (a)(7) of this section, the sponsor shall not lose the benefit of the exception with
respect to the automobile loan if the depositor complied with the certification requirement
set forth in paragraph (a)(8) of this section, and:
(1) The failure of the loan to meet any of the requirements set forth in paragraphs
(a)(1) through (a)(7) of this section is not material; or
(2) No later than ninety (90) days after the determination that the loan does not
meet one or more of the requirements of paragraphs (a)(1) through (a)(7) of this section,
the sponsor:
(i) Effectuates cure, establishing conformity of the loan to the unmet
requirements as of the date of cure; or
(ii) Repurchases the loan(s) from the issuing entity at a price at least equal to the
remaining principal balance and accrued interest on the loan(s) as of the date of
repurchase.
477
(3) If the sponsor cures or repurchases pursuant to paragraph (b)(2) of this section,
the sponsor must promptly notify, or cause to be notified, the holders of the asset-backed
securities issued in the securitization transaction of any loan(s) included in such
securitization transaction that is required to be cured or repurchased by the sponsor
pursuant to paragraph (b)(2) of this section, including the principal amount of such
loan(s) and the cause for such cure or repurchase.
§ __.19 General exemptions.
(a) Definitions. For purposes of this section, the following definitions shall apply:
First pay class means a class of ABS interests for which all interests in the class
are entitled to the same priority of payment and that, at the time of closing of the
transaction, is entitled to repayments of principal and payments of interest prior to or prorata with all other classes of securities collateralized by the same pool of first-lien
residential mortgages, until such class has no principal or notional balance remaining.
Inverse floater means an ABS interest issued as part of a securitization transaction
for which interest or other income is payable to the holder based on a rate or formula that
varies inversely to a reference rate of interest.
(b) This part shall not apply to:
(1) U.S. Government-backed securitizations. Any securitization transaction that:
(i) Is collateralized solely by residential, multifamily, or health care facility
mortgage loan assets that are insured or guaranteed (in whole or in part) as to the
payment of principal and interest by the United States or an agency of the United States,
and servicing assets; or
(ii) Involves the issuance of asset-backed securities that:
478
(A) Are insured or guaranteed as to the payment of principal and interest by the
United States or an agency of the United States; and
(B) Are collateralized solely by residential, multifamily, or health care facility
mortgage loan assets or interests in such assets, and servicing assets.
(2) Certain agricultural loan securitizations. Any securitization transaction that is
collateralized solely by loans or other assets made, insured, guaranteed, or purchased by
any institution that is subject to the supervision of the Farm Credit Administration,
including the Federal Agricultural Mortgage Corporation, and servicing assets;
(3) State and municipal securitizations. Any asset-backed security that is a
security issued or guaranteed by any State, or by any political subdivision of a State, or
by any public instrumentality of a State that is exempt from the registration requirements
of the Securities Act of 1933 by reason of section 3(a)(2) of that Act (15 U.S.C.
77c(a)(2)); and
(4) Qualified scholarship funding bonds. Any asset-backed security that meets the
definition of a qualified scholarship funding bond, as set forth in section 150(d)(2) of the
Internal Revenue Code of 1986 (26 U.S.C. 150(d)(2)).
(5) Pass-through resecuritizations. Any securitization transaction that:
(i) Is collateralized solely by servicing assets, and by existing asset-backed
securities:
(A) For which credit risk was retained as required under subpart B of this part; or
(B) That was exempted from the credit risk retention requirements of this part
pursuant to subpart D of this part;
479
(ii) Is structured so that it involves the issuance of only a single class of ABS
interests; and
(iii) Provides for the pass-through of all principal and interest payments received
on the underlying ABS (net of expenses of the issuing entity) to the holders of such class.
(6) First-pay-class securitizations. Any securitization transaction that:
(i) Is collateralized solely by servicing assets, and by first-pay classes of assetbacked securities collateralized by first-lien residential mortgages on properties located in
any state and servicing assets:
(A) For which credit risk was retained as required under subpart B of this part; or
(B) That was exempted from the credit risk retention requirements of this part
pursuant to subpart D of this part;
(ii) Does not provide for any ABS interest issued in the securitization transaction
to share in realized principal losses other than pro rata with all other ABS interests based
on current unpaid principal balance of the ABS interests at the time the loss is realized;
(iii) Is structured to reallocate prepayment risk;
(iv) Does not reallocate credit risk (other than as a consequence of reallocation of
prepayment risk); and
(v) Does not include any inverse floater or similarly structured ABS interest.
(7) Seasoned loans. (i) Any securitization transaction that is collateralized solely
by servicing assets, and by seasoned loans that meet the following requirements:
(A) The loans have not been modified since origination; and
(B) None of the loans have been delinquent for 30 days or more.
(ii) For purposes of this paragraph, a seasoned loan means:
480
(A) With respect to asset-backed securities backed by residential mortgages, a
loan that has been outstanding and performing for the longer of:
(1) A period of five years; or
(2) Until the outstanding principal balance of the loan has been reduced to 25
percent of the original principal balance.
(3) Notwithstanding paragraphs (b)(7)(ii)(A)(1) and (b)(7)(ii)(A)(2) of this
section, any residential mortgage loan that has been outstanding and performing for a
period of at least seven years shall be deemed a seasoned loan.
(B) With respect to all other classes of asset-backed securities, a loan that has
been outstanding and performing for the longer of:
(1) A period of at least two years; or
(2) Until the outstanding principal balance of the loan has been reduced to 33
percent of the original principal balance.
(8) Certain public utility securitizations. (i) Any securitization transaction where
the asset-back securities issued in the transaction are secured by the intangible property
right to collect charges for the recovery of specified costs and such other assets, if any, of
an issuing entity that is wholly owned, directly or indirectly by an investor owned utility
company that is subject to the regulatory authority of a State public utility commission or
other appropriate State agency.
(ii) For purposes of this paragraph:
(A) Specified cost means any cost identified by a State legislature as appropriate
for recovery through securitization pursuant to specified cost recovery legislation; and
(B) Specified cost recovery legislation means legislation enacted by a State that:
481
(1) Authorizes the investor owned utility company to apply for, and authorizes the
public utility commission or other appropriate State agency to issue, a financing order
determining the amount of specified costs the utility will be allowed to recover;
(2) Provides that pursuant to a financing order, the utility acquires an intangible
property right to charge, collect, and receive amounts necessary to provide for the full
recovery of the specified costs determined to be recoverable, and assures that the charges
are non-bypassable and will be paid by customers within the utility’s historic service
territory who receive utility goods or services through the utility’s transmission and
distribution system, even if those customers elect to purchase these goods or services
from a third party; and
(3) Guarantees that neither the State nor any of its agencies has the authority to
rescind or amend the financing order, to revise the amount of specified costs, or in any
way to reduce or impair the value of the intangible property right, except as may be
contemplated by periodic adjustments authorized by the specified cost recovery
legislation.
(c) Exemption for securitizations of assets issued, insured or guaranteed by the
United States. This part shall not apply to any securitization transaction if the assetbacked securities issued in the transaction are:
(1) Collateralized solely by obligations issued by the United States or an agency
of the United States and servicing assets;
(2) Collateralized solely by assets that are fully insured or guaranteed as to the
payment of principal and interest by the United States or an agency of the United States
(other than those referred to in paragraph (b)(1)(i) of this section) and servicing assets; or
482
(3) Fully guaranteed as to the timely payment of principal and interest by the
United States or any agency of the United States;
(d) Federal Deposit Insurance Corporation securitizations. This part shall not
apply to any securitization transaction that is sponsored by the Federal Deposit Insurance
Corporation acting as conservator or receiver under any provision of the Federal Deposit
Insurance Act or of Title II of the Dodd-Frank Wall Street Reform and Consumer
Protection Act.
(e) Reduced requirement for certain student loan securitizations. The 5 percent
risk retention requirement set forth in § __.4 of this part shall be modified as follows:
(1) With respect to a securitization transaction that is collateralized solely by
student loans made under the Federal Family Education Loan Program (“FFELP loans”)
that are guaranteed as to 100 percent of defaulted principal and accrued interest, and
servicing assets, the risk retention requirement shall be 0 percent;
(2) With respect to a securitization transaction that is collateralized solely by
FFELP loans that are guaranteed as to at least 98 percent of defaulted principal and
accrued interest, and servicing assets, the risk retention requirement shall be 2 percent;
and
(3) With respect to any other securitization transaction that is collateralized solely
by FFELP loans, and servicing assets, the risk retention requirement shall be 3 percent.
(f) Rule of construction. Securitization transactions involving the issuance of
asset-backed securities that are either issued, insured, or guaranteed by, or are
collateralized by obligations issued by, or loans that are issued, insured, or guaranteed by,
the Federal National Mortgage Association, the Federal Home Loan Mortgage
483
Corporation, or a Federal home loan bank shall not on that basis qualify for exemption
under this section.
§__.20 Safe harbor for certain foreign-related transactions.
(a) Definitions. For purposes of this section, the following definition shall apply:
U.S. person means:
(1) Any of the following:
(i) Any natural person resident in the United States;
(ii) Any partnership, corporation, limited liability company, or other organization
or entity organized or incorporated under the laws of any State or of the United States;
(iii) Any estate of which any executor or administrator is a U.S. person;
(iv) Any trust of which any trustee is a U.S. person;
(v) Any agency or branch of a foreign entity located in the United States;
(vi) Any non-discretionary account or similar account (other than an estate or
trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person;
(vii) Any discretionary account or similar account (other than an estate or trust)
held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident
in the United States; and
(viii) Any partnership, corporation, limited liability company, or other
organization or entity if:
(A) Organized or incorporated under the laws of any foreign jurisdiction; and
(B) Formed by a U.S. person principally for the purpose of investing in securities
not registered under the Act; and
(2) “U.S. person(s)” does not include:
484
(i) Any discretionary account or similar account (other than an estate or trust) held
for the benefit or account of a non-U.S. person by a dealer or other professional fiduciary
organized, incorporated, or (if an individual) resident in the United States;
(ii) Any estate of which any professional fiduciary acting as executor or
administrator is a U.S. person if:
(A) An executor or administrator of the estate who is not a U.S. person has sole or
shared investment discretion with respect to the assets of the estate; and
(B) The estate is governed by foreign law;
(iii) Any trust of which any professional fiduciary acting as trustee is a U.S.
person, if a trustee who is not a U.S. person has sole or shared investment discretion with
respect to the trust assets, and no beneficiary of the trust (and no settlor if the trust is
revocable) is a U.S. person;
(iv) An employee benefit plan established and administered in accordance with
the law of a country other than the United States and customary practices and
documentation of such country;
(v) Any agency or branch of a U.S. person located outside the United States if:
(A) The agency or branch operates for valid business reasons; and
(B) The agency or branch is engaged in the business of insurance or banking and
is subject to substantive insurance or banking regulation, respectively, in the jurisdiction
where located;
(vi) The International Monetary Fund, the International Bank for Reconstruction
and Development, the Inter-American Development Bank, the Asian Development Bank,
the African Development Bank, the United Nations, and their agencies, affiliates and
485
pension plans, and any other similar international organizations, their agencies, affiliates
and pension plans.
(b) In general. This part shall not apply to a securitization transaction if all the
following conditions are met:
(1) The securitization transaction is not required to be and is not registered under
the Securities Act of 1933 (15 U.S.C. 77a et seq.);
(2) No more than 10 percent of the dollar value (or equivalent amount in the
currency in which the ABS is issued, as applicable) of all classes of ABS interests in the
securitization transaction are sold or transferred to U.S. persons or for the account or
benefit of U.S. persons;
(3) Neither the sponsor of the securitization transaction nor the issuing entity is:
(i) Chartered, incorporated, or organized under the laws of the United States or
any State;
(ii) An unincorporated branch or office (wherever located) of an entity chartered,
incorporated, or organized under the laws of the United States or any State; or
(iii) An unincorporated branch or office located in the United States or any State
of an entity that is chartered, incorporated, or organized under the laws of a jurisdiction
other than the United States or any State; and
(4) If the sponsor or issuing entity is chartered, incorporated, or organized under
the laws of a jurisdiction other than the United States or any State, no more than 25
percent (as determined based on unpaid principal balance) of the assets that collateralize
the ABS interests sold in the securitization transaction were acquired by the sponsor or
issuing entity, directly or indirectly, from:
486
(i) A majority-owned affiliate of the sponsor or issuing entity that is chartered,
incorporated, or organized under the laws of the United States or any State; or
(ii) An unincorporated branch or office of the sponsor or issuing entity that is
located in the United States or any State.
(b) Evasions prohibited. In view of the objective of these rules and the policies
underlying Section 15G of the Exchange Act, the safe harbor described in paragraph (a)
of this section is not available with respect to any transaction or series of transactions
that, although in technical compliance with such paragraph (a) of this section, is part of a
plan or scheme to evade the requirements of section 15G and this Regulation. In such
cases, compliance with section 15G and this part is required.
§__.21 Additional exemptions.
(a) Securitization transactions. The federal agencies with rulewriting authority
under section 15G(b) of the Exchange Act (15 U.S.C. 78o-11(b)) with respect to the type
of assets involved may jointly provide a total or partial exemption of any securitization
transaction as such agencies determine may be appropriate in the public interest and for
the protection of investors.
(b) Exceptions, exemptions, and adjustments. The Federal banking agencies and
the Commission, in consultation with the Federal Housing Finance Agency and the
Department of Housing and Urban Development, may jointly adopt or issue exemptions,
exceptions or adjustments to the requirements of this part, including exemptions,
exceptions or adjustments for classes of institutions or assets in accordance with section
15G(e) of the Exchange Act (15 U.S.C. 78o-11(e)).
487
END OF COMMON RULE
List of Subjects
12 CFR Part 43
Banks and banking, credit risk, national banks, reporting and recordkeeping
requirements, risk retention, securitization, mortgages, commercial loans,
commercial real estate, automobile loans.
Adoption of the Common Rule Text
The proposed adoption of the common rules by the agencies, as modified by agencyspecific text, is set forth below:
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons stated in the common preamble and under the authority of 12 U.S.C. 93a,
1464, 5412(b)(2)(B), and 15 U.S.C. 78o-11, the Office of the Comptroller of the
Currency proposes to amend chapter I of Title 12, Code of Federal Regulations as
follows:
PART 43 – CREDIT RISK RETENTION
1. The authority for part 43 is added to read as follows:
Authority: 12 U.S.C. 1 et seq., 93a, 161, 1464, 1818, 5412(b)(2)(B), and 15
U.S.C. 78o-11.
2. Part 43 is added as set forth at the end of the Common Preamble.
488
3. Section 43.1 is revised to read as follows:
§ 43.1 Authority, purpose, scope, and reservation of authority.
(a) Authority. This part is issued under the authority of 12 U.S.C. 1 et seq., 93a,
161, 1464, 1818, 5412(b)(2)(B), and 15 U.S.C. 78o-11.
(b) Purpose. (1) This part requires securitizers to retain an economic interest in a
portion of the credit risk for any asset that the securitizer, through the issuance of an
asset-backed security, transfers, sells, or conveys to a third party. This part specifies the
permissible types, forms, and amounts of credit risk retention, and it establishes certain
exemptions for securitizations collateralized by assets that meet specified underwriting
standards.
(2) Nothing in this part shall be read to limit the authority of the OCC to take
supervisory or enforcement action, including action to address unsafe or unsound
practices or conditions, or violations of law.
(c) Scope. This part applies to any securitizer that is a national bank, a Federal
savings association, a Federal branch or agency of a foreign bank, or a subsidiary thereof.
(d) Effective dates. This part shall become effective:
(1) With respect to any securitization transaction collateralized by residential
mortgages, one year after the date on which final rules under section 15G(b) of the
Exchange Act (15 U.S.C. 78o-11(b)) are published in the Federal Register; and
(2) With respect to any other securitization transaction, two years after the date on
which final rules under section 15G(b) of the Exchange Act (15 U.S.C. 78o-11(b)) are
published in the Federal Register.
489
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the Supplementary Information, the Board of Governors of
the Federal Reserve System proposes to add the text of the common rule as set forth at
the end of the Supplementary Information as Part 244 to chapter II of Title 12, Code of
Federal Regulations, modified as follows:
PART 244 — CREDIT RISK RETENTION (REGULATION RR)
4. The authority citation for part 244 is added to reads as follows:
Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 3103 et seq., and 15 U.S.C.
78o-11.
5. Section 244.1 is added to read as follows:
§ 244.1 Authority, purpose, and scope
(a) Authority. (1) In general. This part (Regulation RR) is issued by the Board
of Governors of the Federal Reserve System under section 15G of the Securities
Exchange Act of 1934, as amended (Exchange Act) (15 U.S.C. 78o-11), as well as under
the Federal Reserve Act, as amended (12 U.S.C. 221 et seq.); section 8 of the Federal
Deposit Insurance Act (FDI Act), as amended (12 U.S.C. 1818); the Bank Holding
Company Act of 1956, as amended (BHC Act) (12 U.S.C. 1841 et seq.); and the
International Banking Act of 1978, as amended (12 U.S.C. 3101 et seq.).
(2) Nothing in this part shall be read to limit the authority of the Board to take
action under provisions of law other than 15 U.S.C. 78o-11, including action to address
490
unsafe or unsound practices or conditions, or violations of law or regulation, under
section 8 of the FDI Act.
(b) Purpose. This part requires any securitizer to retain an economic interest in a
portion of the credit risk for any asset that the securitizer, through the issuance of an
asset-backed security, transfers, sells, or conveys to a third party in a transaction within
the scope of section 15G of the Exchange Act. This part specifies the permissible types,
forms, and amounts of credit risk retention, and establishes certain exemptions for
securitizations collateralized by assets that meet specified underwriting standards or that
otherwise qualify for an exemption.
(c) Scope. (1) This part applies to any securitizer that is:
(i) A state member bank (as defined in 12 CFR 208.2(g)); or
(ii) Any subsidiary of a state member bank.
(2) Section 15G of the Exchange Act and the rules issued thereunder apply to any
securitizer that is:
(i) A bank holding company (as defined in 12 U.S.C. 1842);
(ii) A foreign banking organization (as defined in 12 CFR 211.21(o));
(iii) An Edge or agreement corporation (as defined in 12 CFR 211.1(c)(2)
and (3));
(iv) A nonbank financial company that the Financial Stability Oversight Council
has determined under section 113 of the Dodd–Frank Wall Street Reform and Consumer
Protection Act (the Dodd–Frank Act) (12 U.S.C. 5323) shall be supervised by the Board
and for which such determination is still in effect; or
(v) A savings and loan holding company (as defined in 12 U.S.C. 1467a); and
491
(vi) Any subsidiary of the foregoing. The Federal Reserve will enforce section
15G of the Exchange Act and the rules issued thereunder under section 8 of the FDI Act
against any of the foregoing entities.
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the Supplementary Information, the Federal Deposit Insurance
Corporation proposes to add the text of the common rule as set forth at the end of the
Supplementary Information as Part 373 to chapter III of Title 12, Code of Federal
Regulations, modified as follows:
PART 373 — CREDIT RISK RETENTION
6. The authority citation for part 373 is added to reads as follows:
Authority: 12 U.S.C. 1801 et seq. and 3103 et seq., and 15 U.S.C. 78o-11.
7. Section 373.1 is amended to read as follows:
§ 373.1 Purpose and scope
(a) Authority. (1) In general. This part is issued by the Federal Deposit Insurance
Corporation (FDIC) under section 15G of the Securities Exchange Act of 1934, as
amended (Exchange Act) (15 U.S.C. 78o-11), as well as the Federal Deposit Insurance
Act (12 U.S.C. 1801 et seq.) and the International Banking Act of 1978, as amended (12
U.S.C. 3101 et seq.).
(2) Nothing in this part shall be read to limit the authority of the FDIC to take
action under provisions of law other than 15 U.S.C. 78o-11, including to address unsafe
492
or unsound practices or conditions, or violations of law or regulation under section 8 of
the Federal Deposit Insurance Act (12 U.S.C. 1818).
(b) Purpose. (1) This part requires securitizers to retain an economic interest in a
portion of the credit risk for any asset that the securitizer, through the issuance of an
asset-backed security, transfers, sells, or conveys to a third party in a transaction within
the scope of section 15G of the Exchange Act. This part specifies the permissible types,
forms, and amounts of credit risk retention, and it establishes certain exemptions for
securitizations collateralized by assets that meet specified underwriting standards or that
otherwise qualify for an exemption.
(c) Scope. This part applies to any securitizer that is:
(1) A state nonmember bank (as defined in 12 U.S.C. 1813(e)(2));
(2) An insured federal or state branch of a foreign bank (as defined in 12 CFR
347.202);
(3) A state savings association (as defined in 12 U.S.C. 1813(b)(3)); or
(4) Any subsidiary of an entity described in paragraphs (1), (2), or (3) of this
section.
SECURITIES AND EXCHANGE COMMISSION
For the reasons stated in the Supplementary Information, the Securities and
Exchange Commission proposes the amendments under the authority set forth in Sections
7, 10, 19(a), and 28 of the Securities Act and Sections 3, 13, 15, 15G, 23 and 36 of the
Exchange Act.
List of Subjects
17 CFR Part 246
493
Reporting and recordkeeping requirements, Securities.
For the reasons set out above, Title 17, Chapter II of the Code of Federal
Regulations is proposed to be amended as follows:
PART 246 — CREDIT RISK RETENTION
8. The authority citation for part 246 is added to read as follows:
Authority: 15 U.S.C. 77g, 77j, 77s, 77z-3, 78c, 78m, 78o, 78o-11, 78w, 78mm
9. Part 246 is added to read as follows:
17 CFR § 246.1
(a) Authority and purpose. This part (Regulation RR) is issued by the Securities
and Exchange Commission (“Commission”) jointly with the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, and, in the case of the securitization of any residential
mortgage asset, together with the Secretary of Housing and Urban Development and the
Federal Housing Finance Agency, pursuant to Section 15G of the Securities Exchange
Act of 1934 (15 U.S.C. 78o-11). The Commission also is issuing this part pursuant to its
authority under Sections 7, 10, 19(a), and 28 of the Securities Act and Sections 3, 13, 15,
23, and 36 of the Exchange Act. This part requires securitizers to retain an economic
interest in a portion of the credit risk for any asset that the securitizer, through the
issuance of an asset-backed security, transfers, sells, or conveys to a third party. This
part specifies the permissible types, forms, and amounts of credit risk retention, and
establishes certain exemptions for securitizations collateralized by assets that meet
specified underwriting standards or otherwise qualify for an exemption.
494
(b) The authority of the Commission under this part shall be in addition to the
authority of the Commission to otherwise enforce the federal securities laws, including,
without limitation, the antifraud provisions of the securities laws.
FEDERAL HOUSING FINANCE AGENCY
List of Subjects
12 CFR Part 1234
Government sponsored enterprises, mortgages, securities.
For the reasons stated in the Supplementary Information, and under the authority
of 12 U.S.C. 4526, the Federal Housing Finance Agency proposes to add the text of the
common rule as set forth at the end of the Supplementary Information as Part 1234 of
subchapter B of chapter XII of title 12 of the Code of Federal Regulations, modified as
follows:
CHAPTER XII – FEDERAL HOUSING FINANCE AGENCY
SUBCHAPTER B – ENTITY REGULATIONS
PART 1234 — CREDIT RISK RETENTION
10. The authority citation for part 1234 is added to read as follows:
Authority: 12 U.S.C. 4511(b), 4526, 4617; 15 U.S.C. 78o-11(b)(2).
11. Section 1234.1 is revised to read as follows:
§ 1234.1 Purpose, scope and reservation of authority.
(a) Purpose. This part requires securitizers to retain an economic interest in a
portion of the credit risk for any residential mortgage asset that the securitizer, through
the issuance of an asset-backed security, transfers, sells, or conveys to a third party in a
transaction within the scope of section 15G of the Exchange Act. This part specifies the
495
permissible types, forms, and amounts of credit risk retention, and it establishes certain
exemptions for securitizations collateralized by assets that meet specified underwriting
standards or that otherwise qualify for an exemption.
(b) Scope. Effective [INSERT DATE ONE YEAR AFTER PUBLICATION IN
THE FEDERAL REGISTER AS A FINAL RULE], this part will apply to any securitizer
that is an entity regulated by the Federal Housing Finance Agency.
(c) Reservation of authority. Nothing in this part shall be read to limit the
authority of the Director of the Federal Housing Finance Agency to take supervisory or
enforcement action, including action to address unsafe or unsound practices or
conditions, or violations of law.
§ 1234.14 [Amended]
3. Amend § 1234.14 as follows:
a. In the heading, remove the words “qualifying commercial loans,” and “,and
qualifying automobile loans”.
b. In the introductory paragraph, remove the words “§ 1234.15 through §
1234.18” and add in their place the words “§§ 1234.15, and 1234.16”.
c. Remove the definitions of “Automobile loan”, “Commercial loan”, “Debt-toincome (DTI) ratio”, “Earnings before interest, taxes, depreciation, and amortization
(EBITDA)”, “Lease financing”, “Leverage Ratio”, “Machinery and equipment (M&E)
collateral”, “Model year”, “Payment-in-kind”, “Purchase price”, “Salvage title”, “Total
debt”, “Total liabilities ratio”, and “Trade-in allowance”.
d. Revise the definition of “Debt service coverage (DSC) ratio” to read as follows:
Debt service coverage (DSC) ratio means the ratio of:
496
(1) The annual NOI less the annual replacement reserve of the CRE property at
the time of origination of the CRE loans; to
(2) The sum of the borrower’s annual payments for principal and interest on any
debt obligation.
5. Amend § 1234.15 as follows:
§ 1234.15 Qualifying commercial real estate loans.
(a) General exception. Commercial real estate loans that are securitized through
a securitization transaction shall be subject to a 0 percent risk retention requirement under
subpart B, provided that the following conditions are met:
(1) The CRE assets meet the underwriting standards set forth in §_1234.16 of this
part;
(2) The securitization transaction is collateralized solely by CRE loans and by
servicing assets;
(3) The securitization transaction does not permit reinvestment periods; and
(4) The sponsor provides, or causes to be provided, to potential investors a
reasonable period of time prior to the sale of asset-backed securities of the issuing entity,
and, upon request, to the Commission, and to the FHFA, in written form under the
caption “Credit Risk Retention:
(i) A description of the manner in which the sponsor determined the aggregate
risk retention requirement for the securitization transaction after including qualifying
CRE loans with 0 percent risk retention; and
(ii) Descriptions of the qualifying CRE loans and descriptions of the CRE loans
that are not qualifying CRE loans, and the material differences between the group of
497
qualifying CRE loans and CRE loans that are not qualifying loans with respect to the
composition of each group’s loan balances, loan terms, interest rates, borrower credit
information, and characteristics of any loan collateral.
(b) Risk retention requirement. For any securitization transaction described in
paragraph (a) of this section, the amount of risk retention required under §__.3(b)(1) is
reduced by the same amount as the ratio of the unpaid principal balance of the qualifying
CRE loans to the total unpaid principal balance of CRE loans that are included in the pool
of assets collateralizing the asset-backed securities issued pursuant to the securitization
transaction (the qualifying asset ratio); provided that;
(1) The qualifying asset ratio is measured as of the cut-off date or similar date for
establishing the composition of the pool assets collateralizing the asset-backed securities
issued pursuant to the securitization transaction; and
(2) The qualifying asset ratio does not exceed 50 percent.
(c) Exception for securitizations of qualifying CRE only. Notwithstanding other
provisions of this section, the risk retention requirements of subpart B of this part shall
not apply to securitization transactions where the transaction is collateralized solely by
servicing assets and qualifying CRE loans.
5. Reserve §§ 1234.16 and 1234.18.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 267
List of Subjects in 24 CFR Part 267
Mortgages.
Authority and Issuance
498
For the reasons stated in the SUPPLEMENTARY INFORMATION, HUD
proposes to add the text of the common rule as set forth at the end of the
SUPPLEMENTARY INFORMATION to 24 CFR chapter II, subchapter B, as a new
part 267 to read as follows:
PART 267—CREDIT RISK RETENTION
16. The authority citation for part 267 is added to read as follows:
Authority: 15 U.S.C. 78–o–11; 42 U.S.C. 3535(d).
17. Section 267.1 is added to read as follows:
§ 267.1 Credit risk retention exceptions and exemptions for HUD programs.
The credit risk retention regulations codified at 12 CFR part 43 (Office of the
Comptroller of the Currency); 12 CFR part 244 (Federal Reserve System); 12 CFR part
373 (Federal Deposit Insurance Corporation); 17 CFR part 246 (Securities and Exchange
Commission); and 12 CFR part 1234 (Federal Housing Finance Agency) include
exceptions and exemptions in Subpart D of each of these codified regulations for certain
transactions involving programs and entities under the jurisdiction of the Department of
Housing and Urban Development.
499
[THIS SIGNATURE PAGE RELATES TO THE PROPOSED RULE TITLED
“CREDIT RISK RETENTION”]
Dated: August 28, 2013
Thomas J. Curry (signed)
Thomas J. Curry
Comptroller of the Currency.
500
[THIS SIGNATURE PAGE RELATES TO THE PROPOSED RULE
TITLED “CREDIT RISK RETENTION”]
By order of the Board of Governors of the Federal Reserve System, August 27, 2013.
.
Robert deV. Frierson (signed)
Robert deV. Frierson
Secretary of the Board.
501
[THIS SIGNATURE PAGE RELATES TO THE PROPOSED RULE
TITLED “CREDIT RISK RETENTION”]
Dated at Washington, D.C., this 28th of August, 2013.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman (signed)
Robert E. Feldman,
Executive Secretary.
502
[THIS SIGNATURE PAGE RELATES TO THE PROPOSED RULE TITLED
“CREDIT RISK RETENTION”]
By the Securities and Exchange Commission.
Elizabeth M. Murphy
Elizabeth M Murphy
Secretary
Date: August 28, 2013
503
(signed)
[THIS SIGNATURE PAGE RELATES TO THE PROPOSED RULE
TITLED “CREDIT RISK RETENTION”]
Edward J. DeMarco (signed)
August 28, 2013
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
504
Date
[THIS SIGNATURE PAGE RELATES TO THE PROPOSED RULE
TITLED “CREDIT RISK RETENTION”]
By the Department of Housing and Urban Development
Shaun Donovan (signed)
Shaun Donovan,
Secretary.
August 26, 2013
Date
505