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B oard


G overnors

of the

F ed era l R eserv e System

October 16, 2014



Board of Governors
Governor Tarullo [initialedD


Draft Risk Retention Notice of Proposed Rulemaking

Attached is a memorandum to the Board and a draft Federal Register a final rule
implementing the securitization risk retention requirements of section 941 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act. The final rule would be published jointly by
the Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, the Securities and Exchange Commission, the Federal Housing Finance Agency, and
the Department of Housing and Urban Development in the Federal Register after all agencies
have completed internal review and approval procedures.
The Committee on Bank Supervision has reviewed the rulemaking and I believe it is
ready for the Board’s consideration.



October 16, 2014
Board of Governors

Draft Final Credit Risk Retention Rule
ACTIONS REQUESTED: Staff seeks the Board’s approval of the attached draft final rule
(draft final rule) that would implement the credit risk retention requirements of section 15G of
the Securities Exchange Act of 1934, as added by section 941 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act).2 The draft final rule would be issued
jointly by the Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of
the Currency (the Federal banking agencies), the Securities and Exchange Commission (SEC),
the Federal Housing Finance Agency (FHFA), and the Department of Housing and Urban
Development (HUD) (collectively, the agencies).
Staff also requests authority to make technical, non-substantive changes to the draft final
rule in order to respond to comments from the Federal Register or to incorporate non-substantive
changes requested by the other agencies as part of the approval process.
EXECUTIVE SUMMARY: Consistent with the statute, the draft final rule would require the
sponsor of an asset-backed securities transaction to retain 5 percent of the credit risk with respect
to an asset securitization transaction, unless a specific exemption under the rule applies.

The draft final rule would become effective one year after the date on which it is published in
the Federal Register for securitization transactions collateralized by residential mortgages,


Mr. Alvarez, Mss. Snyder and Ahn, and Messrs. Knestout, Alexander, and Suntag (Legal
Division); Messrs. Treacy, Boemio, Gabbai, and Healey (Division of Banking Supervision and
Regulation); Ms. Pence (Division of Research and Statistics); and Ms. Pastor (Division of
Consumer and Community Affairs).

15. U.S.C. 78o-11.


and two years after the date on which the final rule is published in the Federal Register for
any other securitization transaction.

The draft final rule would adopt the definition of “qualified residential mortgage” (QRM) as
proposed in 2013, which aligns with the definition of “qualified mortgage” (QM) adopted by
the Consumer Financial Protection Bureau (CFPB) in its ability-to-repay rules implemented
pursuant to the Truth in Lending Act (TILA),3 and provide a complete exemption from risk
retention for securitizations of QRMs.


The draft final rule includes a menu of options that would allow sponsors to choose how to
meet their risk retention requirement. The menu of options includes “standard” risk retention
(consisting of a residual “horizontal” residual interest, pro rata “vertical” interest, or a
combination of the two) that could be used for any asset class, as well as options specific to
certain asset classes (such as commercial real estate loan securitizations and asset-backed
commercial paper transactions).


The draft final rule is substantially similar to the rule proposed by the agencies in 2013 (the
2013 proposal).4 The most significant changes include:

A commitment that the agencies would periodically review the QRM definition and
its effect on the residential mortgage market, with the initial review occurring four
years from the effective date of the rule;


Removal of the proposed restriction on cash flows to sponsors holding a horizontal
risk retention interest (the so-called cash throttle, as discussed further below);


An exemption from risk retention for mortgages that are also exempted from the
CFPB’s ability-to-repay rules that are originated by institutions and organizations that
focus on lower income and first-time borrowers;


Adjustments to the disclosures related to the fair value calculation required to
measure horizontal risk retention; and


An exemption from risk retention for securitizations collateralized by owner-occupied
mortgage loans that are secured by 3-4 unit residential properties that meet all the
underwriting and product criteria for QM (qualifying 3-4 unit residential mortgage


15 U.S.C. 1639c.


See 78 FR 57928 (September 20, 2013).


loans) and an exemption that allows securitizations collateralized by both qualifying
3-4 unit residential mortgage loans and QRMs.

The draft final rule does not include a specific exemption for collateralized loan obligations
(CLOs), which securitize leveraged loans, as requested by many commenters. However, the
draft final rule would implement the option from the 2013 proposal for allocating risk
retention to the lead arranger of leveraged loan syndications.


The options under the draft final rule that would be available to particular types of asset
classes include:

For commercial mortgage-backed securities (CMBS), an option to permit a sponsor’s
risk retention requirement to be satisfied if a third-party purchaser retains horizontal
risk retention for at least five years;


For asset-backed commercial paper (ABCP) conduit transactions, an option to allow
sponsors to rely on risk retained by originators of the assets securitized through the
conduit structure;


For master trust securitizations, an option to allow sponsors to use a pro rata “seller’s
interest” (common in the credit card industry) and certain forms of
overcollateralization to satisfy risk retention;


Consistent with the 2013 proposal, the draft final rule would:

Exempt commercial loans, commercial real estate loans, and automobile loans from
risk retention if they meet underwriting standards established in the draft final rule,
with minor adjustments to the proposed standards for commercial real estate loans;


Limit the duration of the risk retention requirement; and


Deem the risk retention requirements of the Dodd-Frank Act to be met for
securitizations guaranteed by the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation (the GSEs) as long as they operate under
conservatorship or receivership of the FHFA with capital support from the United

Congress enacted the risk retention requirements of section 15G of the Exchange Act to
help address problems it perceived in the incentive structure of the securitization markets.
Section 15G requires that securitizers, as a general matter, retain an economic interest in at least


5 percent of the credit risk of the assets they securitize in order to align the interests of the
securitizer with the interests of investors, and to provide an incentive for sponsors to ensure that
securitized assets meet underwriting and other standards to appropriately limit credit risk.
Section 15G generally requires that the agencies jointly prescribe regulations under which
securitization sponsors must retain not less than 5 percent of the credit risk of any asset that they
securitize through the sale of asset-backed securities and prohibits a sponsor from hedging or
transferring the risk it is required to retain. In addition, section 15G mandates that the agencies
provide a complete exemption from risk retention requirements for securities collateralized
solely by QRMs, as defined by the agencies in accordance with the requirements set forth in
section 15G.5
In 2011, the agencies issued a proposal to implement the requirements of section 15G
(the 2011 proposal).6 The 2011 proposal included the menu of options for risk retention in the
draft final rule, but measured horizontal risk retention using par value and a mechanism for
capturing proceeds at the time of sale of the asset-backed securities in order to ensure meaningful
risk retention. The proposed QRM definition from 2011 would have included underwriting
standards such as a 20 percent down payment for purchase mortgage loans and a 70 or
75 percent maximum loan-to-value (LTV) ratio for mortgage refinances, as well as conservative
credit history and debt-to-income requirements. The agencies received significant critical
comment on the original proposal, most of which focused on the premium capture cash reserve
account and on the proposed definition of QRM, which many comments asserted would
significantly constrain access to mortgage credit. At the time of the 2011 proposal, the CFPB
had not yet defined QM, which section 15G establishes as the outer bound for the definition of
The agencies developed and issued the 2013 proposal after considering comments on the
2011 proposal, as well as the final QM rule as adopted by the CFPB early in 2013. The 2013
proposal retained the basic structure of the 2011 proposal, but contained significant proposed


In defining QRM, the agencies must consider underwriting and product features that historical
loan performance data indicate result in a lower risk of default. QRM cannot be broader than the
CFPB’s definition of QM. See 15 U.S.C. 78o-11(e)(4).

See 76 FR 24090 (April 29, 2011).


revisions. Having considered the state of the residential mortgage market, the contours of the
QM definition and the ongoing market and regulatory reforms with respect to residential
mortgages, the agencies proposed in 2013 to align the QRM definition with the CFPB’s QM
definition. Revisions to the 2011 proposal also included:

More flexibility in the “menu of options” by permitting a sponsor to satisfy its risk retention
obligation by retaining any combination of vertical and horizontal ownership interests;


Measuring horizontal risk retention using fair value and requiring disclosures related to the
calculation of fair value, including methodology and economic inputs and assumptions used
in the calculation;;


Removal of the premium capture provision from the 2011 proposal;


Revision of restrictions on how quickly sponsors would be able to receive cash distributions
with respect their horizontal risk retention interests (the cash throttle) so that the cash throttle
would be tied to the fair value measurement;


Limits on the duration of the prohibition on hedging and transfer of the sponsor’s risk
retention interest;


An alternative to standard risk retention for CLOs, whereby certain CLO managers, as
sponsors of CLOs, would not have to retain risk with respect to leveraged loans in the CLO if
the lead arranger of the loan syndicate retained at least a 5 percent interest in the loan at
origination (and did not later hedge or transfer the interest); and


Modest changes to the underwriting standards for automobile loans, commercial mortgages,
and commercial loans.
The Board received over 250 comment letters, including nearly 150 unique comment

letters on the 2013 proposal. The majority of commenters supported the new proposed definition
of QRM. A number of commenters criticized other aspects of the 2013 proposal, particularly the
application of risk retention to CLOs, the cash throttle and disclosures related to the fair value
calculation for horizontal risk retention, and the proposed underwriting standards for automobile
loans, commercial mortgages, and commercial loans.
Staff has reviewed the comments on the 2013 proposal and is recommending some
modifications to the proposed requirements to address commenter and other policy concerns
raised in the 2013 proposal, as discussed further below, and as reflected in the draft final rule.


The following discussion highlights key aspects of draft final rule, including
modifications of the 2013 proposal. Additional discussions concerning each of these matters are
in the identified pages of the attached draft final rule. Also attached as Appendix A is a highlevel summary of comments received from the public in response to the 2013 proposal.
A. Scope
Consistent with the 2013 proposal, the draft final rule generally applies the statutory
5 percent risk retention requirements to a sponsor of a securitization transaction involving the
sale of asset-backed securities. Section 15G of the Exchange Act stipulates that the risk
retention requirements be applied to a “securitizer” of an asset-backed security, which is defined
by the statute to include an issuer of an asset-backed security, as well as 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 attached draft final rule adopts this
definition (See pp. 29-35). Commenters generally supported this approach except in the context
of collateralized loan obligations, as discussed in more detail below.
B. Overview of the Risk Retention Requirements and Exceptions
Consistent with section 15G of the Exchange Act, the draft final rule would require 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 asset-backed security (ABS) interests in accordance with the
methods for risk retention provided in the rule, unless an exemption applied.
1. Residential Mortgage Exceptions
a. Qualified Residential Mortgages
As noted above, under the statute, residential mortgages that the agencies define as
qualifying residential mortgages have a complete exemption from risk retention requirements.
By statute, the QRM definition cannot be broader than the definition for QM as implemented by
the CFPB.7 After weighing concerns about credit risk, mortgage credit availability and the


15 U.S.C. § 78o-11(e)(4)(C). QM is defined under section 129C(b)(2) of TILA (15 U.S.C. §
1639C(b)(2)), as amended by the Dodd-Frank Act, and regulations adopted thereunder by the


impact of new regulations on the mortgage market, the agencies proposed in 2013 to align the
QRM with the QM definition as established by the CFPB.8 The agencies also invited comment
on a more conservative alternative approach to QRM that would include a 70 percent loan-tovalue requirement and certain credit history standards as well as the QM standards. Most
commenters supported the proposed alignment of QRM with QM. The few commenters that
opposed the proposed definition did not support the alternative, more conservative approach and
instead advocated that the agencies revert to the QRM definition in the 2011 proposal, which
would have included underwriting standards such as a 20 percent down payment requirement for
purchase mortgage loans, a 70 or 75 percent maximum loan-to-value requirement for mortgage
refinance loans, and conservative credit history standards.
Staff recommends that the Board adopt the proposal to align QRM with QM. The QM
definition excludes many loans with riskier product features, such as negative amortization, and
requires, among other things, full documentation and verification of a borrower’s debt and
income. The QM definition also requires that borrowers meet a total debt-to-income threshold of
43 percent or less. This definition helps to lower the risk of default, and also helps to preserve
access to affordable credit, especially for low-to-moderate income, minority or first-time
homebuyers. The alignment of QRM with QM should also help facilitate the return of private
capital to the mortgage market because it would limit bifurcation in the mortgage market
between QRM and non-QRM loans and make available a large number of mortgages for
securitization that are not subject to risk retention requirements. The QM standards, which must
be implemented across the residential mortgage market, are also known to investors and should
aid them in evaluating the credit quality of QRM pools. At the same time, aligning the QRM
with the QM at this time will allow the agencies to observe developments in the residential
mortgage market as it continues to recover following the crisis and determine whether
adjustments to the QRM are warranted. (See pp. 355-360.)
Similarly, staff recommends that the Board adopt a provision added to the draft final rule
that would commit the agencies to a periodic review of the QRM definition (as well as the other

CFPB. See 78 FR 6408 (January 30, 2013), as amended by 78 FR 35430 (June 12, 2013) and 78
FR 44686 (July 24, 2013).

See 78 FR 57928, 57991-57993 (September 20, 2013).


residential mortgage exemptions discussed below) and its effect on the residential mortgage
market, and sets forth parameters for the process of the review. The initial review would occur
four years from the effective date of the rule (approximately five years from issuance) and then
every five years thereafter. Any of the agencies may also at any time request to commence the
review. The agencies would use these reviews to consider new developments in the housing and
mortgage markets and whether changes to the QRM are warranted. The agencies would also
consider the results of future reviews of, and any changes made to, the QM definition by the
CFPB. (See pp. 360-363).
b. Exemptions for Qualifying 3-4 Unit Residential Mortgage Loans
Under Regulation Z, which implements the provisions that govern the QM definition, and
accompanying official interpretations, mortgage loans extended to acquire owner-occupied 3-4
unit residential properties appear not to qualify for QM status even if they otherwise meet all of
the other QM criteria.9 Consequently, these loans would not be QRMs under the draft final rule.
In the securitization markets, mortgage loans collateralized by one-to-four unit properties
are typically categorized as residential mortgages and mortgages of three-to-four unit properties
are frequently combined in a single collateral pool with one- or two-unit residential properties.
From a credit risk perspective, mortgages secured by 3-4 unit residential properties generally
have the same characteristics as mortgages secured by two-unit properties, which are covered
transactions under Regulation Z and may qualify as QMs, and, therefore, as QRMs.
The apparent exclusion of these loans from the definition of “covered transaction” under
Regulation Z, and the consequence that they are not QRMs, even if they otherwise meet all of
the other QM criteria, could inappropriately constrain funding from the securitization markets for
these types of residential mortgages. Staff is therefore recommending that the agencies invoke
the authority in the statute to provide an exception in the draft final rule for those owneroccupied mortgage loans secured by 3-4 unit residential properties where they meet all the
criteria for QM in Regulation Z, but are not “covered transactions” for purposes of the QM
definition (qualifying 3-4 unit residential mortgage loans). Furthermore, in order to ensure that


See 12 CFR part 1026 Supplement I, paragraph 3(a)(5)(i). These loans appear not to be
“covered transactions” under Regulation Z and its Official Interpretations because they are
deemed to be extended for a business, rather than consumer, purpose.


qualifying 3-4 unit residential mortgage loans benefit from the exemption from risk retention as
intended and maintain access to securitization markets and mortgage credit similar to residential
mortgages that are QRMs, staff also recommends that the agencies draft an exemption in the
draft final rule permitting sponsors to combine both QRMs and qualifying 3-to-4 unit residential
mortgage loans in a single transaction.
Under section 15G(e) of the Exchange Act, the agencies may provide exemptions for risk
retention if the exemption would help ensure high-quality underwriting standards for securitized
assets and improve access of consumers to credit on reasonable terms, or otherwise be in the
public interest and for the protection of investors. As discussed in the draft final rule, staff
believes these findings are met for the exemptions for qualifying 3-to-4 unit residential loans.
(See pp. 392-398).
c. Exemption for Community-Focused Mortgage Loans
The agencies did not propose in 2013 to exempt from risk retention community-focused
mortgage loans exempted by the CFPB from the ability-to-repay rules under TILA. Those loans
exempted from ability-to-repay rules include: credit extended pursuant to a program
administered by state housing finance agencies; credit extended by creditors designated by the
U.S. Department of the Treasury as Community Development Financial Institutions; creditors
designated by HUD as a Community Housing Development Organization that have entered into
a commitment with a participating jurisdiction and are undertaking a project under the HOME
program; creditors designated by HUD as a Downpayment Assistance through Secondary
Financing Providers, and certain nonprofit creditors that meet the CFPB’s requirements for the
Although only some of these categories of loans have been securitized, a number of
commenters requested that the agencies exempt these loans from risk retention to ensure that
these loans would continue to be eligible for securitization without potential increase in costs due
to risk retention. These commenters argued that these loans are important to ensuring that lowto-moderate income and first-time borrowers obtain access to credit, and that the community
focus of these lending programs, including their tailored underwriting process, would ensure
sound underwriting.
In light of these comments, and in recognition of the role that these loans play in ensuring
access to mortgage credit in many low-to-moderate income communities, staff recommends that


the Board exempt the above referenced loans from risk retention. As discussed in the draft final
rule, staff believes the findings required for this exemption under section 15G(e) are met with
respect to the community-focused loans described above. (See pp. 378-392.)
2. Menu of Options
a. Standard Risk Retention
Consistent with the 2013 proposal, the final rule would allow a sponsor to retain risk in
the form of a vertical interest (an interest in each class of the ABS interests in the transaction, or
a single security representing a pro rata interest in the entire transaction) that meets the rule’s
eligibility criteria (eligible vertical interest), a horizontal residual interest (the most subordinated
ABS interest) that meets the rule’s eligibility criteria (eligible horizontal interest),10 or any
combination of the two. The risk retention requirement would be met if the percentage of the
eligible vertical interest when added to the percentage of the eligible horizontal residual interest
equals no less than five, and would be determined as of the closing date of the securitization
As noted above, the agencies proposed in 2013 generally to require sponsors to measure
their risk retention requirement using fair valuation methodologies acceptable under GAAP.11
Using fair value would ensure that the horizontal risk retention would be economically
meaningful and measured using accepted methodologies understood in the market, facilitating
the ability to compare risk retention across transactions. The fair value method also takes into
account various economic factors that may affect a securitization transaction, which should aid
investors in assessing the degree to which a sponsor is exposed to the risk of the securitized
The requirements for the fair value measurement of risk retention under the draft final
rule would be substantially similar to those in the 2013 proposal. Under the draft final rule, fair


See section 2 of the draft final rule (definition of “eligible horizontal residual interest”). In
lieu of holding all or part of its risk retention in the form of an eligible horizontal residual
interest, the draft final rule would allow a sponsor to cause to be established and funded, in cash,
an eligible horizontal cash reserve account, at closing, in an amount equal to the same dollar
amount (or corresponding amount in the foreign currency in which the ABS interests are issued,
as applicable) as would be required if the sponsor held an eligible horizontal residual interest.


Cf. Financial Accounting Standards Board, Accounting Standards Codification Topic 820 –
Fair Value Measurement.


value would be calculated using the fair value measurement framework under GAAP. In
response to comments and to facilitate current market practice, the draft final rule makes some
adjustments to the proposed requirements by allowing sponsors to calculate fair value as of a
“cut-off” date (generally the date as of which the composition and characteristics of the collateral
pool are stablished).
In the 2013 proposal, sponsors would have been required to disclose their fair value
methodology and all significant inputs used to measure its eligible horizontal residual interest a
reasonable time prior to the sale of the ABS. Sponsors also would have been required to disclose
the reference data set or other historical information used to develop the key inputs and
assumptions. Commenters raised a number of concerns regarding the proposed disclosure
requirements. Some commenters expressed concerns that the rule would require them to disclose
information that is proprietary ad highly confidential that could be used by third parties to the
competitive disadvantage of a sponsor. Commenters also raised concerns regarding potential
liability and litigation if fair value projections, assumptions and calculations disclosed to
investors pursuant to the rule prior to sale of the ABS turned out to be incorrect. Some
commenters asked for clarification regarding the required timing of the disclosures.
Staff believes that that it is important to the functioning of the markets and to fulfillment
of the purposes of section 15G that the draft final rule ensure that investors and the markets, as
well as regulators, are provided with key information about the methodology and assumptions
used by sponsors to determine their risk retention requirement when holding an eligible
horizontal residual interest. As the agencies have previously observed, fair value is a
measurement framework that, for certain types of instruments, requires an extensive use of
judgment. In situations where significant unobservable inputs are used to determine fair value,
disclosures of those assumptions are necessary to enable investors to effectively evaluate the fair
value calculation.
Therefore, staff recommends generally retaining the proposed fair value disclosure
requirements with some modifications in response to commenter concerns. Under the draft final
rule, sponsors would generally be allowed to describe their expected calculation methodologies
and ranges of inputs and assumptions (based on bona fide estimates) used for disclosures prior to
the sale of the ABS, and after sale any material differences between the expected methodologies,
ranges of inputs and assumptions and those actually used in the fair value calculation. These


modifications should effectively balance the benefits investors and others receive from the
disclosures against the concerns raised by commenters. (See pp. 64-83).
As noted above, the 2013 proposal also contained cash throttle provisions that would
have restricted how quickly a sponsor holding an eligible horizontal interest could receive
distributions with respect to that interest. These restrictions were intended to ensure that the
sponsor’s economic exposure to the transaction was not reduced too quickly. Commenters
expressed significant concern regarding the proposed cash throttle. Specifically, commenters
argued that the proposed restriction was incompatible with a variety of securitization structures,
including those that pay monthly cash flows predominantly from interest payments for much of
the life of the securitization. Commenters argued that the re-proposal’s failure to distinguish
between payments of interest on the eligible horizontal residual interest and other ABS interests
from payments of principal on those same interests would be largely unworkable with such
transactions. In addition, commenters argued that it would be impossible to make the required
projections of future cash flow for revolving structures, since their asset pools frequently change.
The draft final rule would not implement the proposed cash flow restriction or any similar
alternative mechanism. Staff has considered the comments and commenters’ alternative
suggestions and has not been able to identify a cash flow restriction that would operate without
significant risk of unintended consequences and undue disruption to various securitization
markets, while functioning effectively across asset classes. In addition, staff believes that a cash
flow restriction is not necessary to ensure meaningful risk retention, since the draft final rule
includes a number of mechanisms, including rigorous disclosure requirements and restrictions on
the ability to hedge or transfer a sponsor’s credit risk, that achieve similar purposes. (See pp. 8391.)
b. Collateralized Loan Obligations
A CLO is an asset-backed security that is collateralized by loans and a small amount of
other assets. Often, CLOs are collateralized by portions of tranches of senior, secured
commercial loans of lower credit quality, non-investment grade borrowers. There are two
general types of CLOs: balance sheet CLOs that securitize loans held by a sponsor institution or
its affiliates in portfolio, and “open market” CLOs that securitize assets purchased on the
secondary market at the direction of a CLO manager that is not typically affiliated with the
originators of the loans.


The 2011 proposal identified CLO managers as securitizers of CLO transactions that they
managed for purposes of the risk retention requirements, and would have required them to retain
risk on the same basis as any other sponsor. A number of commenters opposed this approach,
arguing that open market CLO managers should not be required to (and financially could not
afford to) retain risk in a CLO.
To provide more flexibility in achieving meaningful risk retention for CLOs, the agencies
included in the 2013 proposal an option that would allow open market CLO sponsors to satisfy
the risk retention requirement where the lead arranger for each syndicated loan purchased by the
CLO retained, at the origination of the syndicated loan, at least 5 percent of the face amount of
the term loan tranche purchased by the CLO (lead arranger option). The lead arrangers would be
required to retain this interest until the loan prepaid, matured or experienced a payment or
bankruptcy default or acceleration.
A number of commenters on the 2013 proposal raised significant concerns about, and
objections to, the provisions in the 2013 proposal applicable to open market CLOs. These
commenters argued that, because open market CLO managers typically do not own or acquire
the loans that comprise the CLO’s collateral pool, they do not meet the definition of “securitizer”
under section 15G of the Exchange Act and therefore are not subject to risk retention
requirements under the statute. In addition, commenters argued that the lead arranger option was
unworkable given current market practice and would not be a meaningful alternative.
Commenters argued that few open market CLO managers would have the balance sheet capacity
to finance a risk retention requirement, with the result that a risk retention requirement would
reduce CLO offerings and limit access to credit for commercial borrowers. Several commenters
argued that open market CLOs should be exempted from risk retention or receive more favorable
treatment because their structural characteristics (in particular their fee structure) already ensure
investor protection and high underwriting standards.
The draft final rule would apply risk retention to CLOs substantially as proposed in 2013.
As discussed further in the draft final rule, staff believes that CLO managers meet the statutory
definition of “securitizer” in section 15G of the Exchange Act because they are persons that
organize and initiate an asset-backed securities transaction by indirectly transferring assets to the
issuer. Through its authority to identify assets and direct the issuer to purchase those assets, the
CLO manager organizes and initiates the asset-backed securities transaction by typically


negotiating the primary deal terms of the transaction and directing the CLO issuing entity to
acquire the commercial loans that comprise the collateral pool. The CLO manager has sole
authority to select the commercial loans to be purchased by the issuing entity and directs the
issuing entity to purchase such assets.12
Staff does not recommend adopting a structural exemption from the risk retention
requirements as suggested by commenters. There is significant evidence of widespread
deterioration in underwriting standards for leveraged loans in recent years, which are the primary
assets purchased by most CLOs. Further, many of the structural features that commenters cited
in support of their arguments (such as the subordination of some of CLO managers’ fees and
participation by key investors in the negotiation of CLOs’ investment guidelines) were shared by
CDOs of ABS and other types of CDOs that performed poorly during the financial crisis.
Requiring open market CLO managers or lead arrangers to retain economic exposure in the
assets being securitized should help ensure the quality of assets purchased by CLOs, create
discipline in the underwriting standards, and reduce risks that such loans may pose to financial
stability. While the rules may cause a reduction in CLO issuance and have a modest impact on
availability of commercial credit, staff believes that lending to creditworthy commercial
borrowers will continue at a healthy rate and that the benefits of the rules outweigh projected
impacts on the CLO and leveraged loan market.
In addition, despite commenter assertions that the lead arranger option will not be widely
adopted by lead arranger banks, staff believes the option provides additional flexibility for lead
arranger banks and non-banks and therefore may reduce disruption to the market. Further, the
option should meaningfully align incentives of the party most involved with the credit quality of
the securitized assets (the lead arranger) with the interests of investors. (See pp. 199-236.)
c. Master Trusts (Revolving Pool Securitizations)
Master trusts typically issue multiple series of asset-backed securities over time,
collateralized by a common pool of securitized assets. They are the common vehicle for
securitizing credit card receivables and assets with similar characteristics. The 2013 proposal
would have recognized the “seller’s interest” retained by a master trust sponsor as an acceptable
form of risk retention to meet the sponsor’s obligations under the rule.


See memo from the Legal Division dated October 16, 2014 in the Office of the Secretary.


Staff recommends that the Board adopt in the draft final rule the proposed master trust
option, with several refinements responding to commenter concerns and designed to expand the
availability of the seller’s interest option more broadly. The refinements would liberalize the
structural elements of the seller’s trust option by permitting any entity capable of issuing one or
more series of ABS collateralized by a revolving pool to use the seller’s interest option. The
draft final rule would also revise the calculation of seller’s interest to include both pari passu and
subordinated interests, such as trust-wide overcollateralization and series-level junior bonds.
(See pp. 91-135.)
d. Asset-Backed Commercial Paper
The 2013 proposal included an option designed specifically for sponsors of ABCP
conduits, which issue commercial paper that may be collateralized by a wide range of assets
including securitized automobile loans, commercial loans, trade receivables, credit card
receivables, student loans, and other loans.
The draft final rule requirements for ABCP conduits are consistent with the 2013
proposal, with some modifications that respond to commenter concerns. The draft final rule
would clarify that either an originator-seller of the securitized assets or its majority-owned
affiliate may satisfy the risk retention requirement; clarify that a conduit must have one investorfacing liquidity facility provider (but permit the liquidity facility to be syndicated to additional
providers); extend (to 397 days) the maximum allowable tenor of commercial paper issued by an
‘eligible’ conduit; expand the collateral criteria; and liberalize the definition for qualifying
special purpose entities that are the vehicle for risk retention under the option. The draft final
rule would not “grandfather” assets or ABS interests held by existing ABCP conduits as some
commenters requested, consistent with other provisions in the rule. Section 15G of the Exchange
Act applies to any issuance of asset-backed securities after the effective date of the rules,
regardless of the date the assets in the securitization were originated. Section 15G and the draft
final rule would not, however, apply to any securitization transaction conducted before the
effective date of the final rule, which is one year after publication in the Federal Register with
respect to securitizations of residential mortgages and two years after publication with respect to
securitizations of other assets. (See pp. 140-170.)
e. Commercial Mortgage-Backed Securities


As contemplated by section 15G of the Exchange Act, the 2013 proposal included
provisions that would permit third-party purchasers that act as special servicers to hold risk
retention in lieu of the sponsor in CMBS transactions. The draft final rule would adopt these
provisions substantially as proposed, with a few adjustments in response to specific comments.
Consistent with the proposal, the CMBS option would allow a sponsor to satisfy the risk
retention obligation if a third-party purchases a first-loss subordinated interest in the transaction,
retains the interest for a minimum of 5 years in compliance with the rule’s hedging and transfer
restrictions, and meets certain other restrictions with respect to that interest. The rule would
allow multiple third-party purchasers to combine to satisfy this risk retention option, but would
require them to hold their interests in equal proportions and at the same level of subordination.
In addition, in response to comment, the draft final rule would adjust the quorum needed for
investors to vote to remove and replace the special servicer in order to ensure that an appropriate
level of investor interest in the question of removal and replacement would be necessary for the
vote to be operational. (See pp. 170-194.)
f. Government-Sponsored Enterprises
The 2013 proposal did not require additional risk retention for securitizations sponsored
by GSEs while they are in conservatorship or receivership and receive financial support from the
U.S. government. The GSEs fully guarantee the timely payment of principal and interest on the
securities they issue and are exposed to the entire credit risk of the assets that collateralize those
securities. In light of the authority and oversight that the FHFA has over the GSEs and the
financial support that they are receiving from the U.S. government, staff continues to believe that
it is appropriate to recognize the guarantee of the GSEs as fulfilling their risk retention
requirement. In this regard, the draft final rule would adopt this section of the 2013 proposal
without any changes. However, given the ongoing activity regarding reform of the GSEs, the
draft final rule notes that treatment of the GSEs under the risk retention rules would be revisited
once they are subject to reform. (See pp. 194-199.)
g. Foreign Safe Harbor
The draft final rule includes a “safe harbor” provision for certain securitization
transactions with limited connections to the United States and U.S. investors, that is identical to
the provision included in the 2013 proposal. The safe harbor effectively exempts the
securitization from risk retention requirements. An important requirement of the safe harbor is


that no more than 10 percent of the value of all classes of interests in the securitization
transaction could be sold or transferred to U.S. persons.. Some commenters requested an
expansion of this safe harbor so that securitization transactions with a larger percentage of
securities sold to U.S. persons could also qualify. Other commenters requested that the agencies
deem compliance with foreign risk retention regulations to be sufficient to comply with the risk
retention requirements under the draft final rule. Staff does not recommend that the Board
expand the safe harbor in order to ensure that the draft final rule would be applied to transactions
with a significant connection to the United States. In addition, staff does not recommend
recognizing compliance with foreign regulations as meeting the risk retention requirement under
the draft final rule, because foreign risk retention regimes vary, many jurisdictions do not have
risk retention requirements, and it would be difficult for the agencies to assess the
meaningfulness of risk retention across securitization transactions under such a regime. (See pp.
3. Underwriting Standards and Exemptions for Automobile, Commercial Real Estate, and
Commercial Loans
As contemplated by section 15G of the Exchange Act, the draft final rule would exempt
from the risk retention requirements securitizations of various types of assets that meet minimum
underwriting standards. Separate underwriting standards were set for commercial, commercial
real estate, and auto loans. The underwriting standards in the draft final rule are similar to those
in both the 2011 and 2013 proposals and include provisions related to (1) the borrower’s credit
history and ability to repay the loan, (2) valuation of the collateral, (3) loan-to-value ratios, and
(4) risk management and monitoring.
The underwriting standards for qualifying loans in the draft final rule reflect supervisory
experience with lending practices across diverse portfolios. The standards would be significantly
tougher than the equivalent for QRM, as observed by some commenters. This difference in
scope reflects the variability in these markets and underwriting practices, as well as the statutory
requirement that the underwriting standards for exempting non-QRM assets indicate low credit
risk.13 In addition, policy considerations run against incorporating common underwriting


15 U.S.C. 78o-11(c)(2)(B).


practices that might allow more loans to qualify into the underwriting standards, such as credit
scores developed by private, third-party vendors.
The Board received a number of comments on specific aspects of the underwriting
standards for qualifying loans, particularly with regard to commercial real estate loans. In
response to comments, staff is recommending minor adjustments to the commercial real estate
underwriting standards. However, staff is not recommending the more significant changes
commenters requested for commercial real estate loans, which included loosening debt service
coverage ratio and LTV requirements, longer amortization periods, and longer minimum term
requirements. Loosening these requirements would not be consistent with developing low credit
risk across the commercial real estate industry.
Some commenters also requested that the agencies provide an additional qualifying
commercial real estate exemption for single-borrower or single-credit transactions involving a
securitization of cross-collateralized loans to one or more related borrowers, with more liberal
underwriting standards to qualify for the exemption than the standards required to exempt other
qualifying commercial real estate loans. Staff does not believe it would be feasible to construct
more liberal underwriting standards for single-borrower and single-credit transactions to both
address commenters concerns while appropriately limiting an exemption from risk retention
commercial mortgages with low risk. In particular, staff is concerned that a singleborrower/single-credit category that benefitted from such an exemption would be prone to
regulatory arbitrage that is difficult to monitor. Therefore, staff is not recommending an
additional exemption for single-borrower or single-credit transactions in the draft final rule.
Consistent with the 2013 proposal, the draft final rule would allow sponsors to reduce
their risk retention requirement for a securitized pool consisting of both qualifying and nonqualifying loans of a single asset class by the amount of qualifying loans included in the pool
(blended pools). However, the risk retention requirement could not be reduced by more than
50 percent, so that the sponsor would always be required to meet at least a 2.5 percent risk
retention requirement for blended pools. Some commenters requested that the agencies relax the
2.5 percent “floor” for blended pools, while others requested that the agencies maintain it. Other
commenters requested that the agencies not permit blending in the final rule because of concerns
that investors may have trouble evaluating the credit quality of non-qualifying assets in blended
pools. Having considered the competing policy issues raised by commenters and the narrow


scope of the underwriting requirements for qualifying loans, staff recommends that the Board
adopt the blended pool limit as proposed to facilitate market liquidity for both qualifying and
non-qualifying assets. The 2.5 percent “floor” would serve as a minimum risk retention
requirement so that the economic incentive for the sponsor to ensure that the non-qualifying
loans in the pool are appropriately underwritten is not unduly weakened. (See pp. 307-344.)
4. Hedging, Transfer, and Financing Restrictions
Under section 15G of the Exchange Act, a securitizer is prohibited from directly or
indirectly hedging or otherwise transferring its risk retention interest. Accordingly, consistent
with the 2013 proposal, the draft final rule would prohibit a sponsor or any of its affiliates from
hedging the credit risk the sponsor is required to retain under the rule through any instrument or
transaction that would reduce its credit risk exposure through the risk retention. The hedging
restrictions would not prohibit a sponsor from benefiting from credit enhancements or risk
mitigation products that are designed to benefit all investors, such as private mortgage insurance.
(See pp. 264-271.)
The draft final rule would adopt the provisions in the 2013 proposal that limit the
duration of the prohibition on hedging and transfer of the sponsor’s risk retention interest, so that
transfer or hedging may occur after the end of the period when default on the underlying assets is
most likely to be associated with low quality underwriting. Commenters generally supported
these provisions in the 2013 proposal. For CMBS, a sponsor (or the initial third party as
applicable) could transfer the interest to another qualified third-party purchaser five years after
the closing of the securitization transaction. For residential mortgage securitizations, the
prohibition would end on the date that is the later of (1) five years after the closing of the
securitization transaction or (2) the date on which the total unpaid principal balance of the
residential mortgages is reduced to 25 percent of the original unpaid principal balance, in any
case, not to exceed seven years from the date of the closing. For all other securitizations, the
prohibition would end the later of (1) two years after the closing of the securitization transaction;
(2) the date on which the unpaid principal balance of the securitized assets is reduced to 33
percent of the original balance; or (3) the date the total unpaid principal obligation of the
securities issued is reduced to 33 percent of the original principal amount.


In addition, as proposed, the draft final rule would allow sponsors to securitize seasoned
loans that are current and that have been outstanding for a period mirroring the sunset date for
the loan’s asset class, as described above. (See pp. 277-281; 292-294.)
5. Other Exemptions
The draft final rule would adopt, without material change, the exemptions from the risk
retention requirements for government-backed securities, government-insured securitized assets,
and pass-through resecuritizations from the 2013 proposal. These exemptions were either
required by section 15G of the Exchange Act or proposed to be adopted using the agencies’
general authority to exempt securitizations under the statute, if certain findings are made. Where
applicable, the required findings are discussed in the preamble to the draft final rule. (See pp.
CONCLUSION: For the reasons discussed above, staff recommends that the Board approve the
attached draft final rule. Staff also recommends that the Board delegate to staff the authority to
make technical and minor changes to the attached materials prior to publication in the Federal
Register, including responding to comments from the Federal Register, or to incorporate changes
requested by other agencies as part of the approval process.


Attachment A
Overview of Comments on the NPR
The Board received approximately 250 comments, including nearly 150 unique comment
letters, on the NPR. Commenters included banking organizations, trade associations, consumer
advocacy groups, public officials (including members of the U.S. Congress), private individuals,
and other interested parties.
General comments:
While most commenters supported the reproposed risk retention rule, many commenters
expressed concerns about various aspects of the proposal. A substantial number of commenters
requested significant revisions to the proposal, discussed below.
General Risk Retention Requirement:
Several commenters supported higher minimum risk retention requirements. Some
commenters requested that the minimum requirement vary based on factors such as asset quality.
Most commenters supported the menu of options for satisfying the risk retention requirement,
but requested increased flexibility and additional options, including insurance policies,
guarantees, liquidity facilities, and standby letters of credit. Commenters also requested specific
modifications to various aspects of each option, discussed below.
Standard Risk Retention:
While several commenters expressed support for the use of fair value in measuring the
risk retention amount, a number of commenters expressed concerns, primarily related to the
timing and disclosure of the fair value measurement and specific accounting issues, and proposed
alternative measurement methodologies to address such concerns. Many commenters also
requested a “safe harbor” from liability with respect to the disclosures. In addition, several
commenters argued that sponsors should not have to measure and disclose the fair value of
eligible vertical interests, so long as the underlying ABS interests have a principal or notional
balance. Further, numerous commenters opposed the cash flow restrictions on the eligible
horizontal residual interest option, arguing that the proposed restrictions were impractical and
incompatible with a variety of securitization structures in various asset classes.
Open Market Collateralized Loan Obligations:
Many commenters argued that managers of open market collateralized loan obligations
(CLOs) are not “securitizers,” as defined in section 15G of the Exchange Act and, therefore, that
the agencies cannot subject them to the risk retention rule. In addition, many commenters


requested an exemption or reduced risk retention for open market CLOs, arguing that their
structural features already protect investors and ensure high quality underwriting. Some
commenters requested a new option to allow third-party investors in CLOs to hold risk retention
instead of CLO managers. Commenters also generally opposed the proposed alternative risk
retention option for open market CLOs, under which a lead arranger in a syndicated loan could
satisfy the risk retention requirement, asserting that this option was inconsistent with current
market practice and would not be adopted by lead arranger banks. Among other concerns,
commenters argued that lead arranger banks would be hesitant to retain risk as proposed because
holding a position that cannot be hedged or transferred might subject them to criticism from bank
regulators. As a result, these commenters argued, the risk retention requirement would lead to a
reduction in CLO offerings and credit to commercial borrowers.
Master Trusts/Revolving Pool Securitizations
Many commenters argued that the option for master trusts would not be useable by most
revolving pool securitizations and requested technical revisions, including: giving risk retention
credit for subordinated seller’s interests; modifying the fair value calculations and measurement
of the seller’s interest; permitting risk retention in legacy master trusts to be held at the legacy
master trust level for permitted horizontal forms of risk retention; permitting subordinated
distributions on the seller’s interest prior to an early amortization event; modifying provisions on
excess funding accounts and early amortization to better reflect market practice; eliminating the
separation of interest and principal waterfalls; permitting the amount offset by horizontal
interests to be determined on a weighted average basis across all series of outstanding investor
ABS interests; permitting, on a grandfathered basis, a revolving pool securitization that relies on
horizontal interests to offset any portion of the seller’s interest; and including certain seriesspecific interest reserve accounts as an offset to the minimum seller’s interest.
Asset-Backed Commercial Paper
Many commenters requested additional forms of risk retention within the asset-backed
commercial paper (ABCP) option, including standby letters of credit, guarantees, liquidity
facilities, unfunded liquidity, asset purchase agreements, repurchase agreements, and other
similar support arrangements and credit enhancements. Some commenters argued that arrangers
and managers of ABCP conduits are not “sponsors” and therefore should not be subject to risk
retention. Many commenters requested a full exemption from risk retention for ABCP conduits


with certain features or structures, or for ABCP conduits with underlying assets that were
originated before the applicable effective date of the rule. Many commenters expressed general
support for the ABCP option, but requested additional revisions, including: extending the
maximum ABCP maturity to 397 days; modifying the limitations on assets that may be acquired
by ABCP conduits; permitting originator-sellers to convey to intermediate SPVs assets acquired
in business combinations and asset purchases; broadening the definition of 100 percent liquidity
coverage; permitting multiple liquidity providers; and reducing the disclosure requirements.
Commercial Mortgage-Backed Securities
Generally, commenters supported the proposed commercial mortgage-backed securities
(CMBS) risk retention option, but some commenters requested modifications. Several
commenters recommended allowing the third-party purchasers to hold the interests in a seniorsubordinated structure, rather than pari passu, provided that the holder of the subordinated
interest retains at least half of the requisite eligible horizontal residual interest, and that both
third-party purchasers independently satisfy all of the requirements and obligations imposed on
third-party purchasers. These commenters suggested that a senior-subordinated structure would
better allow the market to appropriately and efficiently price the interests in a manner that is
commensurate with the risk of loss of each interest, and to address the different risk tolerance
levels of each third-party purchaser. Multiple commenters expressed support for the Operating
Advisor requirement, but many commenters suggested different voting quorum requirements for
the Operating Advisor to remove the special servicer. Many commenters argued that the fiveyear transfer restriction period should be reduced, because it would significantly impair the
liquidity of CMBS and render the B-piece interests much less desirable, and suggested different
alternative approaches.
Government-Sponsored Enterprises
The few commenters that commented on the treatment of government-sponsored
enterprises under the risk retention rule were generally supportive of this option.
Municipal Bond “Repackaging” Securitizations
Many commenters requested an exemption from risk retention for tender option bonds
(TOBs) or technical clarifications or adjustments to the proposed option to cover a broader range
of transaction structures and current TOB programs. Commenters argued that subjecting TOBs
to the risk retention requirements would significantly increase the costs of TOB programs,


adversely affect the state and local governments that indirectly receive funding through these
programs, and decrease the availability of tax-exempt investments in the market for money
market funds. A few commenters requested that the residual interest in any TOB structure
qualify as a risk retention option if the residual interest holder met certain requirements. Several
commenters suggested technical clarifications, adjustments and corrections.
Foreign Safe Harbor
Commenters generally supported the safe harbor for certain foreign securitizations, but a
few commenters suggested modifications, including: increasing the 10 percent limit on the value
of ABS interests permitted to be sold to or for the account of U.S. persons; clarifying that the
limit applies only at date of initial issuance; excluding from the limit securitization transactions
with a sponsor or issuing entity that is a U.S. person which makes no offers to U.S. persons and
issuances of asset-backed securities that comply with Regulation S of the Securities Act;
providing for coordination of the rule with foreign risk retention requirements; and clarification
on how the dollar value of ABS interests should be determined.
Qualified Residential Mortgages
Most commenters supported the agencies’ proposal to align the definition of a “qualified
residential mortgage” (QRM) with the definition of a “qualified mortgage” (QM) as defined
under the Truth in Lending Act (TILA). Several commenters asked that the QRM definition
accommodate the use of blended pools of QRM and non-QRM loans. Other commenters sought
more specific expansions of the definition, including an exemption of loans originated by
community development financial institutions and other community-focused lenders that are
exempt from the ability-to-repay requirements (and, as a result, do not qualify to be QMs under
TILA), imposition of a less than 5 percent risk retention requirement for some loans that did not
qualify for QM, and the inclusion of non-U.S. originated loans. Several commenters expressed
concern with both the alignment of the QRM definition with the QM definition as well as the
alternative, more restrictive, definition of QRM for which the agencies had invited comment, and
suggested that the agencies should use the definition of QRM published for comment in the
original proposal.
Underwriting Criteria for Other Asset Classes
Commenters requested a number of modifications to the proposed underwriting standards
for qualifying commercial (QCLs), commercial real estate (QCRELs), and automobile loans


(QALs). Some commenters argued that a much lower percentage of commercial, commercial
real estate, and automobile loans would qualify under the proposed underwriting standards than
residential mortgages would qualify as QRMs, and recommended that the underwriting criteria
for QCLs, QCRELs, and QALs be modified to capture a portion of the market similar to that
portion of the residential mortgage market captured by the QRM definition. Some commenters
requested that the agencies reduce or remove the 50 percent limit on the reduction for blended
pools of QCLs, QCRELs, and QALs, and certain commenters requested clarification on the
depositor certification requirement.
Qualifying Commercial Loans
Commenters argued the proposed QCL criteria were too strict in one or more areas and
suggested that the agencies relax the standards in various ways, including by: removing the
straight-line amortization criterion; increasing the maximum amortization period beyond 5 years
(up to 15 or 20 years); allowing payment-in-kind loans; reducing retention for debtor-inpossession situations and loans resulting from Chapter 11 exit financings; increasing the leverage
ratio to 4.5x or less; and replacing the leverage ratio with a 60 percent or 50 percent debt-tocapitalization ratio. Some commenters requested that the agencies create multiple types of QCL
underwriting criteria to address different industries or different types of commercial loans. Some
commenters also requested that the agencies allow QCL securitizations to have reinvestment
periods, so long as the new loans added to the pool would either be QCLs or not reduce the
blended pool ratio below 50 percent.
Qualifying Commercial Real Estate Loans
Many commenters argued that the proposed underwriting criteria were too strict and
requested that the agencies modify the QCREL criteria to allow more loans to qualify for the
exemption, including by: eliminating or changing the debt service coverage ratio criteria;
removing or modifying the requirement to examine two years of past borrower data; expanding
the types of derivatives allowed to convert a floating rate into a fixed rate through a rate cap
derivative; allowing interest-only loans with lower loan-to-value (LTV) ratios; shortening the
minimum length requirement; increasing the amortization period requirement; increasing the
LTV ratio requirements; and eliminating the combined LTV cap.
In addition, some commenters requested an expansion of the QCREL criteria or an
additional QCREL exemption for single-borrower or single-credit transactions involving a


securitization of cross-collateralized loans provided to one or more related borrowers. A few
commenters requested that the agencies consider distinct QCRE loan underwriting standards for
different commercial real estate sectors. Some commenters questioned the exclusion of certain
land loans from the definition of commercial real estate in the original and revised proposals and
suggested clarification that the exclusion did not apply to such loans, because these loans are
included in many existing CMBS securitizations.
Qualifying Automobile Loans
While some commenters supported the reproposed definition of automobile loan, others
argued that the reproposed definition was too narrow and inconsistent with existing market
practices, and requested modifications, including: expanding the definition of QALs to include
motorcycles and automobile leases; eliminating or increasing the maximum debt-to-income ratio
requirement; replacing the debt-to-income ratio requirement with a payment-to-income ratio
requirement; modifying the verification requirements so that originators would need to verify
only debts listed on borrower’s credit report and could rely on borrower stated income without
verification; using a credit scoring system instead of the credit history verification criteria; and
eliminating the down payment requirement.
Hedging, Transfer and Financing Restrictions
While some commenters supported the proposed restrictions on hedging, others opposed
the provisions as overly restrictive or requested clarification as to the scope of the proposed
restrictions. Several commenters requested clarification that the term “servicing assets” includes
hedging instruments. Several commenters expressed general support for the sunset provisions
but others requested shorter time period restrictions. A few commenters requested clarification
for transactions that do not typically have a nominal “principal balance” and one commenter
requested that the test use the cut-off date instead of the closing date for measurement.
Several commenters requested modifications to the proposed general exemptions from
the risk retention requirement, including expansion of the exemptions for resecuritizations and
for seasoned loans, or additional exemptions, including an exemption for single-borrower